Buying a business is like investing in online real estate. When carefully selected and properly maintained, buying an online business can create a stream of income without the need to start a business from scratch. While there are hundreds of thousands of e-commerce stores available for purchase, not all of them are considered great investments. So, here’s how to find the right business to acquire, how to conduct due diligence, and how to ensure you get the best possible deal.
Why You Should Buy a Business
There are many advantages to purchasing an existing business instead of starting a new one. Avoiding procrastination when you buy an online business instead of creating one, you’re less likely to procrastinate. The hard part of setting up the store has already been done – no need to worry about the logo not fitting, or struggling with the color palette, or feeling overwhelmed by all the little tasks required to start a new store. Additionally, whether you invested $50 or $1 million in buying a business, you are committed to making that business successful. Your financial commitment should motivate you to strive for your first sale. Start selling from day one when buying a business, you can jump straight into marketing and selling. You gain an early advantage over new competitors who are struggling in the setup phase. And if you’re lucky, you may skip the early stages where businesses can fail. If you have a store that has added products to its website, you can start selling on the day you get access to the account. Alex Yurick, owner of Detour Coffee Roasters, saw the benefits of buying an existing business. “There were so many opportunities to rebrand, amplify what we were doing digitally, get the organization positioned for growth, and use that as a foundational pillar for all the other things we were looking at,” says Alex. Relying on an existing customer base, established businesses may have a loyal customer base and a proven track record of selling their products to them. Acquiring this type of business means you can generate your first sale almost immediately. Rob Witherhead, an independent digital consultant, says, “By acquiring an existing business, we gained an existing customer database, some repeat customers, and a level of setup, meaning we could be operational from day one. If we had started everything ourselves, it would have taken us longer to get started, longer to generate significant revenue, [and] all the while we would be incurring overhead.”
How to Buy a Business in 8 Steps
1. Decide on the stage of the business you want to buy
Buying a business is a significant investment, and it can be an overwhelming decision. First, determine the lifestyle you want. Depending on the size of the business you purchase, your lifestyle may change significantly.
Small businesses: These businesses require long hours without much pay while you try to establish the business and achieve some security. But if you enjoy building from the ground up, this might be the right type of business for you.
Existing businesses: If you’re looking to grow an already established business and want to be able to live comfortably off the profits of your acquisition, you may be looking for an existing company with a strong customer base already. If you wish to maintain a business that is already performing well and intend to diversify your investment portfolio, you might want to consider companies that may have already gone through the establishment process.
You say
Mona Phone, owner of the bean farm: “Intentionally, we looked for an existing company that needed some updates to expand its growth. Existing companies usually come with a wealth of data and customer loyalty, and they have captured a share of the market. Our goal was to find a company that had these qualities and was also willing to update its brand visually and transition to more effective digital or marketing operations.”
Mona adds: “We felt that this would be the best way to ensure that our investment would have an immediate return with regular sales and plenty of options to generate more sales using modern practices.”
Other questions to consider include:
What are your skills and strengths? When deciding on a new business venture, find out what you bring to the table and what you need to learn or improve. For example, if payroll is not a strength of yours, you might shy away from purchasing a new business with many current employees.
What are you passionate about? If you have prior knowledge in a specific field, that narrows down the industry you want to buy into. Being a business owner is already challenging and can be very time-consuming, so you may prefer to purchase a business that aligns with your interests.
Browse Businesses for Sale
Once you have decided what type of business you want to buy, it’s time to find it. There are many places to find an existing company for sale, and the type of business you’re looking for will determine where you find it.
For example, if you are looking for something that already exists, business brokers may be your best bet. You can also find listed companies on Craigslist or in newspapers or within your own network of small business owners.
However, if you are someone who wants to see all available options in one place, online business marketplaces like BizBuySell or Acquire might be a better option for you.
Understand Why the Business is Being Sold
Businesses are bought and sold for various reasons. We hope that the business you are considering buying is a good one in a solid position and that the current owner intends to retire, but there’s always the possibility that there are more concerning reasons.
If possible, sit down with the current owner and ask them why they are selling their business. Ask them questions like:
What debts and liabilities is your company facing? Can I see your cash flow history and/or your company’s cash flow statement? Have you faced any supply issues? What is the condition of your equipment? What working capital did you start with? Can I see your business plan and operations?
Learn as much as you can before you make that purchase – from previous owners, your own online research, and conversations with current clients and employees.
Remember: the problems and successes that the business faces will become your problems once the company is yours.
Evaluate the Financial Value of the Business
Next, estimate the value of the business. This evaluation is a good starting point for future negotiations. You don’t want to pay more than you should, but likewise, you want to negotiate a good deal.
There are several methods for valuing a business, from income-based approaches to asset-based methods. A business broker can connect you with a certified accountant or a certified business appraiser who will help in evaluating the business you are considering acquiring.
Rob Withershead says about buying his business: “The seller had a number in mind, but we needed to look at our version of its worth based on best- and worst-case scenarios. Fortunately, we had a very open dialogue with the seller, so there wasn’t any hard negotiation. It was about finding a way we could come to a point where all parties were happy.”
Negotiation
On Price
Now that you have conducted the necessary due diligence, it’s time to negotiate the price you are willing to pay for the business.
The price set by the seller is not a fixed price. It can be adjusted based on the valuation you discovered and your payment terms.
Expect that you and the seller will exchange offers and interviews with each other. You will also begin to outline the general terms of the sale during this process, such as whether you want to purchase only the business assets or make it a stock sale.
Note: When making an offer, do not insult the business owner by placing a lower estimate on their company. They may choose not to negotiate with you at all.
Submitting a Letter of Intent
A letter of intent is a document that states your intention to conduct business with the recipient of the letter. It is advisable to submit a letter of intent so all parties are on the same page before any contracts are put in place and signed.
Letters of intent typically include: who is doing the deal (i.e., the parties involved). The general terms of the deal, but not any details. For example, it may simply state that party A wishes to purchase party B’s company. Requirements and restrictions of the deal. Often, this can include a confidentiality agreement or non-disclosure agreement. A timeline for how the deal will proceed.
Reviewing Important Legal Documents
After both parties have signed the letter of intent, review all important legal documents. This is another opportunity to ensure that you are entering into this deal with your eyes wide open.
Examples of documents to review include: ownership documents, such as commercial lease agreements or lease listings. Existing contracts and whether they can be transferred to the new owner. Marketing and advertising materials. Tax returns for the past three years. Any formation documents, certificates, business licenses, etc. Current income statements, payroll statements, balance sheets, and cash flow statements. Business loan/debt information. Any legal records, such as ongoing litigation.
Completing the Deal
Now that all legal and important documents have been reviewed, it’s time to complete the deal. The final purchase agreement is the legally binding contract that both you and the seller must agree to before the business ownership is transferred.
It’s advisable to find a good business attorney to review the sales agreement and to negotiate on your behalf. This way, you can ensure that you get everything you agreed upon with the seller.
Once everyone agrees to the terms of the purchase agreement and signs it, your bank will place the necessary funds in escrow to hold them until the agreed-upon closing date.
When all legal documents have been signed and submitted by both parties, the funds will be released from escrow and delivered to the seller, and you will officially become the new owner of the business.
Congratulations! After completing the deal, follow up on the transfer of ownership process and submit the necessary applications for the licenses and regulatory documents needed for your new business under its name.
How to Buy a Business Without Money
You will need money to purchase the business and fund the first few months of operations. However, you do not have to use your own money to do so. You can acquire a business without any capital coming from your own pocket.
Common ways to secure financing to buy a business include:
Traditional bank loans. Most banks offer their clients an unsecured personal loan. It is an easily accessible loan for those who have a good credit score and wish to buy a new business, although these loans tend to have lower amounts. The average personal loan balance is $17,064.
Seller financing. Some business owners may offer loans to buyers to purchase a business rather than requiring a lump sum payment. Buyers pay for their purchase later or in installments.
Financing
Outstanding accounts. Get financing to acquire your business and pay off the loan as a percentage of sales. Shopify Capital provides funds to business owners without strict monthly payments. Pay off the loan with a small percentage of incoming sales.
Small Business Administration (SBA) loans. The Small Business Administration in the United States (SBA) offers loans to businesses through its own program or approved private loans. This type of financing can be used as a loan to acquire a business.
Cooperative financing. Cooperatives offer loans at lower interest rates than traditional banks. However, this type of financing is usually only available to current members of the cooperative.
Difference Between Franchise and Buying a Business
When entrepreneurs buy an existing business, they take full ownership of the company. This includes their inventory, current customer base, product listings, and retail partnerships.
A franchise, on the other hand, is a completely different business model. It occurs when entrepreneurs buy the rights to use an established brand’s logo, including the logo, name, and products. Entrepreneurs can become franchise owners of a company like McDonald’s and open their own restaurant selling McDonald’s hamburgers, for example.
The biggest difference between the two is ownership and level of control. When buying the entire company, you have full control over the entire organization. Franchise owners, however, do not have the same level of control, as decisions related to marketing and product pricing remain with the parent company.
Things to Consider Before Deciding to Buy a Business
Key things to consider before buying a business include:
Inventory
Existing businesses often have products in inventory for future sales. Value this inventory throughout the purchasing process.
This not only affects the selling price of the business but also helps in planning the post-deal period. You’ll get an approximate estimate of how long the business will continue with the current inventory before investing in new stock.
Rob Wetherhead says: “Most businesses will market themselves as ‘Company + Inventory Worth,’ so you need to be 100% clear on what is included in the inventory and how much it’s worth.
Then you should consider whether this inventory is suitable and in demand for the business you want it to become. The cost of the inventory can exceed the cost of the company in smaller transactions.
Equipment
If the business you are considering purchasing needs equipment to operate, check whether this equipment is included in the sale of the business.
For example, a company that makes its own clothing may have screen printing machines to print its t-shirts. Ensure that this equipment is included in the sale agreement – the business cannot survive after being acquired without it.
While doing this, clarify whether the company owns the equipment outright. Some businesses may lease equipment or use financing to distribute the cost of purchasing equipment. These payments will become your responsibility once the company is yours.
Legal Documents
There are many laws that businesses must comply with when selling products online. Check whether the company you are considering purchasing complies with these regulations by requesting important legal documents.
These include, but are not limited to: Articles of Incorporation, business licenses (if required), business insurance, and employment contracts.
You may want to hire a legal expert for additional support throughout this process. E-commerce consultant Elliott Davidson says: “Sellers, even those using brokers, only have basic information to share, and you will need to dig deep and know what to look for yourself.
“The variable
The common thread in all these cases will be your lack of complete knowledge about your legal costs initially. These costs will vary based on the amount of communication, and you may require additional legal support throughout the process.
Tax Declarations and Financial Statements
The financial statements of the company provide insight into the company’s performance. They can also indicate if you are paying more than you should when purchasing the company.
Ask the current owner to share the following financial statements for the past five years: the current budget, including any business assets; profit and loss statements, including gross and net income; cash flow statements; financial forecasts for the future; tax returns.
When considering the acquisition of the business, Mona wishes to focus more on these financial statements. “I wish I had a more cohesive understanding of the profit margin,” she says. “It’s easier when there are fewer products, and harder when running a store like ours that has over 500 products. Knowing which products have the best profit margins helps in many areas: budgeting, purchase orders, advertising and marketing costs, and of course, net profit.”
Sales Records
Sales records are an important part of due diligence, as they verify the amount of sales the company has made. Analyze the company’s operations to understand:
How many customers have purchased from the company? Customer retention metrics, such as loyalty and repeat order rate. How much does it cost to acquire a customer (CAC).
Sales records also allow you to understand how much time you will have after acquiring the company.
Debts
From initial loans to business credit cards, ask the seller to disclose any debts related to the company before you agree to purchase the company. You will be responsible for these debts once the company becomes yours.
Similarly, check the credit to see the company’s credit history. If the current seller has any overdue or unpaid payments, you may face difficulties – such as low approval rates or high-interest rates – when obtaining credit for the company in the future.
Buying an Existing Business: Conclusion
Once you find the business you wish to acquire, work on conducting due diligence and review all details. The more you can learn about the internal workings of the business, the more likely you are to avoid unknown surprises that could disrupt your new venture.
In summary, take these final words from George Molous, CEO of e-commerce brokers: “If the acquisition feels rushed and makes you and the broker or professional feel that the acquisition is not right for you, I promise you there will be other great deals for you in the future.
“Don’t rush, take your time, and you’ll know when to speed up the acquisition when it feels right.”
How to Buy a Business: Frequently Asked Questions
How can I take over an existing business?
Decide on the type of company you want to buy. Browse businesses for sale. Find out why the company is being sold. Evaluate the company. Negotiate the price. Submit a letter of intent. Review important legal documents. Finalize the deal.
Is it good to buy an existing business?
Many entrepreneurs find buying an existing business more beneficial than starting their own from scratch. They can start operating and making sales almost immediately by acquiring a business with an existing customer base and product line.
What percentage do you need to buy a business?
There is no minimum percentage required to buy a part of a company. However, to acquire the company and transfer ownership, you will need to obtain a majority of the shares (e.g., 51%).
How can I get money to buy a business?
Financing
Seller. Small Business Administration (SBA) loans. Unsecured bank loan. Accounts receivable financing. Cooperative financing.
What is the difference between a franchise and buying a business?
When entrepreneurs buy an existing business, they take full ownership of the company. A franchise, on the other hand, is when entrepreneurs buy the rights to use the existing brand’s logo.
Things to consider before buying a business:
Inventory. Equipment. Legal documents. Tax returns and financial statements. Sales records. Debts.
Buying an existing business: Conclusion
Once you find the business you want to acquire, work on due diligence and review all details. The more you can learn about the inner workings of the business, the better chance you have of avoiding unknown surprises that could derail your new venture.
In summary, take these last words from George Moulos, CEO of e-commerce brokers: “If the acquisition feels rushed and makes you and the broker or professional feel that the acquisition is not right for you, I promise there will be other great deals for you in the future.
“Don’t rush, take your time, and you’ll know when you should speed up the acquisition when it feels right.”
Source: https://www.shopify.com/blog/how-to-buy-business-shopify-exchange
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