- There are many opportunities to buy an existing business, and it’s important to set yourself up for success before starting the process.
- The positives of buying an existing business include inheriting a customer base and operational plan, while the negatives include a potentially higher purchase price and having to deal with possible existing problems.
- This article explains what you need to look for in a potential business purchase, the pros and cons, where to find the right one, and the best funding options you can use to purchase an existing business.
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State of the “Businesses for Sale” Market
The “businesses for sale” market refers to the sector that deals with buying and selling established businesses. It’s made up of a wide range of industries and sectors, from small local businesses to large enterprises. The market is influenced by a variety of factors, like:
- The state of the economy: During times of economic growth and stability, the market tends to be more active, with a higher number of businesses being bought and sold. On the other hand, during economic downturns or recessions, the market may experience a slowdown as buyers become more cautious.
- Industry trends: Different industries have varying levels of demand. Some sectors, like technology, healthcare, and e-commerce, traditionally have more potential for growth and profitability. Other industries may experience fluctuations based on consumer preferences, regulatory changes, or market disruptions.
- Demographics: The aging population and retirement of baby boomers have had a significant impact on the “businesses for sale” market. Many business owners from this generation are looking to sell their businesses and transition into retirement, creating a supply of businesses for sale. This trend is expected to continue as more baby boomers reach retirement age.
- Online marketplaces: The invention of online platforms and marketplaces has transformed the way businesses are bought and sold. Websites and platforms dedicated to connecting buyers and sellers have made it easier to access a larger pool of potential buyers. These platforms offer various tools to streamline the buying and selling process.
- Financing and deal structure: The availability of financing options and deal structures can impact the market. Access to capital and favorable lending conditions can motivate buyers and make acquisitions more feasible. One the other hand, the market can go down when interest interest rates are high and credit is less easily available.
Like all markets, the “businesses for sale” market is dynamic and can vary significantly based on regional and local conditions. Factors like government regulations, tax policies, and cultural norms can also shape the market dynamics.
Pros and Cons of Buying an Existing Business
Buying an existing business can offer several advantages and disadvantages for small business owners. Here are some pros and cons to consider when finding the right business to purchase:
- Established operations: An existing business already has a foundation in place for things like operational systems and processes. This can save time and effort compared to starting a business from scratch.
- Brand recognition: You’ll get a brand name, reputation, and customer loyalty built into the deal. This can provide a head start in terms of market recognition and customer trust (although make sure that the brand reputation is a positive one).
- Established customer base: One of the biggest advantages is inheriting an existing customer base. This can generate immediate revenue and provide a platform for future growth and expansion.
- Cash flow and financial history: An established business often has a track record of financial performance, which can help in securing small business loans and assessing the business’s financial viability. Positive cash flow from day one can also reduce the risk of initial losses.
- Supplier and vendor relationships: Established businesses may already have established relationships with suppliers, vendors, and partners. This can make it easier to access reliable suppliers and favorable terms from the get-go.
- Higher cost: Buying an existing business can cost more than starting a new business. The value of an established business may reflect its assets, customer base, and potential for future earnings.
- Existing challenges: The business you acquire may come with existing problems or challenges that need to be addressed, like outdated equipment, inefficient processes, or legal issues. Assessing and fixing these issues can require time, effort, and investment on your part.
- Management challenges: It’s hard for a new owner to integrate into an existing business culture and manage employees who already work there. These challenges can lead to difficulties putting needed changes into place or achieving desired outcomes.
- Hidden liabilities: It’s crucial to conduct thorough due diligence to uncover any hidden liabilities — this could be pending lawsuits, unpaid taxes, or contractual disputes. If you don’t identify these risks ahead of time, you may end up paying for them down the road.
Ultimately, you’ll want to consider both the advantages and disadvantages, as well look closely at the specific business and its market conditions. Conducting due diligence, seeking professional advice, and creating a well-informed business plan can help mitigate risks and increase the chances of a successful acquisition.
Where to Find Existing Businesses
There are several ways to find businesses that are for sale. Here are some common strategies to help you locate businesses that are on the market.
Online business marketplaces
There are online platforms dedicated to buying and selling businesses. Websites like BizBuySell, BizQuest, and BusinessesForSale.com offer listings of businesses for sale across different industries and locations. These platforms let you search for businesses based on specific criteria, like industry, location, and price range.
Working with a business broker can help you access a wider range of businesses for sale. Brokers specialize in connecting buyers with sellers and often have a large network and access to confidential listings. They can help you navigate the buying process, negotiate deals, and provide guidance throughout the transaction.
Professional networks and associations
Engaging with professionals such as lawyers, accountants, and financial advisors who work with businesses can provide access to potential opportunities. They may be aware of businesses looking for buyers or have connections with business owners who are planning to sell.
If you have a specific industry or location in mind, you can proactively reach out to business owners to ask about their interest in selling. This approach requires research and targeted communication, but it can lead to discovering businesses that are not actively listed for sale.
Industry-specific publications and websites
Some industries have specialized publications, websites, or newsletters that feature businesses for sale within their niche. These resources can provide insights into opportunities within your industry.
When searching for businesses to potentially buy, having a clear understanding of your own criteria, budget, and objectives will help streamline the search process and focus on opportunities that line up with your requirements.
Why Consider a “Boring” Business
When people think of successful businesses, they often first think of flashy startups like Google or household names like Target. But there are a lot of lesser-known businesses with less of the pizzazz that provide fantastic opportunities for any entrepreneur looking to buy an existing company. More localized businesses or family-owned companies can have a proven track record of success, be profitable, and provide stability for you as an investor.
Types of “Boring” Businesses
There are many types of businesses that might be more low-key than a billion-dollar tech startup or high-profile company but are profitable and stable. These businesses include:
- Construction or landscaping companies
- Vending machines
- Personal training
- Online teaching
- Cleaning service
- Accounting and bookkeeping
- Real estate
When you’re looking to buy a business, it’s best to look at the financial details and potential for future performance rather than being drawn in by a shiny idea. Making sure the business is a stable investment is the best way to set yourself up for success.
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Business Formation: Due Diligence and Legal Considerations
With any new venture — whether that’s forming your own business or buying an existing one — you’ll need to both conduct due diligence and address legal considerations to ensure compliance, mitigate risks, and protect your interests.
Due diligence is the process of thoroughly investigating and assessing a potential business opportunity before going ahead with it. You’ll need to gather relevant information (like the asking price vs. the fair price), analyze these details, and make informed decisions before agreeing to a sale of the business. Due diligence helps you understand the risks, opportunities, and overall viability of the business you’re forming or acquiring.
During due diligence, you’ll want to think through the following aspects:
- Compliance: Make sure that the business complies with all applicable laws, regulations, and licensing requirements. Assess any potential legal liabilities, ongoing litigation, or regulatory issues that may affect the business.
- Finances: Review financial statements, balance sheets, tax returns, and other relevant financial documents to assess the business’s financial health, revenue, expenses, profitability, and cash flow. Identify any outstanding debts and liabilities.
- Contracts and agreements: Examine contracts with customers, suppliers, landlords, and employees. Evaluate their terms, obligations, rights, and potential risks. Identify any limitations, exclusivity, clauses, or potential disputes that may impact the business.
- Intellectual property: Determine whether the business owns or has the right to use any patents, trademarks, copyrights, or trade secrets. Assess the protection and enforceability of its intellectual property.
- Assets and liabilities: Identify and evaluate the assets and liabilities of the business, including real estate, equipment, inventory, leases, loans, and outstanding obligations. Assess any potential environmental, legal, or operational liabilities.
In addition to due diligence, you’ll want to consider several legal aspects when forming or acquiring a business. While the specific legal requirements may vary depending on the jurisdiction and type of business entity, some common legal considerations include:
- Business structure: Make sure the business uses the appropriate legal structure, such as a sole proprietorship, partnership, corporation, or limited liability company (LLC). Each structure has different legal and tax implications.
- Registration and licensing: Check that the business is registered with the relevant government authorities and has the necessary permits and licenses required to operate legally in your area.
- Contracts and agreements: Review contracts, like partnership agreements, operating agreements, shareholder agreements, employment contracts, customer agreements, and vendor contracts. Make sure they’re comprehensive, clear, and protect your interests.
- Compliance with employment law: Ensure the previous owner understands and complies with employment laws, including hiring practices, wage and hour regulations, employee benefits, workplace safety, and anti-discrimination laws.
- Tax obligations: Check that the business complies with tax laws and obligations, including obtaining tax identification numbers, understanding tax reporting requirements, and fulfilling tax payment obligations.
- Data privacy and security: If the business handles customer data, make sure there are appropriate privacy and security measures to protect it in compliance with the law.
It’s a good idea to consult with legal professionals to ensure that all legal requirements and considerations are adequately addressed when you’re acquiring or forming a business. Using a business formation service is one of the best ways to form a business and make sure you’re compliant.
Funding Options for Purchasing an Existing Business
When you’re buying a business, you’ll need quite a bit of working capital up front to cover startup costs like the purchase price and the down payment. This capital can be made up of private funding (from investors, personal savings, or loved ones) or from lenders for funding like bank loans or lines of credit.
You also may be able to use seller financing, which is an agreement between the buyer and the current owner to pay back the value of the business over time. Seller financing can benefit both parties by allowing the buyer to pay more slowly and giving the seller a bigger pool of potential buyers to choose from.
Some examples of good business acquisition loans include:
How Can Nav Help?
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This article was originally written on October 25, 2023.
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