Buying an existing business can be an efficient way for an aspiring entrepreneur to get their foot in the door as a business owner.
More than 10,000 businesses changed hands in the U.S. in 2018. You could take over an operation that already has a proven business model and an established brand. If youâ€™re lucky, the business would already have positive cash flow.
â€śThereâ€™s all kinds of scenarios where you might want to buy an existing business rather than start your own,â€ť said John Bartelme, a SCORE mentor based in Durham, N.C. SCORE is an organization providing business education through mentoring and workshops in partnership with the U.S. Small Business Administration.
An opportunity to buy an existing business may arise if the owners of your current workplace decide to sell. You might consider buying the business if you have already spent a significant amount of time working for the company, learning the ins and outs, Bartelme said. For current business owners, buying another company in your industry would allow you to grow your enterprise, he said.
Another instance when you might buy an existing business would be when one goes up for sale in an industry in which you have interest, like restaurants, Bartelme said. But purchasing a business without any industry experience can be a risky move. You may not necessarily be suited to run a restaurant just because you like dining out, he said.
Before you take over an existing operation, weâ€™ll help you decide whether buying a business is the right choice for you.
To organize the purchase process, consider this as your checklist for buying an existing business.
To give yourself a better shot at success, consider purchasing a business that matches your existing skills and knowledge, Bartelme said. If you already know the industry, you would be in a position to improve and strengthen the business youâ€™re buying.
On the other hand, when you purchase a franchise, the franchiser would provide guidance and a business plan for you to follow as you learn the ropes, Bartelme said.
â€śBuying a franchise is a way to go for a lot of people who have no prior experience in that area,â€ť Bartelme said. â€śThe need to be competent in that kind of business is less a factor than it would be in some other businesses where you donâ€™t have that support.â€ť
Before making an offer on an existing business, you need to know what itâ€™s worth. The seller would likely determine the value, but you should make your own estimation, Bartelme said. He suggests hiring an independent, third-party valuation firm to appraise the business. Hiring a valuation firm will be an extra expense, but it could save you from overpaying, he said.
â€śWhat a person thinks their business is worth versus what itâ€™s actually valued at can be quite different,â€ť Bartelme said.
There are several methods to determine the value of a business. If youâ€™re experienced in finance and accounting, you may be able to value the business on your own. If not, consider hiring an accountant or valuation firm to appraise your business.
These are a few common valuation approaches:
You should understand the facets of the industry in which the business operates, as well as all details about the business itself. After expressing an interest in the existing business, you may be able to sign an agreement that gives you access to financial records in exchange for confidentiality. Review all recent tax returns, financial statements and banking records to get an idea of the financial health of the business.
You may want to hire an accountant or analyst to help you pore over documents. They could spot red flags that you might miss. For instance, if the business is relatively cheap, thereâ€™s probably a reason why. The brand reputation could be damaged, or the markets may have rejected the businessâ€™s products or services.
Unless you can pay the price of the business in full, youâ€™ll likely need some form of financing to cover the purchase. You could work out a number of creative financing deals with the seller, Bartelme said, depending on your relationship. For example, the seller may offer you a deal that would allow you to put down a portion of the cost upfront and pay the rest in installments, Bartelme said.
â€śThey might be agreeable to selling it to you over a time frame,â€ť he said. â€śBut you donâ€™t want to begin talking about that until youâ€™ve agreed on a sale price.â€ť
In some cases, the seller might hold on to the title of the land or building where the business is located and lease it to you, he said. You would purchase the business itself, but not the property.
You might have to turn to a small business lender to obtain extra capital. Before borrowing money, make sure the business is able to support loan payments.
Consider starting your financing search with LendingTree, MagnifyMoneyâ€™s parent company. On LendingTreeâ€™s platform, there are dozens of business lenders there to compete for your business. You simply fill out a short form online and can be matched with offers from up to five lenders based on your creditworthiness.
Once you have a clear idea of what the business is worth and how much you can afford to spend, you would present an offer to the seller. This is where an independent valuation would come in handy, Bartelme said. Both parties could negotiate based on that figure.
Sellers are often overly optimistic about what the business is worth, Bartelme said. Expect the seller to try to get the largest amount for their business, especially if itâ€™s a family-owned operation.
â€śTypically for a family business, this has been their life,â€ť he said. â€śTheyâ€™re emotionally connected to it, and rightfully so.â€ť
Including business experts like brokers, accountants, lawyers, certified valuation analysts or advisors in the negotiation process could ensure that you make the best deal. They could also help you shape a plan to operate the business successfully going forward.
There are several benefits to buying an existing business, as well as downsides to taking this route into business ownership.
The closing process typically takes 30 to 60 days, depending on the complexity of the sale. During this time, you should take a final look at all sales documents and financing agreements. Be sure to check titles and ownership documents for all assets that are transferring as well.
Thereâ€™s typically a transition period when new ownership takes over a business, Bartelme said. Itâ€™s not uncommon for the previous owner to stay on board as a consultant. They may agree to a consulting contract for the first year or two.
â€śThe upside is that you have a smoother transition that is much more transparent to the customers and the clients,â€ť he said.
But the downside is that the previous owner could continue to act as if they still own the business, Bartelme said. It could be a while before they hand over the reins completely.
Once you have full control of the business, prior industry experience would become beneficial, Bartelme said. You could hit the ground running and start earning a profit.
â€śThe less you know about a business, the higher the risk,â€ť he said. â€śThatâ€™s why itâ€™s pretty important that you do know something about that industry.â€ť
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