How To Buy an Existing Business
As the startup surge continues, one way to become a small business owner is to buy an existing business. According to the BizBuySell Insight Report for Q4 2021, the business for sale market has shown “slow, yet steady growth” for the year, “particularly in terms of buyer demand for financially-healthy businesses.”
If you’re in the market for a small business, you’re likely going to have to contend with rising prices. Median sales prices rose about 30% in 2021, “finishing the year at $324,500 in the fourth quarter.”
What are buyers looking for?
According to the BizBuySell Small Business Survey, 60% of buyers say profitability and strong financials are a purchase requirement, followed by trained and skilled employees (37%). Of the financials are subpar, 18% want a discount on the sales price.
Most in-demand types of businesses were: the service sector (37%), restaurants (26%), and wholesale distributors (25%). Specifically, buyers were looking for “pandemic-resistant businesses,” such as liquor stores, gas stations, auto repair shops, and e-commerce.
Why are owners selling?
Several factors are contributing to business owners putting their companies up for sale.
The most common reasons given are “retirement and general burnout.” But running a business through two years of a pandemic has taken a toll—43% said “pandemic fatigue was moderately to extremely motivating” for them to consider selling their businesses. Plus, one business broker noted that “the challenge of finding and keeping employees is a deciding factor to sell now.”
As unfortunate as that is, it’s good news for people looking to buy a business. More than 78% of business brokers surveyed expect more sellers to enter the market in 2022, with 25% saying they expect significantly more sellers.
Many baby boomer business owners are seeking to exit their companies as well, opening up more opportunities for business buyers, many of whom are entering the market after quitting their jobs. BizBuySell reports that 21% of business buyers identified themselves as being part of the Great Resignation. And 73% of business brokers say they expect an increase in the number of buyers hitting the business-for-sale market in 2022.
How to buy a business
So, where do you start if you want to buy a business? BizBuySell is the largest online marketplace of businesses for sale. You can also find a business broker by checking the professional organizations, such as IBBA.org, and its search for a broker tool or looking for For Sale By Owner (FSBO) opportunities.
As you begin your search, ask yourself these questions:
- Is it an established business or a turnaround?
- Are you willing to move to run a business?
- Do you have the necessary skills to manage a business?
- Does it fit your lifestyle?
- Do the earnings of the business you’re considering provide enough money for you to live on?
- Why is the owner selling the business?
Once you identify several businesses you’re interested in, call or email the business broker (or owner) to get more information. Remember, at this stage, you’re in a filtering process, so you’ll need to ask more questions, including:
- Does the business have a strong reputation?
- How’s the competition?
- Does it have a strong, established customer base?
- Does the business have recurring customers/revenue?
- Do the company’s top five customers account for most of its revenue?
- Does it have a fragmented customer base?
- Do they have a diverse source of suppliers?
- Does it have steady sales throughout the year, or are sales seasonal?
Once you’ve narrowed down your choices, consider:
- Don’t just focus on the financials. Remember, the business’s financials have been done to minimize taxes, not show earnings. Focus on the company.
- Don’t just focus on the bottom line. A company’s sales are vitally important.
- Focus on what you will do with the business: 70% of your focus should be on what improvements you can make to the business, and 30% should be on what the seller has done with it.
Are you ready to make an offer?
Making an offer is the beginning of the negotiation—not the end. Offer a price you feel comfortable with, subject to due diligence. You should be able to write a check for the down payment. You’ll also need to check that you’ll have enough money after buying the business that you have enough money for your working capital needs and to live on.
After getting your offer, the seller may ask for a larger down payment, shorten the payout period, or have other demands.
Once you and the seller agree, it’s time for your final due diligence:
- Ask your accountant or hire a CPA to help verify financial information
- Verify the company’s earnings (look at tax returns, P&Ls, bank statements)
- Verify the gross sales
- Verify the contracts, business obligations, and customer mix
- Verify an acceptable lease transfer, industry non-compete, and training & transition period for new management
- Verify you’re buying a typical inventory level and that all equipment is in working order
Once you and the seller are satisfied, you can close the deal and get ready to take ownership of the business.
Don’t try to do this yourself. Get the help you need from an accountant, an attorney, and a SCORE mentor. You can find one here.