Buying an existing business can be an attractive alternative for entrepreneurs compared to starting a business from scratch. Acquiring an already established enterprise reduces risk, provides instant cash flow, and gives you a head start in areas like branding and operations. But where exactly can you find businesses to purchase? This comprehensive guide explores the world of business buying to equip you with the knowledge to navigate this process successfully.
Purchasing an existing business essentially means acquiring all the assets, intellectual property, goodwill, and operational facets of a business from its current owners. It can include buying out all or some percentage of the company’s shares, assets, or both depending on the deal structure.
It’s important to understand what exactly the process of buying an entire business entails before pursuing this path. There are many advantages but also critical factors to consider, from valuation, negotiations, and financing to legal and tax implications. Doing thorough research is key to make the smartest investment decisions when buying a small business.
Advantages of Buying a Business
There are several compelling reasons why buying an existing business can give entrepreneurs a strategic edge:
Reduced Risk Compared to Starting Anew
Launching a new business comes fraught with uncertainty and risk. The challenges of attracting customers, building operational capacity, hiring staff, establishing supply chains, and navigating legal compliance requirements can sink many startups. Acquiring an existing, profit-making enterprise significantly mitigates these risks.
92% of small business failures are due to lack of experience according to Bloomberg. Buying an already thriving business hands the new owner a fully functional organization with polished processes. Requiring less guesswork and with much higher survival rates, purchasing an established company provides a safer pathway to business ownership.
Instant Customer Base and Cash Flows
Finding and keeping customers consistently engaged takes tremendous effort for nascent companies competing in crowded markets. Purchasing an enterprise with an existing book of business sidesteps the pains of acquiring customers organically. You gain instant access to an audience along with the cash flows from an income-producing asset.
This makes buying a small business especially compelling for first-time entrepreneurs getting their feet wet in business ownership. The built-in revenues and profits act as a springboard to gain experience and then diversify into new products, services or markets.
Established Brand and Reputation
Starting from square one also means having zero brand recognition. Standing out requires continuous, long-term brand building through effective marketing. Buying an established business means taking over an enterprise that already enjoys market visibility and trust.
90% of business buyers rated existing brand value as an important factor driving their purchase decision according to Kingsbrook Partners research. Stepping into the shoes of an recognized player in the industry can lend your new company credibility, sparing the effort of creating awareness from scratch.
Where to Find Businesses For Sale
With an improved perspective on why acquiring an existing business can be prudent, the next step is finding promising companies available for sale. Here are some of the best places to look:
Online Marketplaces
Websites like BizBuySell, LoopNet, and BusinessMart.com offer searchable databases of businesses listed for sale across diverse industries, locations, types, and price ranges. Options include independent small businesses, franchises, commercial real estate, and more.
These sites allow customizing your search criteria to match business types or locales of interest. Listings provide high-level overviews including asking price, cash flows, years in business, and financing options. Marketplaces like BizBuySell also offer buyer guides and resources providing tips for purchasing process.
Business Brokers
Business brokers are experienced professionals that connect buyers and sellers of businesses just like real estate agents facilitate property deals. They can present curated options while guiding you through negotiations, valuation, financing, and legal aspects of transactions.
Good brokers specialize in particular industries or niches so they can accurately match promising acquisition targets to buyer needs. The Find a Broker tool on BizBuySell can locate industry or location-specific brokers nationwide.
Industry-Specific Platforms
Certain online communities cater to deal-making surrounding particular niches. For instance, NichePursuits and Exchange focus on buying and selling online businesses like blogs, ecommerce stores, SaaS apps, and more.
These industry-specific sites showcase curated opportunities pre-vetted to be performing assets, along with niche-relevant metrics like site traffic, revenues, profits, and digital assets. This facilitates matchmaking buyers to specialized investment opportunities.
Types of Businesses to Consider
From traditional brick and mortar stores to internet-based apps, many types of enterprises across sectors can be purchased as existing businesses. Evaluating options based on your skills, interests, and risk appetite can guide decisions.
Online Businesses
The rise of e-commerce and remote work has increased the investment appeal of web-based businesses like niche websites, blogs, digital subscriptions services, elearning portals, and virtual consultancies. According to SaleHoo research, 65% of business buyers favored online ventures for their scalability and lucrativeness.
Requiring low overheads with the flexibility of remote operation, these virtual companies can be run as hands-off investments if automated, while possessing immense growth potential. Dynamic valuation metrics like website traffic, ad revenues, email subscriber lists, and social media followings characterize these assets.
Service-Based Businesses
Every community relies on local services like HVAC technicians, electricians, plumbers, house cleaners, beauty salons, pet groomers, etc. These evergreen businesses enjoy recurring demand largely immune to economic fluctuations, making them desirable and dependable investments.
Established service companies also often come with essential tangible assets like real estate, equipment, and machinery. Overall modest overhead requirements compared to other sectors improves profit margins. Hands-on involvement however is mostly essential to manage daily operations.
Traditional Brick and Mortar
Physical storefronts remain a pillar of main street commerce. Ventures like restaurants, retail shops, golf courses, car washes, storage facilities, and hotels can be purchased as instantly revenue-generating assets. These locations provide community visibility and convenience as gathering places.
However, brick-and-mortar enterprises have large fixed costs like rent, inventory, utilities, and personnel. Unless processes are systemized and automated or franchised, extensive owner oversight is required which restricts scale. Investing in commercial property itself and then leasing out space can provide more passive involvement.
Steps to Buying a Business
Buying a company involves much more than just having adequate funding. An organized pathway must be followed to transition ownership seamlessly while avoiding missteps.
Finding The Right Opportunity
This crucial first step establishes parameters for a venture that matches your skills, objectives, and budget. Defining these criteria narrows the playing field, whether exploring online databases, brokers, or other sources to pinpoint promising contenders that warrant further exploration.
Valuing The Business
Now diligence begins by objectively assessing if the asking price reflects true worth. Just like appraising a property, both qualitative and quantitative information determines valuation. Broker guidance or online tools like BizBuySell’s Valuation Tool can provide estimates combining hard numbers and market conditions.
Negotiating The Deal
Once satisfied with valuation, preparing an offer involves negotiating agreements surrounding finances, assets included, inventory, employees retained, non-compete clauses, etc. Expert brokers can steer these complex discussions to reflect both buyer and seller priorities, often starting with non-binding letters of intent.
Due Diligence
Before money changes hands, exhaustive investigation is mandatory through the due diligence process. This involves verifying all documentation around legal compliance, finances, tax filings, debts, contracts, employees, lawsuits and other facets materially impacting the business. If any red flags appear now, the buyer can exit pursuing the deal.
Securing Financing
With satisfactory diligence, next comes arranging funding usually involving a combination of investor capital, bank loans, lines of credit, retirement savings or government-backed Small Business Administration loans.
Closing The Deal
Finally the baton is passed once financing and all paperwork is finalized! Asset transfer takes place, new banking relationships established, business name registrations updated, and operational oversight transitions marking the first day under new leadership.
Considerations When Buying a Business
Beyond just capital resources, acquiring a company mandates evaluating additional aspects crucial for success after ownership changes hands:
Legal Considerations
Proper legal structuring ensures protection if liabilities arise later connected to the previous business. Buyers must determine if purchasing assets or shares make most sense. Expert legal counsel helps navigate issues like business entity type, licensing, purchase contract specifics, and intellectual property assignments.
Market Valuation
Independent valuation assessments add objectivity in deal-making, preventing overpayment due to misaligned perceptions between buyers and sellers. Correctly benchmarking against industry standards provides reliable estimates factoring in both hard numbers and intangibles like branding.
Training and Onboarding Teams
Buyers may be skilled entrepreneurs but still new to the specific industry. A transition period where previous owners train the incoming leadership not only in operations but also relationships with key staff, vendors and clients helps retain organizational knowledge and continuity.
Financing Options for Buying a Business
Substantiating the capital to fund a business acquisition can come from varied sources, each with their own pros, cons and eligibility criteria. Comparing all options based on your financial profile is prudent:
- Bank Loans – Traditional institutions provide conventional financing allowing decades for repayment at competitive interest rates. However qualification requires strong personal credit scores and collateral.
- Seller Financing – Sellers receive purchase amounts in incremental payments stretching years while earning interest income in lieu of lumpsum payouts. This provides flexible options for buyers with limited funding.
- SBA Loans – America’s Small Business Administration guarantees loans provided by approved lenders to qualifying businesses for amounts up to $5 million repayable over 10-25 years. Collateral requirements are also lower.
- Alternative Financing – Relatively newer funding sources like merchant cash advances, microlenders, online loan brokers, pension financing, home equity loans, or even crowdfunding can offer creative financing channels.
On average, buyers should expect to self-fund at least 30-50% of the total acquisition value while leveraging other instruments for remaining capital needs.
Most Profitable Businesses to Buy
With many options across industries, narrowing down most lucrative business types can inform smart investment decisions:
According to 2022 data from Sageworks consulting, the sectors yielding highest net profit margins are:
- Software publishing (30%)
- Lessors of real estate (22%)
- Offices of real estate agents & brokers (17%)
- Architectural services (15%)
- Management consulting services (15%)
- Offices of physicians (15%)
Essential services in sectors like healthcare and financial services that enjoy recurring consumer demand historically have delivered stable revenues. Companies in emerging industries like SaaS and e-commerce marketplace also offer relatively higher upside potential in coming years.
Other factors influencing profitability span macroeconomic landscape, industry lifecycle stages, level of competitiveness, operational efficiency benchmarks, customer retention rates, and key person risk.
Business Buying Process
Orchestrating the successful purchase of an established enterprise requires careful choreography across 8 key steps:
- Defining Needs – Outlining your experience, skills, objectives, budget, and target market provides clarity when identifying potential acquisition options.
- Searching For Opportunities – Leverage online databases, local brokers, trade journals, or professional networks to find promising prospects. Shortlist those warranting further exploration.
- Valuing The Business – Scrutinize past financial records, future projections, tax filings, assets, and market value drivers to assess a fair acquisition price.
- Making The Offer – Prepare a letter of intent detailing the non-binding proposal terms around financing, assets, employees, valuations, and legal aspects.
- Conducting Due Diligence – Undertake exhaustive verification of documents encompassing all legal, financial, tax, operational, staff, IP, and commercial facets of the business to uncover any deal-breaking red flags.
- Finalizing Financing – Secure funding from bank loans, government programs, alternative lenders, seller financing or investors to underwrite the buyout costs.
- Closing The Purchase – Work with lawyers to legally transfer assets, shares, intellectual property and operational ownership, finalize paperwork and establish new banking.
- Transitioning Business – Collaborate with sellers to onboard staff to new systems, retain clients, integrate processes, and transfer industry knowledge to the incoming leadership.
After successfully completing this structured pathway, the buyer can step into the shoes of a strategically acquired turnkey enterprise!
Conclusion
Purchasing an existing small business can offer entrepreneurs a rocketboost compared to launching their own startups from scratch. Take advantage of reduced risks, instant cash flows, and established brands by buying companies already functioning as income-producing assets.
Online marketplaces, brokers and industry niches offer searchable databases of diverse enterprises available for acquisition. Traditional main street storefronts, e-commerce ventures, web-based apps, and profitable service businesses represent options for potential buyers to evaluate.
Following organized steps for valuation, due diligence, financing and negotiations facilitated by experts, smooth ownership transitions become achievable. Consistently profitable sectors enjoying recurring demand offer relatively safe harbors to drop anchor.
By cognizant assessment of needs and methodical adherence to the buying process, seizing opportunities to purchase enterprises handpicked for your objectives can offer exciting pathways to business ownership. The rewards of strategic market entry and growth arbitrarily outweigh the risks and sweat equity demands associated with launching startups.
Hopefully this comprehensive guide provided clarity on navigating the landscape of business buying as an alternative entrepreneurship on-ramp!
