Important steps to consider before buying an existing business

Important steps to consider before buying an existing business

If you’re an owner of a small business who’s looking at expanding operations, you may want to consider buying an existing business. This “entrepreneurship through acquisition” is a viable option to jumpstart the growth of your business, instead of relying on slower organic growth. And buying an existing business is also a way to diversify your portfolio.

But first, let’s address the stigma that founders sell their business because there’s something wrong with it. Perhaps they’ve had a change in lifestyle, or they prefer to pursue a new business idea instead, or maybe they’ve lost their passion for business. Even so, letting go of a business they’ve built from scratch isn’t an easy one. They want to turn over their business to someone who’s invested in making it grow — and that may be you.

When buying an existing business, look for one that has endured and continues to remain profitable. That last thing you or your investors want is to acquire a flash in the pan.

If you’re planning to acquire an existing business, there are several factors you need to consider carefully:

#1 The kind of business you want to acquire

Investing in a business is a huge commitment that takes time and effort. A thorough acquisition plan should account for:

  • Industry — Are you interested or passionate about the company's industry? Do you have prior experience in it?
  • Size — Are you fine with a mom-and-pop store? Or are you willing to take on a much bigger challenge? A larger business means a heftier price tag and more complexity, but you’re also looking at bigger profits.
  • Lifestyle — Are you fine with working at odd hours, or do you prefer a nine to five routine? Are you willing to adapt to the acquired company's business hours?
  • Location — Are you willing to relocate for your work? Or do you prefer somewhere closer to home? Besides travel time, the location of your acquired business has an impact on the cost of labor, taxes, and other financial considerations that will affect your bottom line, so choose wisely.

#2 The owner’s motive for selling their business

It’s okay to ask the owners what their reasons are for selling their business. And since they’ll put their best foot forward when answering your questions, do some background research just to corroborate what they say.

#3 The history of the business

Ask the owners to provide you with an outline of the business history. You’ll want to know things like which opportunities they took, which they passed on, their sales patterns, the mistakes they made, how they survived difficult business cycles, their staff culture, customer base, and their direct and indirect competitors.

And while you’re at it, visit their physical location. Check for adequate working conditions, potential for expansion, and physical upkeep.

#4 Due diligence

Put together an acquisitions team that can determine the health and value of the business you wish to acquire. This team should include an attorney, accountant, and other assessors. They should go through the company’s tangible and intangible assets and check the accounting records thoroughly, especially if the company has outstanding liabilities.

#5 Your source of funding

Once you’ve settled on a purchasing price, you need to cough up the money. Here are some options for funding:

  • Seller financing — If the seller is willing, you can purchase their business over time with regular payments plus interest.
  • Angel investors — When you partner with a venture capitalist, less profit will go to you if your business succeeds. But if it fails, you won’t suffer a huge financial loss.
  • Business loans — You can take out a loan from either a traditional bank or an online alternative lender.

#6 The drafting of the sales agreement

After the negotiations are finished, it’s time to finalize the agreement. Your lawyers should make sure there are no ambiguities in the agreement that can potentially cause trouble after the sale.

Acquiring a business takes time, effort, and careful consideration. But if you do things right and take no shortcuts, you’ll be the one to grow and expand a good business into a great success.

If you’re expanding your business, whether organically or through acquisition, you’ll need a managed IT services provider who can help with the transition and ongoing stability. The IT specialists at Online Computers have the expertise and experience to guide and assist you through those periods. If your business is in or around Hanover, Morristown, or Madison, get in touch with our experts today. You build the business, we’ll build scalable IT solutions.

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