Preexisting Finances: How to Buy a Business

30 percent of new businesses close shop within two years of opening. 50 percent never make it past five years.

As an entrepreneur, it’s clear that failure is always looming. So, what should you do to enhance your chances of finding success?

You have to ensure your new business offers a product or service that solves a problem. But there’s also another way: buy an existing enterprise with a proven business model. 

Interested in this strategy? Here’s a guide on how to buy a business.

Know Your Interests

Any seasoned entrepreneur will tell you passion is the key to success. Doing what you love will keep you going to work without feeling like it’s an obligation or a chore.

As such, the first step to buying a business is to identify your passions and interests. You want to own a business that ignites and excites your entrepreneurial spirit.

Are you into farming, for instance? If yes, you have no business buying a construction company, however lucrative the industry might be. What you should be looking at is an agribusiness company.

That being said, don’t blindly follow your passion and interests. If what you’re most passionate about is leading you to a struggling industry, it’s best to move to the next thing you’re passionate about.  

Understand the Industry

If you buy a business solely based on its financials, you’ll be making a costly mistake. The success of a business depends on a range of factors, including the vibrancy of the industry in which it operates.

This is why performing industry analysis before buying a business is crucial.

You’ll know the industry participants, distribution patterns, regulatory environment, and competition and buying patterns. With this information, you’ll make a sound decision on whether to go ahead with the purchase.

For instance, understanding the industry’s regulatory environment will give you an idea of how the relevant laws and regulations affect businesses. If the industry is highly regulated, factor in the cost of ensuring compliance.

Ideally, you want to buy a thriving business in a fast-growing industry – not in an industry that’s on a slump.

Make a List of Specific Businesses You’d Like to Buy

Now that you know the type of business you’d like to buy and are satisfied with the state of the industry, it’s time hunt for the specific enterprises you’d like to own.

The first step is to find businesses that are for sale. There are websites that connect business buyers and sellers. Browse through them and make a list of the businesses that meet your specifications.

Another way to find businesses for sale is to ask friends and family. If most of the people around you are entrepreneurs, there’s a chance one or two might be aware of a business that’s for sale. Read this helpful post to gain an insight into the various ways an owner can advertise a business that’s for sale.

Ultimately, aim to make a list of 3-5 businesses. Assess at their physical location, branding, market position, and web presence, and then trim the list to 1 or 2.

Know Why the Business Is for Sale

An entrepreneur can sell a business for a variety of reasons.

They could be looking to exit the market or industry, they could be moving to another country, or they’re no longer interested in entrepreneurship. Others sell because the business is on decline or competition has become fierce.

As a potential buyer, you have to establish why the business you want to buy is up for sale. While some sellers will be straight up and honest with you, others might not be entirely truthful. They could tell you they’re selling their business to raise funds for a new venture, while, in fact, they’re offloading it because it’s facing a lawsuit.

The question is: how do you establish the real reason a business is for sale?

The answer? Due diligence. 

By combing through a business’ profit and loss accounts, balances sheets, and other financial statements, you’ll determine whether the owner is selling because of economic uncertainty.

Also, talk with the business’ existing clients, employers, and other stakeholders to get their views on the state of the company. If it has been going through turbulent times behind the scenes, there’s a chance an employee or customer knows.

Know Your Budget and Secure the Funds

Right off the bat, you must embrace the fact that it’s cheaper to start a new business from scratch than it is to buy an existing one.

So, how much do you want to spend on purchasing a business? The amount will depend on the nature of the business you want to buy. If you’re planning to acquire a high-revenue business with a huge market share, be prepared to splurge.

This is where you need to hire an acquisition consultant. The professional will help you establish a budget that meets your needs and even work with you to craft an irresistible offer. In addition to the amount, you need to acquire the business, ensure you take other costs into account, such as legal fees.

With the budget ready, shift your focus to securing the funds.

You could self-finance the purchase, but if you’re unable to, there are options. You could secure a business loan from a bank or other lender, or fundraise from friends and family.

Do Further Due Diligence and Reach a Sale Agreement

After making the initial approach to buy a business, the owner will invite you to the negotiation table if they like your offer.

Before finalizing the deal, be sure to do further due diligence. At this point, the owner should provide all the crucial information about the business, including permits and licenses, asset listings, contracts and leases, certificate of good standing, and organizational chart.

Ask as many questions as possible. If anything looks suspicious, engage your lawyer. And if everything checks out, draw a sale agreement that outlines the terms of the deal.

That How to Buy a Business!

Buying a business eliminates the uncertainty of starting a new business. You’re buying a proven concept.

However, if you have no experience with business acquisitions, you might end up making costly mistakes. Lucky for you, this post on how to buy a business has all the information you need to make the right moves.

Keep tabs on our blog for more business advice and insights.

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