When most of us think of becoming an entrepreneur, we often think of building a brand new business. But buying an existing business can be a smart way to become a business owner while reducing the risks associated with startups.
What Are The Advantages Of Purchasing A Business Over Starting A New Business From Scratch?
There can be numerous advantages to buying a business versus creating your own business from the ground up. When you buy a business, you may also buy its:
- Customer base. You can immediately benefit from the existing customer base the business has already established. It can be expensive to find and acquire new customers. If the business you buy has a good reputation you reduce that cost. Many buyers require the seller to sign a non-compete for a period of time so they can’t take all their customers elsewhere.
- Experience. If the business has employees, you may want to continue to employ them to benefit from their experience. Existing contractors can be helpful to the new owner as well. Business owners who sell their businesses also agree to stay on for a period of time, which may be beneficial.
- Vendors and suppliers. If the business has good relationships with suppliers you may be able to benefit from those relationships, which may include net-terms billing. For example, the business may have established net-30 or net-60 terms that allow it to pay for purchases later.
- Good credit. If the business has good business credit, you may have an advantage in terms of getting financing or terms with suppliers. If the business is earning healthy revenues that also helps it qualify for small business loans at better rates.
- Intellectual property. You may also purchase the IP of the business including copyrights, patents and/or trademarks.
- Brand and goodwill. If the business is well-known and respected in the community you will be able to leverage that reputation to continue to grow your business.
Another big advantage is that it can be very hard to get small business loans for a startup. Lenders prefer to lend to businesses with at least two years of revenues, so buying an existing business with cash flow will provide more options to finance that purchase.
Are There Costs With Purchasing An LLC?
You will likely have to pay some money out of pocket to purchase another business. Most business owners who sell their businesses want at least some cash upfront. Otherwise, if you aren’t successful in running the business they walk away with nothing.
How much you’ll pay depends on the type of business, how much money it makes and many other factors.
Some sellers will self-finance part of the sale. Or you can get financing to buy the business to help reduce your out of pocket costs. Often you’ll need a down payment of at least 10—20% of the purchase price.
However, some businesses can be purchased for as little as a few thousand dollars. In that case, you may be able to put the entire cost on a business credit card!
As far as the LLC itself is concerned, you can either purchase the entire business including the LLC, or you can purchase the assets of the business and form a new LLC (or other business structure) to hold those assets. While buying the whole LLC may seem simpler it does come with more legal risk. And asset protection is one of the main benefits of an LLC.
In addition, there will be costs you’ll incur through the sales process including:
Legal and Professional Fees
It’s a good idea to hire a business attorney for legal advice, to prepare or review term sheets and legal documents, and to review the purchase agreement. Skimping on these costs can be expensive and can even put your personal assets at risk.
You will also want to consider hiring a CPA to review financial statements and tax returns of the business to better understand what you’re buying.
Spending money during the due diligence process can save you money in the long run, even if what you learn makes you decide not to buy the business.
LLC filing requirements and filing fees vary by state. In addition, the business will need professional, occupational and/or business licenses.
If you purchase an LLC, you may need to update the Articles of Organization by filing Articles of Amendment with the state Secretary of State or similar agency. In addition, it’s a good idea to update the LLC Operating Agreement, even if not required. Some business formation services offer those as part of a package or for an additional cost.
If you decide to form a new business entity, you will incur the cost of new filing fees.
Where Can I Buy an LLC?
There are numerous options to find businesses for sale:
1. Online Marketplaces
There are numerous websites that help facilitate the sale and purchase of businesses. Here are a few of the more popular ones.
- BizBuySell is the largest online site for businesses for sale
- Flippa is the largest online marketplace for ecommerce and online businesses for sale
- Microacquire focuses on startup acquisition and can be especially helpful if you’re trying to acquire a SaaS or ecommerce business.
- BusinessBrokers.net features businesses for sale across the US.
2. Business Brokers
These professionals evaluate and facilitate business sales. They may be aware of opportunities that don’t make it to online marketplaces. Business brokers can help sellers get a certified valuation, which can help both the buyer and seller feel more confident about the price of the value of the business. Just like in real estate, though, a broker often represents the seller so you want to make sure you are getting independent professional advice as a buyer.
3. Word of Mouth
Start talking to people you know in your community or in the industry in which you want to make your purchase. You may hear about business owners who are thinking of selling but haven’t yet taken steps to put it up for sale.