How To Buy a Working Business: A Quick Guide
Most people prefer buying a working business because it’s less risky compared to starting a business from scratch. When you purchase a working business, you get to manage an operation that’s generating profits and cash flow. Besides, you have a well-established reputation, customer base, as well as the staff who are familiar with the operations of the business. Also, you don’t need to re-invent new business processes—like creating new systems, policies, and procedures—because there’s an already set successful formula for managing the business put in place.
Buying a working business, however, comes with one major downside—it’s more expensive than starting it from nothing. But the good thing is, it’s much easier to get the required financing to buy such a business than to start a new business.
The thing is, investors and bankers are more comfortable with financing an already existing business. Moreover, an existing business can give you legal rights like copyrights or patents, which can be very profitable in the long run.
However, there’s nothing like a sure bet when it comes to purchasing an existing business. If you are not careful, you can end up taking over the wrong business—thus losing your money in the process. With that said, make sure you follow the following steps to help you to get the best deal when buying an existing business.
Determine the kind of business you want to buy
This starts by narrowing down your interests, skills, experience, and passions. With that said, you need to buy a business that fits with what you love doing and are experienced in.
For instance, if you have been a head chef at a restaurant, and you want to manage your restaurant. In such a scenario, your experience in the industry, and the passion to run such a business can be the ideal starting point for owning a business.
While you might want to purchase a business because of its financial benefits, make sure that you align yourself with the immaterial goals of the business. At the end of the day, the more familiar and knowledgeable you are about the model, services or products, industry, trends, and customers of the business, the more successful and innovative your new business ideas will be.
Search for businesses listed for sale
There are numerous ways to find businesses for sale that fit the business model you are searching for. These ways include:
- Craigslist ads
- Online business marketplaces
- Business brokers
- Newspaper classifieds
- Attending industry conferences and networking with business professionals
The primary role of a professional Orlando Business Broker is to legally represent business sellers. Therefore, ensure that you exercise extra caution when conveying your information to them—like how far you want to go in negotiations.
But a professional business broker can assist you to identify the kind of business you are looking for, prescreening business to rule out failing businesses, handling the necessary paperwork, and negotiating on your behalf. Please note that business brokers earn a commission after completing a sale—and the seller is the one who makes the payments.
Evaluate the business
By now, you know why you need to buy a business. But, do you understand the goals you have for the business after acquiring it? Therefore, it’s important to evaluate whether the business suits your needs.
Take your time to determine whether your financial position allows you to purchase the business. Also, it’s important to check whether you have enough money to run the business once you buy it. The biggest consideration from a capital point of view is the returns you expect from the business.
Seek the services of a professional accountant to help you in reviewing the financial documents of the business. Some of the documents that the accountant should review include:
- Tax returns
- Sales records
- Balance sheets
- Accounts receivables and payables
- Cash flow statements
- Debt disclosures
These documents should help you get a good picture of whether the business will meet your goals or not.
Value the business
In this step, you must review what other buyers paid for a similar business in the market. This should help you to get a market price for the business. Here are two common methods to help you in valuing the business:
- Calculating the net worth of the business – basically, this is the difference between the assets and liabilities. However, it’s important to note that this method doesn’t put into consideration intangible assets, and this includes future earnings.
- Calculating the value of the business based on the capitalized future earnings – when buying a working business, you are essentially buying its assets, as well as the profits that the business might generate in the future—these are referred to as future earnings. Now, this technique “capitalizes” the future earnings of the business by generating the expected value today.
Now, once you value the business, it’s time to negotiate the purchase agreement. Typically, you are responsible for drafting the agreement because you are the one investing, and have a higher risk of loss. Make sure that you involve an attorney experienced in mergers and acquisitions when drafting this document.
Once you agree on the final price, it’s time to look for the capital. Numerous ways can help you to source for the required capital, like:
- Seller financing
- Personal financing
- Venture capital and angel investing
- Business loans
Take your time to research more about each of these forms of business funding to determine the kind of arrangement that would be suitable for your business.