Buying a small business can be an excellent way to jump right into ownership. Rather than spending the time and money to start a business alone, those who buy existing businesses can pay to take on a business that already has momentum. There are, of course, pros and cons to buying an existing small business, but, overall, it can end up being extremely rewarding, both financially and psychologically.
In this article, we’ll explore the process for buying a small business and what a buyer needs to know before acquiring a small business.
How Long Can it Take to Purchase a Small Business?
Buying a small business is no walk in the park. While buyers can take advantage of the start-up time saved by purchasing a pre-established business, buying and owning a small business is not for the faint of heart. Buyers can expect a business search and purchase to take 12 to 24 months. In that time, efforts will likely include reaching the due diligence stage with more than a dozen different businesses and going as far as writing letters of intent to three or four unique sellers.
What Small Business Will Be Right For You?
When it comes to picking a business to buy, returns and profits are crucial, but owning a small business will likely be worthless if it’s not the right fit for you, even if you are finally your own boss. A small business buyer should be sure to understand some key things about themselves before jumping into the business search.
Passion and Knowledge
An ideal buyer-business match will first and foremost align in terms of passion and knowledge. The more you know about the industry in which you’ll be doing business, the better prepared you will be to face any challenges that come along. Plus, if passion for the business is what gets you in, it can be more worthwhile to you to hold on and put your efforts in when things are good as well as when things don’t quite go according to plan.
Even if the big picture industry matches, though, it’s also important to consider the direct day-to-day effects your business will have on your life. A business’s location may require a move. If a change like that doesn’t match with your plans or goals, that can cause strain. The size and type of business you buy will also demand different management styles. Some businesses may require you to be hands-on on a daily basis, while some will require a higher-level leader who doesn’t necessarily spend as much time actually participating in customer-facing work. Make sure to take into account how you want to spend your day as you look for small businesses to buy.
Of course, purchasing the business will require you to know how much you are able to spend. Take stock of your cash and assets. A loan will most likely be in order. Talk to a loan specialist to make sure you know how much you can spend on a business before you start shopping.
There are hundreds of factors to consider when deciding on the right business. Some non-negotiables may become apparent as you look around, but establishing a baseline will help you narrow down businesses. If everything aligns, eventually you will find one that brings you what you’re looking for in this new undertaking.
Where Can You Find Small Businesses For Sale?
When you know what kind of business you’d like to buy, it’s time to actually find one for sale. There’s no one place to find a small business for sale. Using many different resources can help broaden the search and assure that you have considered all your options.
To start, reach out to your network. As with many things, who you know can make all the difference. Your network of friends, family, coworkers, college buddies, and more all have the potential to open up your best opportunities and garner the highest quality insights and leads.
The next best place to look is the internet. Websites like BizBuySell provide databases where businesses for sale can be found. The right business may also come from other sites like Craigslist.
A great strategy beyond more direct searches involves keeping up with the industry in general. Conferences, meetups, and other business-related events can help you grow that vital network as helping you keep an eye out on small-business developments.
What Details of a Business Should I know Before Purchase?
Once you’ve found businesses that match your goals and resources, it’s time to start looking into the details. Due diligence is one of the most important steps in the process and can be tiring, but the more exhaustive the research in this stage, the more likely a buyer is to avoid risks and potential issues later on.
Read below to learn about factors to consider as you complete your due diligence for the businesses you’re investigating and download our due diligence checklist for later.
One of the most vital types of information you’ll need from any business in order to make an informed decision is financial data. Thoroughly examining and understanding the documents included in this list will take time and effort but is absolutely vital to assure no unexpected surprises come after buying small businesses.
- Financial Accounts
- Annual Reports
- Cash Flow Statements
- Debt Disclosures
- Tax returns
A huge factor in a business is its brand reputation, both inside and outside the company. Investigate the business’s reputation and culture to understand how customers and employees perceive it. Taking a business down to its bones and building it back up better may be an opportunity to buy cheap and grow quickly. At the same time, a poorly-perceived brand can be difficult to fix without a lot of changes. Buyers who are excited to take on a challenging project like this, but those ready to jump in and hit the ground running should be sure to look for a company with an established and loyal customer base.
- Store layout
- Company image
- Company culture
- Quality of inventory
- Customer loyalty
- Customer satisfaction
An investigation of the people making up the business is also key. Make sure to collect as much quantitative and qualitative data as possible on your small business’s network.
- Industry Experts
Buildings, Inventory, and Other Physical Assets
A business’s physical assets should be explored before a purchase. Determining the state of the office building, inventory, equipment, and other assets can help a buyer know where further investments may be needed and if they can be avoided elsewhere.
- Leases and Rental Agreements
Licenses and Permits
Business licenses and permits will need to be verified or updated to assure legal compliance. These can be gained from the current owner or applied for by the buyer.
Local zoning requirements should also be checked and verified to assure lawful business practice.
A detailed buyer will also need to check the environmental regulations and requirements for the local area.
How Can I Find Out the Value of the Business?
Business valuation can be complicated. Data can be skewed in any direction to make a business seem more or less valuable than it actually is. It’s vital for a buyer not to consider the value of a business in a vacuum. Certain valuation systems provide better forecasts depending on the industry or stage of development.
A valuation can be done by a professional for a fee. The few thousand dollars spent may be worth it, allowing you to potentially save thousands on the price, or earn thousands by picking the small business with the most potential.
To save on the costs of a professional will take plenty of diligence and require a bit of number crunching. A savvy buyer will need to investigate the various valuation approaches including the earnings approach, the assets approach, and the market approach.
What Might I Need to Invest in after a Business Purchase?
An analytical buyer will be ready to consider how the business can scale to increase profitability beyond its current value, however that value is initially calculated. Before buying a business, buyers should be sure to think about the industry and what tactics or assets might be needed in order to grow their new small business.
Many businesses require equipment to get jobs done. Whether a bakery needs an industrial mixer or a trucking company needs more trucks to expand its fleet, key assets can allow businesses to create a greater output at a faster rate, allowing business owners to take advantage of more opportunities.
National Funding’s equipment financing options make equipment far more accessible for small businesses, allowing them to increase value in the short and long term.
Businesses are also commonly limited by manpower. With more workers, a small business has the chance to increase output. New employees can also be hired to work on specialized projects and expand the business in many different ways. A working capital loan with National Funding can provide the flexibility to hire new workers and increase the value of a small business.
Opening a second location or moving to a larger one can provide all new opportunities for a small business. With a new location comes room for a larger team and an expanded customer base, again providing greater opportunities for a small business to grow. Moving to a new location or adding a new one entirely is made easier with small business loans from National Funding.