Buying a business is like investing in online real estate.
Chosen carefully and maintained correctly, buying an ecommerce business creates an income stream without having to start a business from scratch. And while there are hundreds of thousands of ecommerce stores available to buy. Not all of them make a great investment. So, here’s how to find and acquire a business, how to do your due diligence, and how to ensure you’re getting the best deal possible.
- Why you should buy a business
- How to buy a business in 8 steps
- How to buy a business with no money
- The difference between franchising and buying a business
- Things to consider before you decide to buy a business
- Buying an existing business: a final thought
Why you should buy a business
There are a number of advantages to buying an existing business over starting a new one.
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, getting stuck on a color scheme, or feeling 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’re committed to making this business a success. Commiting to a financial payment should motivate you to go after your first sale.
Start selling from day one
Buying a business lets you dive right into marketing and selling. You gain a head start over new competitors stuck in the setup phase. And, if you’re lucky, you skip the early stages where a business can fail.
If your store has added products to your website, you can start selling the day you get account access. Alex Yurek, owner of Detour Coffee Roasters, saw the benefits of purchasing an established business. “There was so much opportunity to renovate the brand, increase what we were doing digitally, and really get the organization into a growth mode and use that as a bit of a foundational pillar for all the other things that we were looking to do,” Alex says.
Count on an established customer base
Established businesses may have an existing customer base and proven track record of selling to them. Acquiring this type of company means you can generate your first sale almost instantly.
Rob Weatherhead, freelance digital consultant, says, “By buying an existing business, we acquired an existing customer database, some level of repeat customers, and a level of set up, which meant we could be operational from day one.
“Had we started everything ourselves, it would have taken us longer to get launched, and longer still to be generating notable revenues, [and] all of the time we would have been incurring overhead.”
How to buy a business in 8 steps
- Decide what stage of business to buy
- Browse businesses for sale
- Understand why the business is being sold
- Value the business
- Negotiate price
- Submit a letter of intent
- Review important legal documents
- Close the deal
1. Decide what stage of business to buy
Buying a business is a big investment, and it can be a daunting decision.
First, determine the type of lifestyle you want. Depending on the size of the business you’re purchasing, your lifestyle might change drastically.
- Small business: These companies demand 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.
- Established business: If you’re looking to grow a business that’s already established and you’d like to be able to live comfortably off your acquisition’s profits, maybe look for an existing company 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.
Mona Vaughn, owner of Bean Farm, says, “My husband and I intentionally searched for an established business that needed a few updates to expand its growth.
“Existing businesses typically come with a wealth of data, customer loyalty, and have made a dent in earning market share. Our goal was to find a business that had those qualities and was also primed for a visual branding update and a transition to more efficient/effective digital operations or marketing.”
Mona adds: “We felt this would be the best way to make sure our investment had an immediate return with regular sales and lots of options to get more sales using modern practices.”
Other questions to consider include:
- What are your skills and strengths? When deciding on a new business venture, figure out what you bring to the table and what you’ll need to learn or improve upon. For example, if payroll is not your strength, perhaps stay away from acquiring a new business with many existing employees.
- What are you interested in? Already having know-how in a certain area narrows down the industry you want to buy into. 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 for sale
After you’ve decided what type of business to buy, it’s time to find it. There are a lot of places to find an existing 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, business brokers 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.
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 owner is simply retiring, but there’s always the possibility of more troubling reasons.
If possible, sit down and speak with the previous business owner and ask why they’re selling their company. 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 existing customers and employees.
Remember: The problems and successes of the business become yours once it’s your company.
4. Value the business
Next, estimate how much the business is worth. This valuation is a good starting point for future negotiations. You don’t want to pay more than you have to, but similarly, you want to negotiate for a good deal.
There are several approaches to valuing a business, from income-based to asset-based methods. A business broker can connect you with a certified public accountant (CPA) or accredited senior appraiser (ASA) that will help value the business you’re thinking of acquiring.
Rob Weatherhead says of buying his business, “The seller had a figure in mind, but we needed to consider our own version of its value based on best and worst case scenarios. Thankfully, we had a very open dialogue with the seller and so there was no hard bargaining. It was more finding a way we could reach a point both parties were happy with.”
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 the 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.
Note: When you make an offer, don’t insult the business owner by undervaluing their business. They might choose not to negotiate with you at all.
6. Submit a letter of intent
A letter of intent (LOI) is a document that states you intend to do business with the recipient of the letter. 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.
LOIs usually include:
- Who is making the 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.
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. Close the deal
Now that everything has been researched and discussed, it’s time to close the deal. The final purchase agreement 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 find a good business attorney to look over the sales agreement, as well as to 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 new official owner of the business.
Congratulations! After you close the deal, follow up on transferring ownership and applying for the necessary titles and organizational documents for your new business in your name.
How to buy a business with no money
You’ll need cash to buy the business and fund the first few months of trading. However, you don’t need to use your own money to do so. It’s possible to acquire a business without any of your own upfront capital.
Popular methods to secure financing to buy a business include:
- Traditional bank loans. Most banks offer customers an unsecured personal loan. It’s an accessible loan for those with a good credit score buying a new business, though these are smaller values. The average personal loan balance is $17,064.
- Seller financing. Some owners will loan buyers the money to purchase a business, instead of one lump sum. Buyers either pay for their purchase at a later date or in installments.
- Accounts receivable financing. Obtain financing for your acquisition and pay the loan off as a percentage of sales. Shopify Capital gives business owners lump sums without strict monthly payments. Repay the loan as a small percentage of incoming sales.
- SBA loans. The US Small Business Administration (SBA) offers loans for businesses through its own program or approved private lenders. It’s possible to use this type of financing as a business acquisition loan.
- Credit union financing. Credit unions offer loans at lower interest rates than traditional banks. However, these tend only to be available to existing members of the credit union.
The difference between franchising and buying a business
When entrepreneurs buy an existing business, they take complete ownership of the company. This includes their inventory, existing customer base, product lists, and retail partnerships.
Franchising, on the other hand, is a completely different business model. It happens when entrepreneurs purchase the rights to use an existing brand’s likeness, including its logo, name, and products. Entrepreneurs can become a franchisee for McDonald’s and open their own restaurant that sells McDonald’s Big Macs, for example.
The biggest difference between the two is the ownership and level of control. When buying a company outright, you’re at the steering wheel for the entire organization. Franchisees don’t get as much control as decisions related to marketing and product pricing are still at the mercy of the franchiser.
Things to consider before you decide to buy a business
Important things to consider before buying a business include:
- Legal documents
- Tax returns and financial statements
- Sales records
- Debt disclosure
Existing businesses often have products in stock to sell in the future. Estimate the value of this inventory throughout the purchase process.
Not only does this inform the business’s sale price, it also helps plan the runway after the deal is closed. You’ll have a rough estimation of how long the company will last with its current inventory before investing in new stock.
Rob Weatherhead says: “Most businesses will advertise themselves as ’business + stock at value,’ so you need to be 100% clear what is included in the stock and how much it is.
“You then need to consider if this stock is suitable and required for the business you want it to become. The cost of stock can be more than the cost of the business in smaller transactions.”
If the company you’re thinking of buying needs equipment to function, check whether this is included in the business sale.
A business that manufacturers its own clothing, for example, might have screen printing machines to print its t-shirts. Make sure this machinery is included in the sales agreement—the business can’t survive post-takeover without it.
While you’re doing this, clarify whether the business has full ownership over the equipment. Some companies lease equipment or use financing to spread out the cost of purchasing the equipment. These repayments will become your responsibility once the business is yours.
There are several laws that ecommerce companies must abide by when selling online. Check the business you’re thinking about purchasing follows these regulations by asking for important legal documents.
This includes, but is not limited to:
- Certificate of incorporation
- Business license (if required)
- Business insurance
- Employment contracts
- Trademarks or patents
Consider hiring a legal expert for extra support throughout this process. Ecommerce consultant Elliot Davidson says, “Sellers, even those who are using brokers, only have basic information to share, and you’ll have to dig deep and know what to look for yourself.
“The one common variable in all of these cases will be not fully knowing your legal costs at the beginning. This will vary based on the amount of communication, and you might need extra legal support throughout the process.”
Tax returns and financial statements
A business’s financial statements give insight into company performance. They can also indicate whether you’re paying too much for a business you’re about to acquire.
Ask the current owner to share the following financial statements from the past five years:
- The current balance sheet, including any business assets
- Profit and loss statements, including gross and net income
- Cash flow statement
- Financial projections for the future
- Tax returns
Looking back on her business acquisition, Mona wishes she’d focused more on these financial statements. “I wish I’d had a more solid understanding of profit margins,” she says. “This is easier when there are fewer products, and harder when running a store like ours with over 500 products. Knowing which products have the best margins helps in so many areas: budgeting, purchase orders, advertising and marketing costs, and of course, the bottom line, profit.”
Sales records are an important part of due diligence, because they verify how much the company has made. Analyze its business transactions to understand:
- How many customers have bought from the company
- Customer retention metrics, such as loyalty and repeat order rate
- How much it costs to acquire a customer (CAC)
Sales records also allow you to understand how much runway you’ll have immediately after taking over the company.
Rob Weatherhead says about buying one business, “We didn’t allow for enough investment runway post purchase. Things take time to get going, even when you buy an existing business so it is worthwhile keeping some reserves aside for the first six months.”
From startup loans to business credit cards, have the seller disclose any business-related debt before you agree to purchase the company. You’ll be liable for this debt once the business becomes yours.
Similarly, run a credit check to see the company’s credit history. If the current owner has late or overdue payments, you might run into difficulties—such as low approval rates or high interest rates—when obtaining credit for the business in future.
Buying an existing business: a final thought
Once you’ve found your dream business to acquire, work through this process and do your due diligence. The more you can find out about the business’s inner workings, the less chance there is of unknown surprises throwing your new venture into disarray.
To summarize, take these parting words from George Moulos, CEO of Ecommerce Brokers: “If an acquisition feels too rushed and your intuition and the intuition for a broker or professional also makes you feel like the acquisition isn’t the right one for you, I promise there will be other great deals for you in the future.
“Don’t rush, take your time, and you’ll know when you need to speed up for an acquisition when it feels right.”
How to buy a business FAQ
How do I take over an existing business?
- Decide what type of company to buy.
- Browse businesses for sale.
- Figure out why the business is being sold.
- Value the business.
- Negotiate a price.
- Submit a letter of intent.
- Review legal documents.
- Seal the deal.
Is it a good idea to buy an existing business?
Many entrepreneurs find buying an existing business more beneficial than starting their own from scratch. They can hit the ground running and make sales almost instantly by acquiring a business with an existing customer base and product line.
What percentage do you need to buy a business?
There is no minimum percentage you need to buy when purchasing part of a company. However, to acquire the business and transfer ownership, you’d need the majority of shares (e.g., 51%).
How to get money to buy a business?
- Seller financing
- SBA loans
- Unsecured bank loan
- Accounts receivable loan
- Credit union financing