Many individuals enter entrepreneurship by starting their own business. Others, like myself, receive the opportunity to buy an existing business.
Buying a business is a huge responsibility. You are taking the reins from its previous owner as the company’s new leadership. There are certain perks that come with buying an established business, such as transferring over existing intellectual property and having a built-in customer base. However, plenty of hard work still needs to be done before and after the purchase.
Let’s start with the ‘before’ part of the conversation.
Ready to buy a business? Don’t make an offer until you have carefully followed these rules.
1. Answer This Question: “Why Do I Want to Buy This Business?”
When I purchased MyCorporation in 2009, I was the GM of its division at Intuit. I was familiar with the inner workings of the business. I believed in its offerings and customers and was confident that I could manage and grow the business as CEO.
Buying a business is a major investment. Why do you want to buy this existing business? Do not answer by saying you’re doing it for financial purposes or to become a boss. Take the time to consider the answers to these questions.
- Is this business in an industry I am experienced in? Entrepreneurs don’t need to know every single thing about the business they’re interested in purchasing. However, it does help to have some familiarity with its industry. Otherwise, you’ll spend most of your time trying to catch up.
- How do I benefit from the purchase? Does the business already have a proven concept? Strong revenue? Loyal customers? Is the business and its offerings in demand?
- Why is the business for sale? This is a conversation you may have with its seller. You can discuss how long the company has been in business, what the current leadership is like, and revenue over time. Don’t be afraid to ask why the business is for sale either. The reasons may vary. If the response you receive sounds fishy, move into conducting due diligence. (More on that in a bit.)
- What do I need to operate this business? Will you need to hire more employees? Lease a new office location? File specific permits to stay in operations?
- Am I passionate about this business? You want to buy a business or know a few things about its industry. However, the company won’t grow under disinterested leadership.
2. Conduct Due Diligence with The Help of An Attorney and Accountant
It’s still considered a risk to purchase a business for sale, even if you feel confident that this is a good match.
Start conducting due diligence about the business. Learn all that you can about the background of this company. It is advised that you do not do this alone. Hire an attorney and accountant to help out.
Accountants can assist with understanding the financial background of the business, evaluate its financial statements from previous years, and determine the costs involved with its purchase. Attorneys may assist with gathering and drafting key documents. Some of these may include tax returns, contracts and leases, a certificate of good standing, and letter of intent, the latter of which is issued by the seller when a price proposal has been agreed upon by both sides.
3. Determine Funding for the Business
Generally, most entrepreneurs purchasing businesses need a little extra capital. When I purchased MyCorporation, I took out a second mortgage. I also bootstrapped the purchase. It’s a difficult way to fund a business because it requires strict budgeting, but it can be done.
Bootstrapping aside, consider other funding options. The U.S. Small Business Administration (SBA) offers SBA-guaranteed loans in price points from $500 to $5 million. Available from a wide variety of lenders, these loans often come with rates and fees comparable to traditional bank loans. These loan programs do come with requirements, so check in with the lender you’d like to work with (using SBA’s Lender Match tool) before moving forward.
Not ready to apply for a loan? There are other avenues available to fund the purchase of the business. You may use your existing personal savings, borrow money from family, or buy the business using Rollovers for Business Start-ups (ROBS) from eligible retirement accounts.
4. Prepare the Sales Agreement
Everything has been leading up to this moment! It’s time to close the deal with a sales agreement. Work closely alongside an attorney when creating this document and have them review the terms with you before signing the paperwork.
Once you’ve signed, congratulations! The business has been sold to you and you are now its owner. This is an exciting time. Great successes, as well as some challenges, lie ahead. Don’t worry. Let the passion, understanding, and familiarity you have for the company and industry guide you forward in all aspects of leadership from here on out.