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Becoming an entrepreneur doesn’t always mean starting a business from scratch. In some cases, buying an existing business can be a much more appealing option. While the up-front costs of buying a business are greater on paper, Entrepreneur explains, the risk is lower because the business is probably already turning a profit.
Buying an existing business is often easier to finance than starting your own. According to Entrepreneur, lenders and investors are more likely to finance the purchase of an existing business with an established customer base. Further, buying a business gives you access to legal rights, staff, office space, equipment and other useful resources that take valuable time to acquire.
How to buy a business: step by step
While there are many advantages to buying a business, the process isn’t without its hidden downsides and pitfalls. For that reason, it’s important to know how to buy a business. These steps offer a good starting point.
Determine the right business for you
Deciding what kind of business to buy shouldn’t be a purely financial decision. It’s important that your goals align with those of the company. When you’re interested in and knowledgeable about what the business does, you’re likely to make better decisions when actually running it.
Ask yourself questions about finances:
- How much will the business cost you?
- What will you owe your lenders and investors?
- How will you pay them back?
- How much profit is the business making?
- Do you know how to improve the profit?
- What’s the ideal scale of the business?
- How large should the staff be?
- Will you personally make money on the venture?
Investigate existing businesses
Once you know what kind of business you want to buy, start looking at your options. You can do this yourself, but it can be helpful to hire a business broker, too. While a business broker will charge you a commission, he or she will have access to more information about businesses for sale and will be able to help with tasks like negotiation and paperwork.
Do your research
Once you’ve narrowed your choices down, do some research on your finalists. Investigate the history of each one and try to figure out why the business is for sale. Does it have outstanding debts? Is its location unsustainable? Are there supply chain or inventory issues? Is there a problem with the business’s branding? Research can help you avoid potentially expensive pitfalls in the long run.
Perform financial analysis
Before you commit to a purchase, take a close look at the company’s financials. Ensure that the books are telling the whole story and that the cash flow is sustainable. Look at payroll, debt history, marketing budgets and more, going back a few years. Getting organized now will help you assess your potential return on investment.
Explore financing options
While you can certainly use your own money to buy a business, most new entrepreneurs don’t have that much capital. Luckily, there are a variety of financing options available. A small business loan can help, as can investors. It’s also possible to finance your venture by selling stock to employees, negotiating installment payments with the current owners, taking on a partner or leasing the business until you can afford to buy it outright. Brokers can help considerably in this step of the process.
Purchase the business
Your business broker can also help with all the paperwork and procedures involved with closing the deal. There are many considerations to keep in mind when you’re making the purchase, from the bill of sale and the lease to consultation agreements with the previous owners. You’ll want to do your legal due diligence; make sure you’re aware of the bulk sales laws in your state and that you have all the licenses to operate the business once it’s yours.
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Content sponsored by Jefferson Online.