How to Buy a Business: A Detailed Roadmap for First-Time Buyers

Buying a business is a process of acquiring the assets of one business from a seller. Business sales can take many shapes and sizes, from simple blogs sold between two parties, to multinational businesses being purchased in a merger. Buying a business takes a lot of patience and skill and can be a great option for those interested in owning a business, without the starting one from scratch. We will explore a few of the general steps which could be expected when purchasing a business.

Key Points:

• Buying a business is a skill in itself and requires patience, process knowledge, and risk appetite
• Business sales happen in many shapes and forms but follow a similar process in acquiring such an asset
• There are many reasons you may want to purchase a business, but ensuring you’re getting something that aligns with your goals is key to long term success

Step One: Determine What Kind of Business You Want to Buy

A for profit business is an entity that exchanges goods and services in return for money and operates to generate a profit. This means that there are many types of businesses which an owner can operate, from selling services like consulting, to selling goods to consumers like an e-commerce brand.

The type of business you want to buy should align with your interests, what you’re good at, and how much risk you believe the business will bring to yourself as the owner. Weighing these attributes should allow you to understand and target certain types of businesses to look at acquiring.

Step Two: Search for Businesses That Are for Sale

Now that you understand the type of business you’d like to purchase, the next step is to find potential candidates which may sell to you. You can use online marketplaces like flippa.com, or shop locally asking business owners, although you may find less success. Getting an idea for the type of business you’d like to buy, and seeing real examples of what is for sale, and for how much will give you a great anchor to understand what to expect.

Step Three: Evaluate Why That Business is Available for Purchase

If a business is operating effectively, generating cash month over month, and shows no signs of issue, you might take pause and question why it would be for sale in the first place. It is important to understand why a business might be for sale; is someone retiring, or is the business about to be under legal scrutiny with a potential claim; it is important to be upfront and ask the questions when evaluating a business.

Step Four: Target a Business That’s Compatible with Your Goals, Budget, and Expertise

You will want to ensure that any potential businesses you are looking to purchase do in fact meet your list of criteria. This could mean that they are for sale at a price which you’d be willing to pay, or that the operation of the business services a specific target customer you are also looking to target. These traits of the business should align with your expectations to ensure a long term fit that will continue to bring success to the business.

Step Five: Analyze the Business and Determine Its Value

Now that you’re in acquisition conversations with a potential seller, you'll want to get the financial statements of the business; profit loss, balance sheets, statements of cash flows, anything related to the historic operation of the business. These will serve as a baseline understanding of how the business has performed.

You can perform procedures such as ratio analysis on the financials, or look at cash inflows and outflows to begin forming a hypothesis of how the business was run, and what efficiencies you may bring to the business if you were to assume ownership.

The final step is really defining the price tag of the business. There are many valuation methods to determine this, and they will vary by industry and nature of the business. Often seen are revenue multiples, where the sales price is reflected by a multiple of revenue. This might look like a revenue multiple of 1.5 on a $100,000 annual revenue business vaulting the business at $150,000.

Step Six: Work with the Seller to Negotiate a Purchase Price

Negotiating the final price and terms will vary on the size of the deal and how many parties are involved in the transaction. Buyers might expect more success on negotiating terms when they have fact backed claims from their analysis. Buyers might remain with the seller rather than transferred. This step includes anything that will seal the final terms of the sale.

Step Seven: Prepare and Submit a Letter of Intent (LOI)

A letter of intent is typically a non-binding agreement which shows that after all discussions and analysis the buyer is prepared to move forward in the deal and commit to the purchase. This may include items outlining the seller no longer operating as a competitor post sale, and any good faith agreements such as no longer advertising the business for sale.

Step Eight: Conduct Due Diligence Prior to Purchase

As the sale moves forward you now may be more privileged to information that may have been sealed prior to entering into your agreement with an LOI. Be sure to check for items like  licensing, legal documentation or any other facts about the business which were advertised during the discovery process and negotiations. Ensuring everything is as represented protects both the buyer and seller from a soured deal.

Step Nine: Obtain Funding to Complete the Acquisition

Assuming you are purchasing the business with cash, you will now need to secure and have ready your funds. You may have used a business acquisition loan, borrowed from family and friends, or are paying with owner funds; either way having the cash ready to disperse at closing will be a key step in closing the deal. If you are considering a business acquisition loan, our guide on the best business acquisition loans offers comprehensive information to assist you in making an informed decision.

Step Ten: Finalize the Agreement with the Necessary Paperwork

A sale will typically be accompanied by a business purchase agreement. A business purchase agreement is a sales contract which outlines the sale of a business between two parties; it covers a variety of topics such as what is being sold, when, and clauses for disputes, among other items.

Why Buy a Business?

Reasons you Might Buy a Business

There are a variety of reasons why you may want to buy a business. Maybe you are wanting to start new streams of income for yourself but are unsure of how to get started. It's possible that you want to remove a competitor from your space. Or you may just want to try something new and have a passion for a certain area; buying a business can fill a variety of needs for owners.

Is It Better to Buy a Business or Start Your Own?

Pros and Cons of Buying a Business

Buying a business comes with both pros and cons. For the pros; buying a business can provide owners an already operating asset which is generating money possibly, which overall might reduce the risk of the purchase. It also might be purchased with other people's money, like an investor or from a loan, allowing owners to protect their personal funds while taking ownership.

With these pros there are also downsides. A business might be purchased and owners may soon find out they’re in over their head, or the operation is not as expected and the forecasts made are no longer useful. Further, depending on your business purchase agreement you may be met with historic claims or damages which you signed to own, be sure to always consult a legal professional when purchasing a business.

Pros and Cons of Starting Your Own Business

An alternative could be rather than buying a business, simply starting one. This has some benefits which include all the reward for the effort put into the business, an understanding of operations from the beginning of the business, and ability to put in as little or as much effort relative to the risks you are creating for yourself as the owner.

Starting a business is not easy work however; building a company with a successful month over month and year over year bottom line can take a lot of time and be met with a lot of challenges. It's possible your idea or product becomes obsolete, or new technology reduces the demand for your service. These are not unique to only new businesses but typically without diverse income streams it's possible to fail early.

Tips to Improve the Business-Buying Process

When buying a business a lot of the process and learnings will happen as you go through the motions. Be sure to be patient, do not jump at the first opportunity which exists, and learn the skills you need to make the best decision possible for yourself.

Final Word

Buying a business is an exciting new endeavor which can be rewarding if the correct amount of time, research, and goal alignment are achieved. This process is a skill in itself and can be mastered by owners over time, who might start small and continue to grow. Being aware of the process and what to expect is just the first step in taking the risk needed in order to enjoy the reward this process can yield.