Buying a small business can be a challenging and daunting process. There are many things to consider, from the financial aspect to the emotional toll. The right small business can provide you with everything you need to live your dream life — but the wrong one could be overwhelming and lead to disaster.
If you're not sure how to buy a small business or want to learn more about the process, you’re in the right place. This guide can help you find all the information necessary to make an informed decision.
1. Find businesses for sale
You don’t usually find businesses for sale next to the local grocery flyer in the Sunday paper. You must first know where to look. You generally have three options:
- Make a deal with the business owner directly: An excellent option to buy a smaller company or acquire a competitor in your field.
- Hire a business broker: Get the inside track on industries, company values and an organization's history.
- Search online business listings: Sites like BizBuySell, BizQuest and Franchise Gator make it convenient and easy to search for brands and connect with buyers in specific industries, locations and price points.
You can also search Craigslist ads, the “Businesses for Sale” category in your local classified listings and ask people in your network of small business owners.
2. Understand that buying a small business is different from franchising
Not all businesses are created equal, and buying a company is very different from franchising. One of the questions to ask when buying a business is what kind of company you want.
Buying a small business can be a great way to get in on the ground floor of an industry and make a name for yourself. You typically take over full ownership of the business, letting you take advantage of an established customer base, defined operating expenses and trained staff. But, it can also be risky because it is difficult to know what you are getting into.
Franchising is an easier way to get into the business world because it often comes with built-in support. You’ll have fewer decisions to make because you have access to the brand and its processes, internal systems and marketing materials.
But franchising has risks, too. If you are thinking about franchising, do your research and learn more about the company and costs before signing on the dotted line.
3. Research licensing, insurance, zoning and other regulations
When looking for a business to buy, it is important to research licensing, insurance, zoning and other requirements. The licenses and permits may not automatically transfer to you. Knowing what you need upfront can make sure you establish a legit, lawful business.
- Licensing: To start, contact the governing agency in your state. For example, in California, the Secretary of State business license search can tell you if a company is licensed.
- Insurance: When buying an existing business, ask about the business insurance policy to make sure that they have adequate coverage.
- Zoning: Organizations must follow zoning laws at the local, state and federal levels. Ask about ordinances and requirements to make sure the business checks all the boxes before you sign on as owner.
- Other regulations: Additional regulations can include sales tax permits, employment and labor laws, product labeling, liquor licenses, state and local building codes and more.
When thinking about how to buy a small business, understand that you’re also purchasing the liabilities and problems that go along with it. Do your due diligence to ensure the current owners have met all requirements before signing any documents.
Tip: Attorneys and brokers know the latest laws and regulations. Consult with them to help you navigate the business-buying process so you don’t miss anything.
4. Assess the business environment
The business environment is a crucial element in the success of any business, whether it’s a standalone operation or a franchise. Ask yourself what makes it successful? Does it have a loyal customer base and an appealing product?
You must also consider your competition and potential setbacks you might encounter. What’s the competition like? Is competition growing? What could affect the customer base, product demand, pricing and other business factors?
Thinking through different aspects of the business can help you replicate successful factors and avoid obstacles you might find down the road.
5. Examine business financials and legal structure
Once you’ve researched licensing and other regulations, you have another step to ensure you’ve done your due diligence: examine the company’s financials and legal structure.
It’s unlikely you’ll be able to do this on your own — most new owners aren’t experts in finance, tax code or legal entities. You’re better off working with accountants, lawyers and other consultants on this part of the buying process. They can help you get access to records for at least the last three years, including:
- Cash flow statement
- Income statement
- Balance sheet
- Sales records
- Debt disclosures
- Business plan
- Certificate of good standing
- Facilities lists
- Customer lists
Working with the advisors, you’ll analyze the documents and projected financial statements to make sure they’re reasonable.
6. Agree on a purchase price
When buying a small business, finding and analyzing a potential opportunity is one thing — but a deal isn’t a deal until you set a purchase price. Not surprisingly, many deals fall apart at this stage. Buyers and sellers don’t always agree on the value of the company.
Independent business valuation professionals can help by giving you an objective value assessment. You can also do it yourself using a business valuation method:
- Earnings approach: Uses historical, current and projected profits
- Assets approach: Based on tangible and intangible assets minus debts and liabilities
- Market approach: Measures how much a similar business might have sold for
You don’t have to settle on just one approach. You can use all of the methods to determine how much the business is worth and settle on a final price that’s agreeable to both parties.
7. Secure funding
Funding a new business venture can be the scariest part of buying a company. Luckily, you have options.
The first and most obvious option to get money for your small business is using your own personal funds to kickstart your venture. This offers the benefit of not having to pay any interest on the capital you borrow, but you’ll potentially lose this money if your business doesn't succeed.
You might also ask about seller financing. Some sellers will accept periodic payments to let you repay the cost over time.
A third option is getting a partner who will help fund the business in exchange for a share of ownership in the company. If you choose this path, make sure you know everything about your partner before taking them on board. You don't want to find out halfway through that they're a poor choice for a business partner.
If you don't have those options available, look into a loan from a bank or entity like the Small Business Administration (SBA). The great thing about SBA loans is that they typically involve lower interest rates and less money down than bank loans.
How NEXT helps new business owners thrive
Taking the leap to buy a small business is an exciting opportunity. With a bit of preparation, you can make sure you have the best chance at success.
Small business insurance is essential to protecting your new investment and ensuring your company's growth. Whether you're buying your first small business or you're on your way to becoming an experienced entrepreneur, you need the right business insurance policy. NEXT Insurance can help.
We make getting business insurance easy. NEXT is 100% online and you can get a quote easily, tailor your insurance coverage and purchase in about 10 minutes flat. You can download your proof of insurance 24/7 and get back to business fast.