How to Buy an Existing Small Business

Sometimes the best way to start your own business is to purchase one that already exists. But how do you go about doing that? It isn't simple but it is possible and can be successful if you follow the steps outlined below.

Things You'll Need

• A business plan
• A list of pros and cons for being in business for yourself
• A list of businesses in which you are interested
• The existing business's asking price
• A list of the selling business's tangible assets
• A list of the selling business's intangible assets
• The selling business's financial statements
• A list of the business's intellectual property (if any)
• The business's certificate of good standing (if appropriate)
• A list of the business's environmental requirements (if any)
• A list of the business's license or permit requirements (if any)
• Lease agreement, if you plan to keep the business where it is or other location possibilities, if you intend to move the business
• List of employees with resumes, if you plan to keep them as part of the business
• A list of repairs, upgrades, or changes required of the business's current list of tangible assets
• A budget for the business, including the amount of money you will need to obtain through a lender
• A legal purchase contract

Instructions

How to Buy An Existing Business

1. Decide the type of business in which you want to be engaged (such as retail, manufacturing, service or others).

2. Write a business plan concerning "what" you want to accomplish; "how quickly" you need to accomplish it; "where" you want the business to be located; and "why" you want to engage in that type of business. Set goals and objectives for the business's growth. Outline any changes that you want to make and how those changes will help the business. Be as thorough as possible in establishing a clear, productive plan. This will be crucial for you as a business manager. It will also help you find quicker funding if you require that to make your business purchase.

3. Establish a list of what you need out of the business. Be realistic about what you are willing to risk to establish your business. Even a business that already exists will take some transition time that could eat into your time with your family or that you allot for yourself. You may not make money from it right away, either, which begs the question, "Can you survive without immediate business income?"This is a good place to make a list of pros and cons for the purchase of a business. If the pros far outweigh the cons, then you should definitely move on. However, if the cons far outweigh the pros, you may want to reconsider the purchase at least for the moment.

4. Find a business that you want to purchase. Hopefully, it will be one that is already on the market. However, if it isn't, don't automatically assume that means the owner isn't willing to sell. Sometimes business owners get burnt out or bored with their business but don't think there is a market to sell it. Put out some feelers to find out if there's a chance the owner might be willing to sell.

5. If the business has been up for sale, determine the reason behind the owner's desire to sell. Don't be afraid to check out their given reason either. Sometimes owners will indulge in little white lies or even great big whoppers. Things to check for are: A sagging business reputation, a declining customer base, difficult competition, poor location, inadequate cash infusion, and lost contracts. While some of those problems may be overcome, others might not be. You can't determine whether or not you can solve the problem until you understand exactly what it is.

6. Find out the asking price for the business. If the business is already on the market, chances are that the owner has set a price that he or she wants for the business. If it is a business that you have scoped out on your own, convincing the owner to sell, then he or she may need some time to assess its value.

7. Determine if the asking price is reasonable. This includes several steps as listed below.

8. Request a list of everything tangible that is being sold as a part of the business from the current business owner, including each asset's assessed value. That would include the building (if it is owned rather than leased), equipment, tools, supplies, etc. Sometimes the deal can even include the cash in the register the day the business deal closes; accounts receivable (and even accounts payable). That is somewhat dependent upon the type of business.

9. Request a list of the intangible assets that are included in the business sale. This can include things like intellectual property, established credit lines with vendors (if they are transferable), existing contracts, a list of current customers, a solid reputation in the community, a good credit report, as well as many other factors. While establishing a value for these intangibles can be tricky, most lenders will allow you some leeway in counting them as a part of the business's overall value. Unfortunately, first you must have a good understanding about exactly what they are.

10. Get a list of the business's profit and loss statements for at least the past three years. It would also be valuable if they would provide a cash flow statement as well. However, the key here is really the P&L. If you aren't an expert in interpreting such statements, find someone to help you who can. Check with local Chambers of Commerce, Small Business Development Centers, Existing Business Councils that are often attached to colleges, universities, or even vocational-technical centers. Many of these organizations provide "free" business advice and assistance. Any or all of them likely have experts on hand who can help you interpret financial statements.

11. Check the business's tax status locally, in the state, as well as with the federal government.

12. Make certain the business is not currently, nor has previously been, under litigation. If they have, meet with an attorney to determine if and how this might impact upon you as the business's new owner.

13. Get a list of the business's employees, and their qualifications, if you intend to carry them over into the new business. Find out their wages as well as their benefits such as insurances, retirement plans, bonus programs and the like.

14. Examine the existing business's organizational structure. This is critical if the business is a corporation or a limited liability company. You need to make certain that the company has been functioning as outlined in their articles of incorporation and/or bylaws. If it has shareholders, then you must determine if all of them are willing to sell. If they are, what do they expect in terms of compensation for that sale? If they are not, what do they expect from you as the business continues? Can you live with that? This can become a major sticking point for the purchase of an existing business.Obtain a certificate of good standing from the Secretary of State. This validates the business you are thinking of buying has not previously broken any laws and/or isn't currently or has never been under investigation. The information provided should also let you know which states the business is authorized to do business in and any or all names under which the business has operated in the past.Determine if you must continue that organizational structure or if you have the ability to change it, in the event you want to do so.

15. Determine if the business has any environmental issues. If so, check with the state's environmental agency to make certain that the business has maintained those standards and to determine what you will need to do in the future. In some instances, existing businesses are "grandfathered" in when new environmental regulations are established. However, when the business is sold to someone new, they are then expected to bring the business up to code. This can sometimes be an expensive situation so it is important that you understand your rights and obligations in this area.

16. Determine if the business has growth potential. This will take some intense research into the business's competition, the customer base, marketing opportunities, and other factors. While an existing business may be successful the day you purchase it, that won't be enough. If it doesn't have a future, it isn't a good buy.

17. Identify the various licenses and permits that will be required to run the business.

18. Check out locations for the business if you are not purchasing the building as part of the deal. You may wish to keep the business located where it is, which means you will have to negotiate a lease with the property owner. In some instances that can be a problem because they want to raise the rent or they will want the owner to be responsible for all of the building maintenance (which you might not have counted on in your business plan financial statement). In such instances you may have to look for alternative locations for the business. Or you may just want to relocate business for your own reasons. Perhaps it is no longer in the pathway of its customer base or it could be located in a dying part of town. At any rate, location is critical for any business, so this factor will require thorough examination and detailed planning before moving forward.

19. Outline any repairs, upgrades, or changes that you will need to make to the business and the cost attached each. If these were not provided for in your original business plan then you will have to amend the plan to include them since this may seriously impact your cash flow. Also keep in mind that, if you have to buy a lot of new equipment, supplies, and the like then it might actually be cheaper for you to start your own business from scratch.

20. Obtain permission to have an audit performed on the business's financial statements. Any business that refuses to either provide such an audit for you or allow you to have one run, probably has something to hide. At any rate, if you will be seeking funding to purchase the business, this step will be required by any and all potential lenders. If you can't obtain it, then you may have to back up and find another business to purchase.

21. Determine how much money you will need to have to purchase the business, get it started the way you want, and grow it within the first three years. If you have the ready cash on hand, then you are prepared to move forward. However, if you do not, then you will have to look for partial or total funding.

22. Decide the type of funding you want to explore, if you require more money than you have on hand. If you want to self-fund, then you must determine how you can raise the money. If you need additional funding but don't want to go into heavy debt, then you might want to consider a partnership with someone else who can also bring experience, management skill, and funding to the business. Another possibility is to seek a business "angel;" someone who likes to help new businesses get started. You can also incorporate your business and sell shares of stock to raise funding. You can look for an small business loan through the SBA or a local lender. There are lots of possibilities. Seek guidance through experts in the field who can help you determine the best way to fund your business.

23. Have a legal contract for purchase drawn up, preferably with the help of an expert in the area like an attorney.

24. Meet with the business owner to work out final kinks before closing the deal.

25. Close the deal and start your business your way.

Tips & Warnings

• Be honest with yourself about your business interest. If you think you are going to become an instant millionaire, chances are you are deluding yourself somewhat. On the other hand, if your interest is in developing something that you and your family can enjoy and perhaps pass down or you simply want to be your own boss that is something totally different and just might be "doable."

• If you don't know how to write a business plan, seek assistance on the Internet or through business organizations like chambers of commerce, small business development centers, or business departments at local universities, colleges, or vocational-technical center.

• Be realistic with yourself and your family every step of the way or you doom yourself to certain failure.

• Listen to your gut as overruling your own intuition generally results in a negative outcome.

• Consider hiring your own accountant to help you through the business's financial statements.

• Make certain that you have a solid customer base or can build one. You can provide the best product or service in the world, but if people aren't buying, your business will not be successful.

• Don't be afraid to ask for advice. Contrary to popular belief, that isn't a sign of weakness, but rather a sign of intelligence and great strength.

• Beware of businesses that have been for sale for a long time.

• If an asking price seems too high, it probably is.

• Steer clear of any business that has experienced litigation, tax, or extensive employment issues and problems.

• Don't think you can do a business without solid marketing and advertising. Word of mouth is great but it doesn't happen all of the time. You will have to do some form of marketing and advertising in order to succeed.