Buying an existing business is an alternative to starting your own if you want to jump right in without dealing with process of creating and launching the business. While you can reduce some of the risk involved by buying an existing business with a successful track record, you may spend more money buying a business than you would starting your own. When you’re ready to take the plunge, there are four key steps to the purchasing process.
Finding an Existing Business to Buy
While you can find listings for businesses to buy in many publications, magazines, and websites, two of the most useful places to look are BizON and SuccessionMatching. BizON has business listings in Ontario and allows you to join for free. SuccessionMatching has business listings from all across Canada, but there’s a membership fee that varies depending on the length of membership you choose. You may also find a company to buy through your existing business network – maybe a colleague knows of a business owner looking to sell. Another resource is a broker with contacts in the industry in which you want to buy a business. You might also have luck with other professionals such as investment bankers, lawyers, and accountants. Even reaching out to business owners in your desired industry to see if they know of anyone ready to sell may help you connect with the right opportunity.
Determining the Type of Business to Buy
You need to figure out what type of business is right for you so you can narrow down your options. Consider your areas of expertise and your passions in life to come up with ideas. If you love fitness, you might look for gyms. Extensive knowledge of technology may mean an electronics store is right for you. SuccessionMatching uses an algorithm to match you with potential businesses based on information you enter about yourself.
Another factor is the type of product or service the company handles. Do you want to be involved in a retail operation, or would you rather provide a service for your clients? Maybe you prefer an online business model versus a brick-and-mortar business. You also want to consider the size of company you feel most equipped to handle. If you’re a first-time business owner, jumping in with a larger company that already has several employees may seem a bit overwhelming to manage.
Evaluating the Business
Once you have a business in mind, it’s time to do your research. Due diligence helps you choose an opportunity that’s a smart investment and a good business opportunity. You can do some initial research yourself to see if a business offers potential. Things to evaluate include:
- Physical location, including foot traffic in the area
- Visibility and accessibility
- Current inventory, equipment, and space within the business
- Reviews and reputation
- Quality of goods or services offered
- Current licensing and permits
Get in touch with the owner of the business and ask questions about why they’re selling it. It’s also a good idea to figure out how much assistance they plan to provide during the transition. Are they going to help you maintain relationships with any suppliers they currently use? Request the business’ financial statements, including tax returns and profit and loss statements, for the last three to five years. This gives you a look at how profitable the business has been and how much its current operating costs are. It’s also a good idea to have an accountant look over the financial records to give you an expert analysis as to whether or not the company is a wise investment.
Making the Purchase
When purchasing an existing business, you likely need funding unless you have a large amount of money saved for an outright purchase. It’s a good idea to know where your funding is going to come from and to qualify for funding before you agree to purchase a business. Some funding options include:
- Traditional business loans secured through a bank as long as your personal finances are good enough to qualify
- Seller financing where you make payments each month to the seller with interest added on top of the purchase amount
- Angel investors with a share of the profits going to the investors who provide you the funding
You also need to negotiate with the seller on a price. Know how much you can spend before negotiations, and stick to that limit. If you do your research, you should have a good idea of how much the business is worth and a fair price for purchasing it. A commercial broker can help you with that evaluation to ensure you offer enough to get the business without spending more than you need to.
Once you both agree on the sale price, you need a lawyer to step in and help you draft an agreement. This document should spell out every detail of the sale so there’s no room for ambiguity and outline everything you get as part of the purchase. That might include the building, equipment, current inventory, intellectual property, customer lists, and other assets of the business. You might also create a non-compete agreement to keep the seller from starting a competing business for a set amount of time or within a certain physical distance.
Buying an existing business gives you a head start on owning a company. You can keep on top of your new business’ finances with efficient bookkeeping tools. The QuickBooks Self-Employed app helps freelancers, contractors, and sole proprietors track and manage their businesses on the go. Download the app.