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How to Buy an Existing Business

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How to Buy an Existing Business

By kmurray, Contributor and Moderator
Published: March 18, 2014 Updated: March 18, 2014

Are you ready to enter the business world but nervous about starting from scratch? You may be considering buying an existing business, which certainly has its perks when compared to establishing your own, brand-new operation. But there’s still plenty to keep in mind, and success isn’t guaranteed by simply writing a check and getting the keys. Here are a few tips to help you do your due diligence as you explore buying a business.

Considering the pros and cons

There are many favorable aspects to buying an existing business such as an existing customer base, a team of employees and drastic reduction in startup costs. You may be able to jump start your cash flow immediately because of existing inventory and receivables.

But there are also some downsides to buying an existing business. Purchasing cost may be much higher than the cost of starting a new business exactly because the initial business concept, customer base, brand and other fundamental work has already been done. Also, be aware of hidden problems associated with the business (like debts the business is owed that you may not be able to collect).

Choosing a business

There are many different types of businesses to buy. To narrow down the list of potential businesses you might be considering, ask yourself:

  • What are my interests? If you have absolutely no idea what business you want to invest in, first eliminate businesses that are of no interest to you.
  • What are my talents? Being honest about your skills and experience can help you eliminate unrealistic business ventures.
  • What are my conditions for a business? Consider if a business has a condition that is unfavorable to you, such as location and time commitment.

Doing your research

Once you have found a business that you would like to buy, it is important to conduct a thorough, objective investigation and to determine a fair and equitable price for the sale of the business. You’ll want to examine information such as tax returns, financial statements, employee files, contracts, leases and any other important documents related to the business.

TIP: You should enlist a qualified attorney to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the business.

Buying a business

When you’ve decided to move forward with buying a business, the sales agreement is the key document you’ll need to finalize the purchase. This agreement defines everything that you intend to purchase including business assets, customer lists, intellectual property and goodwill. If you do not have a lawyer to help you draft the terms of the sale, you should at least have one review the agreement before you sign it.

Closing on a business

The closing is the final step in the process of buying a business. Once again, you should have legal counsel available to review all documentation necessary for the business transfer. This page details items you should address during your closing

If you think buying an exiting business could be the right path for you, there’s a lot of information available to help you succeed, including this article from Entrepreneur.com and additional guidance from NOLO.com.

About the Author:

Katie Murray

Contributor and Moderator

I am an author and moderator for the the SBA.gov Community. I'll share useful information for your entrepreneurial endeavors and help point you in the right direction to find other resources for your small business needs. Our ongoing goal is to improve this site to meet your needs, so we're happy to receive your feedback and participation. Thanks for joining our online Community here at SBA.gov!

Comments:

I agree with your all pros and cons and those are very much important as well. Thank you for sharing your nice thoughts.
What to Consider When Buying a Business? Do your due diligence and lookout for red flags. Learn as much as you can about how the business’s operations from the current owner, including details about existing contracts, insurance policies, licenses, employee agreements, and commercial leases. Leases are important for new buyers as you may need to have the landlord’s permission to legally transfer a lease – and you could be held to contractual commitments over employee compensation and benefits. Ask for their previous tax returns. As a prospective buyer, you’ll need to look for potential legal issues with the business’s finances. Some states will hold you responsible if the previous owner was delinquent on paying their sales tax. Understand what you are buying. Is it only the stock or all of the assets. If you are buying the entire business, check to see if required documentation is current and taxes have been paid. Whether you are buying the entire or business or just assets, ensure that key contracts or licenses are either transferable, or you easily acquired on your own. It’s also important to understand that business names and intellectual property may not be for sale. You will also need to get permits and licenses. Negotiate the purchase terms. Have a small business lawyer work with you and the seller to draft the terms of the sale and the agreed payment plan (installments, down payment, etc). Sign the sales agreement. Once you’ve agreed to buy the business and have determined the terms of the sale, you will make it legal with a sales, or purchase, agreement.
Do lots of due diligence and then hire a lawyer. It's a risky world we live in. Minimize risk and be careful.
If you want to set up a business for yourself, I think you need to carefully plan and need a lawyer for specific advice and clear to avoid the worst case happens
Good article. As a "small business attorney," I'm often called upon to help buyers close a deal on a small business. I'm sorry to say, however, that I find that approximately 50% of the deals ultimately fail. I find that the reason for this, is that the "buyer" simply falls in love with the "concept" of the business, without a true understanding of the inner-workings of the business they are purchasing. This isn't true for those buyers who have been in the same business before, and are either relocating or expanding; but this seems almost always true for those buyers making a "lifestyle choice" or otherwise buying a business because it's something they've always dreamed of. Especially for out-of-stater's looking to relocate and who don't really possess a good understanding of the culture of the new state they are moving into. Given the above observations, which kind of buyer are you? If the latter, do yourself a favor and MAKE SURE you hire both (1) a business broker and (2) a strong business attorney. Yes, it's a bit more expensive than going it on your own, but the broker will help you with valuation and comparables. The attorney will make sure you have all the right documents in place, and most importantly, that you're holding the seller to their representations and warranties. Despite my advice above, nothing can replace good due diligence (and the broker and attorney really can't help you there). This means while you may be a smart individual, don't assume you know how to inspect a building if that's not your expertise. Don't assume you can analyze financials if that's not your expertise. Hire the right individuals to help you with your due diligence. Finally, one of my clients actually hired a sales person on his dime, and worked in the store for 3 months before "closing a deal" and made the closing contingent upon his satisfactory review of the business. I thought this was really a good way to "inspect the business," given you're knee-deep in things for months and you're actively trying to sell vis-a-vis the sales person you've hired. I can't think of a better way to truly understand a business before buying it. Good luck! Larry.
Buying a business is not easy task. This is really good post to read about the business buying. The main problem is how to fix the price of the business which is not easy to do.
This is definitely something I'm interested in, but I agree with one of the earlier comments. Some tips in determining the value before buying would be useful. No one wants to pay too much.
Great article, in terms of overall content. Perhaps more information should have been spent on the valuation aspect of buying an existing business. After all, the SBA has guidelines which dictate the level of financing available for buy-out purposes. Such financing is directly related to the value of "goodwill" ... the intangible amount over and above the value of the hard assets.
It is very risky work to run an existing business. Because you may not be capable to run that business such as pre-owner. So 1st decide that what is the present status of business. And in which season which you are buying business that will be profitable for you or not. So I think this article will help you in making a clear view when you can buy a business and when not?
Well the points discussed above is truly mind refreshing, as it is fact that every buying needs to carefully handled specially when it matters on buying an existing business. As all the fact needs to be thoroughly checked & rectified by a legal team to assure that nothing is wrong with it. In case of any violation, proper action can also be taken.

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