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Starting a business from scratch can be tough.
That’s why so many entrepreneurs opt to buy an existing business instead.
When you buy a business, there’s already an established brand name, customer base, and operational infrastructure.
You’re just taking over everything instead of having to build it up from nothing.
This guide will teach how to buy a business the right way, so you can focus on making money instead of fixing problems.
The Top Business Formation Services to Buy a Business
Buying a business is easier with the right guidance and legal assistance. The companies below can help you file the appropriate paperwork and obtain the right legal contracts when you’re purchasing a business.
- LegalNature – Best for managing business formation documents
- Incfile – Best low-cost formation services
- LegalZoom – Most popular business formation service
- Rocket Lawyer – Best for ongoing legal advice
- Northwest Registered Agent – Best registered agent services
- ZenBusiness – Best for simple LLC filing
- Inc Authority – Best free LLC setup
- Incorporate – Best for C-Corps and S-Corps
- Swyft Filings – Best customer support
- MyCompanyWorks – Best for fast setups
- MyCorporation – Best for free EIN
You can read the full reviews of each business formation service here.
5 Steps to Buy a Business
Follow our proven step-by-step blueprint to buy a business:
- Find a Business to Buy
- Start the Negotiations
- Do Your Due Diligence
- Review the Financials
- Draft the Initial Purchase Documents
The Easy Parts of Buying a Business
The easiest part about buying a new business is the fact that you’re not starting from zero. You won’t have to go out and secure a new building, office space, source inventory, or hire employees—everything is already in place.
This can save you a ton of time compared to starting from scratch. It can take months for a startup to become operational. But when you buy an existing business, you can start operating on your first day as the owner.
Another great part of buying an existing business is the information at your disposal. It’s less of a guessing game, as you’ll already have a good understanding of the company’s revenue, sales volume, expenses, and profit margins.
If you were starting a business on your own, you’d have to estimate all of this. Any inaccurate estimates here could create serious problems for your budget and cash flow.
Lots of people who want to buy a business are intimidated by the legal aspects of the transfer. Fortunately, there are tons of great online resources that you can use to create legal documents for buying and selling businesses. Rocket Lawyer is one of my favorites.
In addition to the free legal document templates, Rocket Lawyer also supports electronic signatures. This can help you finalize deals and transfer contracts to the appropriate parties from anywhere, regardless of the buyer’s or seller’s locations.
You can get legal advice in minutes as you’re going through this process by consulting with an attorney on call directly from Rocket Lawyer.
The Difficult Parts of Buying a Business
You need to weigh the advantages of buying a business against the potential drawbacks. Most business owners don’t sell thriving operations at a discounted rate. So if you see a business for sale that looks like a bargain, there might be a catch.
It’s also worth noting that you could be inheriting someone else’s problem. Not all of these problems are easy to spot when you’re simply reviewing documents and paperwork before the purchase.
Other people within the organization could be resistant to change. Some of the employees who have been working there for years might not be fully committed to your vision and the changes you want to make.
It’s possible that the seller might be withholding some information about the business. For example, the financial records will only indicate things like sales, profits, and losses. But these don’t tell you if the business has tons of unhappy customers.
There are certain things you might not discover until several months after the purchase has been finalized. By then, it’s too late to change your mind and back out.
Step 1 – Find a Business to Buy
Some of you reading this right now might already have an idea of a business that you’d like to purchase. But everyone else needs to find a business to buy first.
It’s typically in your best interest to purchase a business in an industry that you’re familiar with and have some experience with. Otherwise, you’ll need to have the right people in place to run the company.
Let’s look at some of the best ways to find businesses for sale.
There are lots of reputable online platforms that are made specifically for buying and selling businesses. This is a great path to take, especially if you’re interested in purchasing a company within a niche-specific category.
For example, if you’re interested in buying an ecommerce business, you can use an online marketplace like Exchange to buy Shopify stores. Flippa is another reputable marketplace for buying SaaS brands, apps, online services, content organizations, and other online businesses.
The great part about using an online marketplace is that you can quickly qualify businesses based on the criteria you’re looking for, such as the asking price or net profit.
Business brokers are intermediaries that assist both buyers and sellers of privately owned businesses.
Not only can a broker help facilitate the sale, but you can also go directly to a broker with your needs and see if they can connect you with potential sellers.
You can think of your business broker as a real estate agent. If you want to buy a house, you can connect with an agent to explain your budget, needs, and location. Then the agent, or broker, will show you everything for sale that fits your criteria.
Industry Notices and Ads
If you’re part of an industry-specific network or group, you can often find businesses for sale in a monthly newsletter or bulletin. Sometimes business owners will even post ads on these industry websites or forums to entice a sale.
So keep your eyes peeled for potential opportunities instead of just deleting these newsletters before opening them.
Word of Mouth
Some business owners will express interest in selling their company without actually listing it for sale. If you have a specific business that you’re interested in, you could always inquire directly with the owner to see if they’re interested in selling.
For example, let’s say you currently own a dry cleaning business. Instead of opening a new location from scratch, you could always inquire about purchasing an existing location in another territory.
Step 2 – Start the Negotiations
Once you’ve found a business that piques your interest, you can start the early stages of negotiating to see if it’s a mutual fit for both parties.
Consult With an Attorney
Obtaining legal counsel is an important step whenever you’re buying a business. But if you’re on a tighter budget and don’t necessarily want to pay an attorney to be present during all negotiations, you can simply consult with an attorney before and after those discussions.
Using an online legal service like Rocket Lawyer is a quick and affordable way to accomplish this.
It’s a simple and on-demand way to get fast answers to your legal questions from real lawyers.
Memberships cost just $39.99 per month. This gives you a free 30-minute consultation for any new legal matter and up to 40% off when you hire a lawyer through Rocket Lawyer’s attorney on-call service.
Find Out How Much the Business Costs
If it wasn’t already disclosed on an online marketplace, you need to find out how much the business costs.
Don’t just take that price at face value. You should also inquire about how the seller came up with that number.
There are some quick formulas that can be used to calculate the value of a business. But these are just guidelines that can vary greatly by industry and other factors.
If the asking price is significantly higher than your budget or your definition of a fair value, you’ll need to find out if there’s any wiggle room on this number before you make an offer.
Find Out Why the Business is For Sale
Ask the current owner their reason for selling. Just be aware that you might not always get a truthful answer. Some common reasons might include:
- Personal health issues
- Exhaustion or burnout
- Branding problems
- Industry changes
- Needs cash for another venture
Be on the lookout for any red flags or inconsistencies with this answer.
Step 3 – Do Your Due Diligence
Now it’s time for you to dive deep into the business itself. This step is arguably the most important because it gives you the best indication of the current and future health of the company you’re planning to purchase.
You’ll likely need to sign a non-disclosure agreement or some other type of business contract before the seller will hand over any sensitive company information. Fortunately, you can quickly create and sign these agreements using Rocket Lawyer.
Review Business Licenses and Permits
Check to make sure that the business has obtained all of the required licenses and permits to legally operate. Examples include:
- Building permits
- Zoning and land use permits
- Health licenses and permits
- Signage licenses
- Seller’s permits
- Liquor licenses
- Professional licenses
If the business doesn’t have the appropriate permits to operate, then it could come back to haunt you after the purchase goes through.
Verify the Certificate of Good Standing
A certificate of good standing verifies that the company has been properly registered with the state. This certificate also confirms that the business is up to date with all of its state fees and it’s legally permitted to operate.
Not every business has this document on hand. So you might need to ask them to obtain a copy from the secretary of state’s office.
Check All Existing Business Contracts
You need to take the time to comb through all of the existing contracts that the business has.
Are those contracts still valid after the purchase is transferred to a new owner? Or are the contracts voided after the sale of a business?
Contracts might include leases, customer contracts, union contacts, distribution contacts, and more.
I don’t recommend going through this process on your own. You can ask a Rocket Lawyer on call to review these contracts on your behalf to determine your potential liabilities.
Review the Organizational Documents
You could also review all of the company’s organizational documents. This will give you more insights into the owners, stakeholder agreements, management structure, and other important information.
I’m referring to things like an operating agreement, articles of organization, articles of incorporation, shareholder agreements, meeting minutes, and similar documents.
Step 4 – Review the Financials
Now it’s time to look at some hard numbers. You need to review the financials of the business to ensure you’re not buying a sinking ship.
At a minimum, you should be reviewing the last three years of both state and federal tax returns filed by the business.
This will not only give you some insights into the company’s tax liabilities, but it can also help you determine whether or not the business is caught up on its tax payments. Those liabilities could transfer to you after the sale.
Balance Sheets and Cash Flow Statements
Balance sheets contain all of the company’s assets, liabilities, and equity.
It should also detail how the company’s assets and liabilities are financed, with both sides of the equation balancing out.
Aside from the important financials on a balance sheet, this document could be the best indicator of a company’s overall financial record-keeping. If the balance sheet is outdated or inaccurate, it could be a red flag for other documents.
Accounts Receivables and Debt Disclosures
You should also look to see how much money is owed to the business. While a high receivables balance might initially seem like a good thing, it could spell out bigger problems as to why the company has so many outstanding invoices.
Look for the average receivables collection time as well. If the company is holding a $100,000 receivables balance, but 85% of that balance is more than a year old, you could have trouble collecting.
You also need to carefully look at any money the business owes and where that money is owed. Review all of the financing terms of those debt disclosures as well.
Step 5 – Draft the Initial Purchase Documents
If you’re happy with all of the information you’ve reviewed, you can begin drafting some official documents to express your interest in the purchase.
Letter of Intent
A letter of intent doesn’t actually commit you to buy the business. But it shows that you’re serious about making an offer.
This document won’t spell out any of the contract specifics. But you can use it to buy some time as the contracts are being finalized. This can help prevent the seller from shopping the business around and entertaining other offers.
The purchase agreement is a formal document that outlines the terms of the sale.
You can easily create a purchase agreement using a template from Rocket Lawyer.
Purchase agreements contain the purchase price, closing details, representations, warranties, confidentiality agreements, non-compete clauses, and more.
In some locations, this document may also be referred to as the business sale agreement or sale of business agreement.