Buying a business is like investing in online real estate.
Between budding entrepreneurs and veterans, successful ecommerce brands and early businesses, there are hundreds of thousands of ecommerce stores available to buy.
How To Buy an Existing Business
Benefits of buying a business
When you buy an online business instead of creating one, you’re less likely to procrastinate. The hard part of store setup is all done for you—there’s no need to worry about the logo not being right, get stuck on a color scheme, or feel discouraged by all the little tasks starting a new store requires.
Plus, whether you’ve invested $50 or $1 million in buying a business, you’ve proven to yourself that you’re committed to making this business a success. The additional financial payment is more than enough to motivate you to go after your first sale early on.
The ability to start selling from day 1
The best thing about buying a business is it lets you completely skip the store setup phase and dive right into marketing. If your store has added products to your website, you can start selling the day you get account access.
And by diving right into marketing, you’ll inch closer to getting your first sale. If you were to build a website yourself, you’d be spending time during the first couple of weeks designing the site. But by buying a business, you gain a head start over new competitors stuck in the setup phase.
How to buy an existing business
1. Decide what stage of business to buy
Buying a business is a big investment, and it can be a daunting decision. Here are some questions that can help you narrow down what stage and size of business you should purchase:
- What sort of lifestyle do you want and need? Depending on the size of the business you’re purchasing, your lifestyle can change drastically.
- A startup means long hours with not a lot of pay, as you try to establish the business and find some security. But if you enjoy building from the ground up, this might be the right kind of business for you.
- If you’re looking to grow an organization that’s already established and be able to live comfortably off your acquisition’s profits, maybe look for a small business with an already solid customer base.
- If you want to simply maintain a company that’s doing well and diversify your investment portfolio, you may want to look into businesses that have already gone through incorporation.
- What are your skills and strengths? When deciding on a new business venture, first figure out what it is you bring to the table and what it is you’ll need to learn or improve upon. For example, if payroll is not your strength, then perhaps stay away from acquiring a new business with a lot of employees.
- What are you interested in? Already having know-how in a certain area narrows down the industry you want to focus on. Being a business owner is already tough and can take up a lot of time, so you might as well buy a business that aligns with your interests.
2. Browse businesses on sale
After you’ve decided what type of business to buy, it’s time to find it. There are a lot of places where you can find a business for sale, and the type of business you want to find determines where you’ll find it.
For example, if you’re looking for something established, a business broker might be your best bet. You can also find businesses listed on Craigslist, in the newspapers, and within your own network of small business owners.
However, if you’re the type of person who wants to see all their options in one place, an online business marketplace like Bizbuysell might be a better option for you.
3. Understand why the business is being sold
Businesses are bought and sold for all sorts of reasons. Hopefully, the business you’re considering is a good business in good standing and the current owners are simply retiring, but there’s always the possibility of more troubling reasons.
If possible, sit down and speak with the previous owners and ask why they’re selling their business. Ask them questions like:
- What debts and liabilities does your business have?
- Can I take a look at the financial track record and/or a cash flow statement for your business?
- Have you had any supply issues?
- What is the state of your equipment?
- What sort of working capital did you start out with?
- Can I see your business plan and business operations?
Find out everything you can before you make this business purchase—from the selling owners, your own online research, and conversations with customers and employees.
Remember: the problems and successes of this business become yours once it becomes your business.
4. Value the business
Once you’ve chosen the business you want, the next step is calculating its market value. There are a lot of things to consider when assessing the value of a business, and there’s no one equation that fits all.
However, armed with the information you learned in the last step, there are four musts for getting an accurate measurement of a business’s value:
1. Understand how the business stacks up in its industry. That means figuring out the seller’s discretionary earnings (SDE). You can do this by going through financial statements and balance sheets, then figuring out what the receivables and expenses are for that business. Measure that up with the SDE multiple for that industry.
2. Look at its finances.
- Check the business’s books.
- Look over tax returns.
- Review profit/loss statements from at least three years.
- Read any permits, licenses, or proprietary documents.
3. Take stock of both its tangible and intangible assets. That means everything from property and inventory to intellectual property and the value of a loyal, established customer base.
4. Take a hard look at a business’s liabilities, which could mean a faulty business plan, accrued expenses, and business loans.
Combine all of this and the information you learned about why the business is being sold to figure out the business’s true value. Then weigh that against the time and commitment you’ll need to get this business to where you want it to be, which will make up the ultimate valuation.
5. Negotiate price
Now that you’ve done your due diligence, it’s time to negotiate on the price you’re willing to pay for this business. The purchase price listed by the seller is not a fixed price. It can be adjusted based on the valuation you’ve discovered and with the terms of your payment.
Expect that you and the seller will go back and forth in submitting offers and counteroffers to each other. You’ll also begin to figure out the general terms of the sale during this process, like whether you want to purchase the assets of the business or just make it a stock sale.
One note: when you make an offer, don’t belittle the business owner by severely undervaluing their business or they might choose not to negotiate with you at all.
6. Submit a letter of intent (LOI)
A letter of intent is simply a letter that states you intend to do business with the recipient of the letter. LOIs usually include:
- Who is making this deal (i.e., the parties involved).
- The general terms of the deal, but not any details. For example, it may just state that Party A desires to purchase Party B’s business.
- Requirements and restrictions of the deal. A lot of times that can be the inclusion of a confidentiality agreement or NDA.
- A timeline of how the deal will be made.
Before a business acquisition, it’s a good idea to submit an LOI so all parties are on the same page before any contracts are hammered out and signed.
7. Review important legal documents
After both parties have signed the LOI, review any and all legal and important documents. This is another chance to make sure you’re going into this deal with your eyes fully open.
Examples of documents you should look through are:
- Property documents, like commercial leases or rent rolls
- Existing contracts and whether they can be transferred over to a new owner
- Marketing and advertising materials
- The business tax returns for the past three years
- Any incorporation documents, certificates, business licenses, etc.
- Current income statements, payroll, balance sheets, and cash flow statements
- Business loan/debt information
- Any legal records, like pending litigation
8. Get funding
Once all of your due diligence has been taken care of, the next step is finding financing options for this purchase. Usually, you put down some sort of down payment and then take out a loan for the rest.
There a few kinds of financing to choose from:
- Shopify Capital. You potentially can receive financing for inventory, marketing, or hiring staff, without lengthy bank approvals or giving up part of your company. Repay the funding through a percentage of sales, with flexible payments that work for you.
- An SBA loan is guaranteed by the Small Business Association. This type of loan offers more flexible limits, interest rates, and payments than traditional bank loans. Because of this, these loans tend to be used for more high-risk ventures.
- A standard bank loan is guaranteed by the bank that issues the loan. The interest rates and terms of these loans tend to vary depending on the bank and the credit/financial history of the person taking out the loan.
- Rollover for business startups (ROBS) is a way that you can use your 401(k), IRA, or another retirement fund to pay for a new business startup cost or business acquisition cost. However, this financing option only works if you have a strong retirement plan to borrow from.
- Seller financing is a loan offered by the seller of the business instead of an outside lender. For example, the seller could offer to sell you their business for a down payment and monthly payments with a fixed interest rate until the business is paid off. Just make sure to do your due diligence on the business and seller before using this option.
- There are a slew of crowdfunding sites like GoFundMe, Kickstarter, and Indiegogo that help startups get on their feet. If you can write a compelling crowdfunding campaign, you might be able to get the public to help you acquire this new business.
- If you are part of a specific demographic—like veteran owned, minority owned, women run, etc.—you may be eligible for business grants.
- Private investors can be angel investors, friends, family. The people in your life can assist you in getting the funding you need. Don’t forget to look to your own network to see where you can get help to achieve your dream.
9. Close the deal
Now that everything has been researched and discussed, it’s time to close the deal. This is where your final purchase agreement comes into play. This is the legally binding contract both you and the seller must agree upon before the ownership of the business is transferred.
It’s a good idea to spend a little money and have a lawyer look over the agreement, as well as negotiate on your behalf. That way, you can make sure you’re getting everything you and the seller agreed upon.
Once everyone has agreed to the terms of the purchase agreement and signed it, your lender will put the necessary funds in escrow to hold them for safekeeping until an agreed-upon closing date.
When all the legal documents have been signed and submitted by both parties, the funds will be released from escrow and given to the seller, and you’ll be the official new owner of the business.
Congratulations! After you’ve closed the deal be sure to follow up on transferring and applying for the necessary titles and licenses for your new business in your name.
Buying an existing business FAQ
How do you buy an existing business?
- Decide what stage business to buy.
- Browse businesses on sale.
- Understand why the business is being sold.
- Value the business.
- Negotiate a price.
- Submit a letter of intent.
- Review legal documents.
- Get funding.
- Close the deal.