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.
Ocean Van bought Coco Laundry, a one-stop-shop for laundry needs in Long Beach, California in 2022. Services include a self-service laundromat; wash and fold service drop-off, pick-up and delivery; and dry cleaning.
“I learned a lot about the overall process when buying a micro business,” he says, “including valuation, due diligence, building relationships with the sellers, and working with a transaction team.”
One of the most important things he learned was “when to let go of a bad deal and when to invest energy and time in a good deal,” he says.
If you’re thinking about buying a business, here are tips for successfully buying an existing LLC.
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.
However, there are serious risks with buying an LLC as well.
“I don’t like to buy an LLC,” warns Garrett Sutton, attorney, author and founder of Corporate Direct. He prefers to buy the LLC’s assets and set up a new business entity.
“If the seller insists (for tax reasons), you must make sure that they are responsible for any lawsuits and claims that arose when they owned the business. You may have to set up a reserve fund that is held for a period of time so that if a claim arises it is paid out of the fund.”
What Should I Consider Before Buying an Existing LLC?
Gretchen Roberts acquired an accounting firm in 2023. “I was fortunate that the books were in very good order and the financials were clear and straightforward,” she says.
Now she’s CEO of Red Bike Advisors, which helps other business owners acquire businesses, providing a range of services from financial due diligence and entity structure to cash flow modeling and post-close accounting and tax support.
In her firm’s work with those acquiring businesses, she says “clean, straightforward financials are the exception rather than the rule.” Instead, she says, “Most financial reviews bring up additional issues, whether trying to determine if the information is accurate, or agreeing on how to classify certain expenses such as owner perks, or spotting financial risks that could dramatically change the buyer’s projections post-close.
In addition to financials, get a copy of its business credit reports to see if they list any outstanding debt, UCC liens, judgments or other undisclosed financial obligations. While business credit scores don’t have to kill a deal, they may offer some insights into the financial health of the business.
You can check, monitor and manage business credit through Nav.
“Make sure the LLC has followed all the formalities and has the proper licenses to operate,” Sutton advises. “If you buy someone else’s LLC you can still have it pierced for the previous owner’s failings.”
Van recommends new entrepreneurs purchase a business with strong recurring revenue. That will “make it less risky during the transition and as the new owner learns the industry and business,” he says. “A turnaround type of business would be risky and require more capital invested to turn the business around.
Along those lines, Roberts recommends potential buyers “run post-close projected, best, and worst case scenarios to forecast revenue, profit, and debt coverage. Can debt and/or investor payouts be supported in the worst case scenario?”
What 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.
“Invest in professionals (legal and financial) for your due diligence,” Roberts advises. “A business is likely the largest purchase you will make outside of your primary home, and you need to be confident in the deal structure, terms, and viability of the business.”
LLC Costs
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, as Sutton recommends, you will incur the cost of new LLC formation costs, including 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.
Nav’s Verdict
Finding and buying a business can be a great way to transition to entrepreneurship. And successful business owners can acquire other businesses to continue to grow. Some savvy entrepreneurs even find ways to profit from LLC losses.
Whatever your goals, “It’s important to take action and invest time and energy almost full-time into searching and finding the business to make it fruitful,” advises Van.
Buying an LLC FAQs
How Do I Finance the Purchase of an LLC?
There are several types of small business loans and financing options that may be used to purchase a business, including:
Van used a home equity line of credit and savings to purchase Coco Laundry. “The line of credit allows me to have a lower interest rate and extremely liquid capital to close the deal, compared to an SBA loan or any loan,” he says. “The downside is my house is on the line if things go south, but I was confident in the performance of the business that can make the payment.”
Roberts used an SBA loan and seller note to purchase the accounting firm she acquired.
The option that works best for your business will depend on your qualifications (usually personal credit and/or business credit), the financial health of the business you’re purchasing, and how quickly the seller wants to cash out.
What Legal Aspects Should I Be Aware of When Buying an LLC?
“If you buy an existing LLC or corporation, you are buying the liabilities that may exist within the entity,” warns Sutton.
“When buying a business it is best to buy the assets of the business and then transfer them into a new LLC that you form,” recommends. “That way you don’t take on the previous obligations or lawsuits in waiting that may come with buying the existing entity.”
At the same time, Roberts says there is a risk of overcomplicating the sale. “We see a lot of buyers’ attorneys set up complex entity structures designed to mitigate risk,” she warns. While some of that is “absolutely appropriate,” she says, “sometimes the structure ends up being not tax-advantageous and/or results in a much larger compliance burden with separate tax returns, bookkeeping, and entity compliance required.”
She encourages prospective buyers to work with their attorney and accountant to “design a structure that balances risk mitigation and compliance burden and that is tax-advantageous.”
How Do I Negotiate the Best Price for a Business?
“There’s a saying: ‘Your price, my terms. My price, your terms,” Robert says.“Every deal is a negotiation along that continuum, and the ultimate goal is to create a win-win where both buyer and seller are happy with the outcome.”
Van says it’s important to “understand what you can afford and don’t overpay and put the business in distress” if you aren’t able to make payments on any financing you use to acquire it. “If someone is willing to pay higher than you, you can win over (the seller) with other qualitative strengths, your plan with the business after acquisition, etc.
But let the next guy pay higher, if he or she thinks they can do something with it that makes it worth more,” he recommends.
If your goal is to get a better deal, “Use every argument you can (to reduce the price), including the failure to follow the formalities,” Sutton suggests.
And know when to walk away. “Let the next guy pay higher, if he or she thinks they can do something with it that will make it worth more,” Van says.
What Steps Are Involved in Transitioning Ownership of an LLC?
The best route to take, Sutton says, is to form your own LLC and transfer the assets of the previous business into it.
The following steps may be modified, depending on whether you are acquiring the LLC or forming a new one.
Review the LLC’s operating agreement. First, check the existing rules for transferring ownership. This document outlines the process and any restrictions.
Get all members’ approval. Most LLCs require all current members to agree to the ownership change. Hold a meeting to discuss and vote on the transfer.
Determine the LLC’s value. Get a professional valuation to set a fair price for the ownership stake being transferred.
Draft a purchase agreement. Create a legal document that outlines the terms of the sale, including price, payment method, and transfer date.
Update LLC documents. Modify the operating agreement and membership certificates to reflect the new ownership structure.
File necessary paperwork. Submit updated forms to your state’s business office. This might include a Certificate of Amendment or similar document.
Notify relevant parties. Inform clients, vendors, and your bank about the ownership change to maintain smooth business operations.
Transfer tax obligations. Work with an accountant to handle any tax implications of the ownership transfer.
Other steps you may need to take include:
- Get a new business bank account.
- Get a new small business credit card.
- Set up a new merchant services account for accepting payments.
How Do I Ensure a Smooth Post-Purchase Integration?
Van says there will be a learning curve. “It will require a lot of time and energy to invest at the beginning to learn everything. Be a student, build relationships with new employees and customers, so the business can continue to run while you learn. Trust your gut when making decisions,” he says.
“Ensure the previous owner and you are aligned on the Day 1 transition with the team and clients all the way through at least 90 days,” Roberts recommends. “It’s critical to have their support so both the team and customers feel confident in the transition. One way to accomplish this is to use the purchase agreement to tie outcomes of the transition to the purchase price–for example, using client retention, employee retention, or revenue as a benchmark.”
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