Buy a Business

Buying a business is a process that takes time. It can sometimes take years to find the right opportunity. When buying a business, you should expect to sign a Non-Disclosure Agreement, disclose financial information about your ability to purchase, and have a resume prepared. Key steps in the business search process:

Ask the why question: Why do you want to buy a business? What work activities do you like? What lifestyle do you wish to pursue? Consider kids and family in your expectations.
Create financial expectations: Determine what income you need to earn. Make sure your expectations are in line with the business financials and the cash flow return it can produce.
Compile a Personal Financial Statement: Compile your assets and liabilities. Identify the capital you'll invest. Your Personal Financial Statement showcases your financial wherewithal to the seller's business broker.
Define your acquisition criteria: Decide what industries, geographic area, and transaction size work best. Your motivation, lifestyle, expectations, financial statement, and résumé will help you develop your acquisition criteria.

Buy vs Start a Business

There are pros and cons to both. Seasoned entrepreneurs have discovered the risk/reward ratio favors buying an existing business.

Starting a business can pay great dividends, but a significant percentage of new businesses fail in the first years. Purchasing an existing business reduces risk and creates opportunities for tremendous profit:

Bank Financing: Buying an established business is less risky; banks finance existing companies but rarely fund start-ups.
Brand: You're buying a brand name. Marketing and networking were already done; this branding transfers to you.
Relationships: You are buying an existing customer base and vendor base that took years to build. The seller often stays on to transition with the business for a short time.
Focus: When you buy a business, you start working immediately and focus on improving and growing it; the seller already laid the foundation.
People: In an acquisition, the most valuable assets are the people who show up and make the business work.
Cash Flow: Existing business sales are structured so debt service is covered with a reasonable salary and profit for growth.

Creative Finance Options

The small business markets have several creative tools for today's business buyers:

SBA Loans: Buyers speak with the broker to line up a Small Business Administration (SBA) lender for your industry. The SBA guarantees a portion of the loan.
Seller Financing: Buyers and lenders often seek seller financing as part of their loan process. The seller holds a note at an agreed-upon interest rate. Lenders obtain comfort knowing the seller has a vested interest in the buyer's success.
Earnouts: A certain dollar amount agreed on by the buyer and seller to be paid based on the performance of the company after the transaction is completed. Often used for companies in a turnaround situation.

In a typical transaction, the buyer may put down 20%, the seller may hold 10–20% in seller financing, and the lending institution would offer conventional or SBA financing to cover the difference.

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Frequently Asked Questions

How long does it take to find and buy a business?

Buying a business is a process that takes time — it can sometimes take years to find the right opportunity. Expect to sign a Non-Disclosure Agreement, disclose financial information about your ability to purchase, and have a resume prepared before serious sellers will share details.

What financing options are available to buy a business?

Buyers commonly use SBA loans (the SBA guarantees a portion of the loan), seller financing (the seller holds a note at an agreed interest rate), and earnouts (additional payments tied to the business's performance after closing). In a typical transaction, the buyer puts down around 20%, the seller holds 10–20% in seller financing, and a lender covers the difference with conventional or SBA financing.

Is it better to buy an existing business or start one from scratch?

Buying reduces risk compared to starting from scratch: banks will finance an established business but rarely fund startups, you inherit an existing brand, customer and vendor relationships, and trained staff, and cash flow is typically structured so debt service is covered along with a reasonable salary and profit for growth.

What do I need to prepare before making an offer on a business?

Sellers and their brokers will expect a signed Non-Disclosure Agreement, proof of your financial ability to purchase (such as a Personal Financial Statement), and a resume. Defining your acquisition criteria — industry, geography, and transaction size — up front helps focus the search.