Buying an existing business can be a long and complicated journey, but it gives you the opportunity to become an entrepreneur without starting from square one.
To set yourself up for success, choose a business you’re passionate about improving and equipped to manage. But passion alone isn’t enough — experience and knowing which questions to ask before you buy are also important.
How much do you need?
Here are the nine steps to buying an existing business:
Figure out what type of business you want to buy. Choose one that matches your skills and interests.
Search for businesses for sale. Explore listings, brokers and your professional network.
Find out why the business is for sale. Ask the owner what prompted the decision.
Narrow down your options. Find a business you can afford and manage.
Determine what the business is worth. Compare its earnings, assets and similar sales.
Make an offer with a letter of intent. Agree on a non-binding purchase price and terms.
Do your due diligence. Review its finances, legal obligations and operations.
Secure funding. Compare loans, seller financing and other funding sources.
Close the deal. Sign the agreements and complete the ownership transfer.
1. Figure out what type of business you want to buy
Narrow down your interests, skills and experience. You’re more likely to succeed if you buy a small business that dovetails with what you already know and like.
For example, if you’ve worked as a line cook for several years, you might decide to run your own restaurant. Or maybe you’re a longtime employee at a company that’s now on the market.
“Long-term key employees of small businesses are often the ones best positioned to successfully succeed the founder,” says Tim Stolz, a certified financial planner and certified public accountant at Bestgate Wealth Advisors in Maryland.
He adds that small businesses are often well positioned to buy their competitors, especially if they serve similar groups of customers.
2. Search for businesses for sale
There are several ways to find a business that fits your criteria:
Browse business-for-sale websites. Sites like BizBuySell.com, BizQuest.com and FranchiseGator.com are online aggregators for small businesses and franchises for sale. You can filter listings by industry, location and price.
Look for local advertisements (or place your own). Check local newspapers, industry publications or social media sites like Facebook or Reddit for business sale listings. You can also post an ad expressing interest in buying.
Ask your network. Reach out to fellow business owners in your area or your local Small Business Development Center. They might know of opportunities that are a perfect fit for you.
Attend industry conferences. While there, you can ask around for references or professionals who can help you find the right business to buy.
Work with a business broker. Just as a small-business loan broker can find you a loan, a business broker can find you a small business for sale.
More about business brokers
Most business brokers are hired by sellers to find qualified buyers and manage negotiations. Individual business brokers or brokerage firms may also have a list of small businesses for sale, so they can connect you with multiple options.
What business brokers can do for you:
Help identify your interests. A good broker will help you pinpoint your skills and interests and connect you with businesses that might be a good fit. They may even introduce you to an industry that you might not have thought to pursue.
Tell you which businesses to avoid. Experienced brokers can help you steer clear of bad deals and failing businesses.
Guide you through negotiations. Buying a business can involve a complicated negotiation process. A broker can advise you on what to ask for, what to avoid and how to structure your deal.
A business broker can be a valuable resource for finding an established business for sale, but it’s important to choose the right one. Choose a broker who understands and represents your interests, not just the seller’s.
3. Find out why an existing business is for sale
Business owners sell for many reasons. It could be something as simple as retirement, or there might be a more worrisome reason, like a fundamental problem with the business. Understand why the owner is selling before you buy.
Ask the owner what challenges they've encountered, what they’ve done to try solving those problems and how those attempts fared. Throughout the process, ask yourself, “Do I have what it takes to meet these challenges with different or better solutions?”
Red flags to watch out for:
🚩A weak business plan (no market for the product or service).
🚩Stronger competitors already in place.
🚩Existing business debts.
🚩A bad location.
🚩A brand reputation issue.
🚩Inventory problems (high production costs, quality issues, storage difficulties or supply-and-demand imbalance, etc.).
🚩Outdated equipment.
In addition to speaking with the owner, talk to existing customers and employees, neighboring businesses and locals. They might be able to give you a more honest view of how the business is doing, without the seller’s bias.
4. Narrow in on a business that aligns with your budget, goals and resources
At this stage, focus on the business that aligns best with your budget, goals and resources.
Set your target size and budget
Calculating the ideal size, location, sales, staff and so on of your prospective business is an important step in the business buying journey, since it gives you a scale to keep in mind when you’re shopping around. Figure out how much you’d ideally want to change a business, and assess how much those changes will cost you.
Decide how hands-on you want to be
Also look at the time and energy commitments you’re planning to invest to make the business your own. Some managers prefer to be in the weeds with their employees, while others prefer to delegate and, one day, own multiple businesses.
Factor in your industry experience
The amount of resources you’ll have to invest depends on the people and processes already in place and on the experience you have in the industry. For example, if you’re buying a tech company but lack technical expertise, you’ll need to invest time learning the ropes or hiring people who have the experience.
5. Value the business
Buyers and sellers often place very different values on the same business. An independent business valuation professional can give you an objective estimate of what the business is worth.
Valuation services, which can be found online or through word of mouth, cost anywhere between $2,000 and $10,000 or more, depending on the complexity and size of the business. But they can save you thousands more in the long run by coming up with a good estimate. Whether you do this yourself or hire someone, it’s helpful to have some knowledge of the three main business valuation methods:
Income approach
The income approach values a business based on its historical, current and projected profits. Specific methods you may come across that fall into this approach include the capitalized earnings method and discounted cash flow method.
Assets-based approach
The assets-based approach measures the value of a business's tangible and intangible assets minus debts and liabilities. Tangible assets include things like equipment and real estate, and intangible assets include things like patents, trademarks and software. The assets-based approach considers the current fair-market value of the business's assets but also the future return on investment that the owner could get from those assets.
Market approach
The market approach measures the value of a business based on how much comparable businesses have sold for. It’s a good way to get a ballpark range for a business's value and to account for local factors that the other approaches may miss, such as the business's location in a particular neighborhood.
6. Make an initial offer with a letter of intent
Once you and the seller agree on an initial purchase price and which assets and liabilities are included in the deal, you’ll submit a letter of intent (LOI). This outlines the proposed purchase price along with the key terms and conditions of the sale. These details are non-binding, which means nothing is written in stone and either party can walk away at any point.
An LOI shows the seller you’re serious about moving forward. It can also grant you exclusive rights to buy the business for a set period of time.
After you both sign it, you can get access to more information about the business to complete your due diligence.
7. Do your due diligence
By this point, you probably already have a good deal of information about the business you’re trying to buy. Due diligence goes deeper and grants you access to sensitive financial and legal information. This way, you can decide whether the price and terms in your LOI are fair or need to be adjusted.
Get expert help
Working with an attorney and CPA with experience in business acquisitions can help you stay on top of the complicated legal and tax considerations involved in a business purchase. Talk to a personal financial planner, too — business ownership is still a risk, and it’s essential to prepare your personal finances as well.
Watch for red flags
There are a few red flags to be especially on the lookout for in this process. Mark Zweig, instructor and entrepreneur-in-residence at the University of Arkansas Walton College of Business, cautions against:
Businesses that face pending litigation.
Businesses with reputations that feel impossible to improve.
Family businesses that employ several relatives.
He also watches out for “single-person management” — situations in which “if the owner leaves, all of the institutional knowledge leaves with them.” And any unethical or illegal activity is a no-go.
Gather and review key documents
There are many business documents, files, agreements and statements that you’ll want to collect and analyze, ideally with the help of a lawyer and accountant, including:
Business financials
Before buying a business, examine its past few years of financials. Double-check that the tax returns and financial statements have passed an audit by a certified public accountant; don’t accept those financials from the sellers themselves.
Use the business's financials as an opportunity to analyze its income stream. The business you purchase doesn’t necessarily have to be profitable yet (particularly if it’s a young business), but there should be a clear path to profitability.
Be in the know on whether the business's debts and liabilities will be included in the transaction or not, and be wary of taking these on. For example, if some of the outstanding receivables the former owner was dealing with are too old — 90 days or more, for example — then they’ll be pretty tough for you to collect on. You might be better off asking the seller to ensure them or contact the customers themselves.
Business licenses and permits
Make sure that the business you’re looking at has all the business licenses and permits it needs. Businesses in certain industries, particularly highly regulated ones like food services and childcare, need a valid permit to stay open.
Contracts and leases
The decision to buy a business can largely be driven by all the stuff it comes with. Whether that means a lease for the location, equipment or something else, you’ll want to make sure the landlord is alright with transferring over these legal documents to your name. Otherwise, you’ll need to negotiate a new lease, which can significantly add to your expenses.
You’ll also want to review any outstanding agreements that the owner has with vendors or customers.
Organizational chart
If the business has employees, request an organizational chart to see reporting structures and roles. Be sure it also includes details on compensation, management practices, benefits, insurance and vacation policies.
Organizational paperwork and certificate of good standing
Sole proprietorships and partnerships may have official founding documents, but registered business entities, such as LLCs and corporations, will have organizational documents on file with the state. For an LLC, this is the articles of organization. For a corporation, this is the articles of incorporation.
The secretary of state in your state should also be able to produce a certificate of good standing that certifies the business is approved to operate in the state.
Status of inventory, equipment, furniture and building
Carefully evaluate these assets, since their value directly affects the purchase price. Review:
What’s on hand.
Its quality.
How sellable it is, both in terms of market viability and its condition.
How fast and for how much each type of inventory has sold in the past.
The present condition of equipment and furniture versus its original selling price.
Whether it was maintained well or needs repairs.
Whether the furniture will be useful to you or if you’ll need to replace it to be operational or for aesthetic reasons.
If you’ll need to make larger modifications to the building.
Zoning laws
Verify local zoning laws to make sure the business complies with location restrictions. While some localities allow mixed-use commercial and residential zoning, others have tight restrictions on where businesses can be located. This especially goes for businesses like bars and nightclubs that may be restricted in a residential area.
8. Secure capital to make the purchase
Once you and the seller agree on a number and your due diligence is underway, the next step in buying a business is to come up with the money to make the purchase. Here are some of the ways to finance a business acquisition:
Small-business loans
It can be very difficult to find startup funding for a new venture. Many business owners rely on their own savings or friends and family to get their business up and running.
“The main advantage of buying a business over starting a business is that there’s capital and loans available from banks for buying businesses,” says Stolz.
Buying a business gives you tons of documents to approach a bank or alternative lender with for financing: financial histories, tax returns, employee records, cash flow analyses, inventory and equipment valuations, and much more. This wealth of data makes business acquisitions a good candidate for loans because lenders aren’t working with a risky blank slate.
If you’re looking for a small-business loan, here are a few potential financing options that may help in buying a business:
Lease the business
It might be possible for you to lease the business instead of buying it outright — with the option to make the big purchase down the road once you’re able to afford it.
Partner up
Taking on a partner when buying a business isn’t only useful to cut costs. You can also bring someone on board with more specific experience or a different skill set. Just don’t forget to draw up a partnership agreement, so co-ownership doesn’t cause any problems down the line.
Personal or family money
Consult your accountant before ponying up a large lump sum of your own cash. Also, make sure that you’re not using all your money buying a business because running a business takes capital, too.
Borrowing money from family is another option. If you go this route, you should understand the tax implications for gifts and family loans. Make sure that you and your family member put the exchange of money in writing and follow IRS rules for family loans.
Seller financing
Some sellers will agree to accept staggered payments over time — sort of like a lender. This way, they get guaranteed income for the coming months (or years, depending on your plan).
There are rules around seller financing, particularly if you plan to use another form of debt financing as well. For example, sellers have to be on “standby” if you’re also getting an SBA loan, meaning they have to agree that they won’t be paid back until you pay off the SBA loan.
Some sellers might also be willing to trade in some assets, like some furniture they really loved or the company car, for a lower price.
9. Close the deal with the appropriate documents
Barring any serious problems found during due diligence, you’re now ready to close the deal. Make sure you (or a broker) have all of these documents, notes and agreements in place before you officially buy a business:
Adjusted purchase price
This is the final count of the cost of your purchase, including all prorated expenses — like rent, utilities and inventory.
Asset acquisition statement
The IRS Form 8594 will list the assets you’ve acquired and for how much. This document is important, so don’t forget it.
Bill of sale
When buying an existing business, this document will prove the actual sale of the business, officially transferring ownership of the business's assets from the seller to you.
Bulk sale laws
Bulk sale laws have to do with the sale of business inventory and are designed to prevent business owners from evading creditors by transferring ownership of the business to someone else. To comply, prospective buyers usually have to notify the local tax or financial authority about the pending sale.
Consultation/employment agreement
This document should be drafted in the case that the seller is staying on as an employee. Make sure to file this agreement if so.
Lease
If you’re taking over the business's lease, make sure your future landlord is in the know. On the other hand, if you’re negotiating a new lease, double-check that everyone understands its terms.
Non-compete agreement
It’s standard practice — and generally a good idea — to ask for a non-compete from the former owner. This way, the previous owner won’t set up a competing shop right across the street.
Patents, trademarks and copyrights
Similarly, when buying an existing business, all patents, trademarks and copyrights might require certain forms to get transferred to you, the new owner.
Vehicle documentation
Does the business you're buying come with any vehicles? If so, you might have to transfer ownership with the local DMV. Make sure to get the right forms completed by the time of sale.
Pros and cons of buying a business
Pros
Proven business concept with structure already in place.
Lower operating costs since many parts of the business are already in place.
Easier to obtain financing because lenders and investors see it as lower-risk than launching a new company.
Intellectual property, like a copyrighted slogan or trademarked logo, may transfer over to you in the acquisition.
Cons
Higher upfront purchasing costs since you’re buying ownership over many existing assets.
Unfamiliarity with the inner workings and details of the business.
Risk of a hidden problem, for example, damaged equipment or bad brand reputation.
Next steps
Read more about how to finance a business purchase.
Compare the best business acquisition loans and learn how to apply.
