There are many ways to become an entrepreneur. You can launch your own business from the ground up, you can partner with someone else, or you can even buy a small business outright.

Buying a small business can create a unique stream of income and help you to launch your new career—you just need to know where to find them and how to invest. 

Buying a business, as opposed to starting something from scratch, can streamline your path to profitability. It can also be less risky, in some cases, if the brand is already successful and established.

If you’re considering purchasing an existing small business, this guide will help. Learn where to buy a small business, as well as the pros and cons of different business types.

How to buy a small business
  1. Figure out what type of business you want to buy
  1. Where to find small businesses to buy
  1. Do you want to buy an existing business or a franchise?
  1. Know yourself before you buy a business
  1. When is the right time to buy a business?
  1. Understand why an existing business is up for sale
  1. Decide on a business that fits your needs and resources
  1. Creating a plan for buying a business
  1. Do your due diligence
  1. Financing your business acquisition
  1. Closing the deal
  1. Know the benefits of buying a business
  1. Keep the downside in mind

Figure out what type of business you want to buy

Not all businesses are created equal. In fact, each one is unique and has its own value proposition and business model. The type of business you buy should align with your particular experience, skills, passions, and interests. 

If you’re passionate and knowledgeable about real estate, for example, a business in the real estate industry should be on your radar. You’ll be less likely to succeed if you’re new to real estate, unfamiliar with industry jargon, and what it takes to thrive. In addition, it’s essential that you agree with the business goals and be willing to work hard to achieve them. Otherwise you may be unmotivated to steer the venture toward success.

Where to find small businesses to buy

There are many ways to find small businesses to buy in your area or industry. You may want to try multiple methods to discover businesses so you can find the best option for your investing goals. 

  • Deal directly with the business owner. Are you looking to acquire a smaller company or competitor in your field? Do you want to enter a new industry or market? One of the best places to buy a business is directly through the other business owner. Do your research, and when you find a business that you want to pursue further, reach out to the owner and discuss the opportunity of purchasing their business directly.
  • Hire a business broker. Business brokers work to connect small businesses with potential buyers—and vice versa. Their job is to understand various industries and company values. They can also provide insight into which businesses to avoid and share context into the history of various organizations. 
  • Find businesses online. Sites like BizBuySell and BizQuest allow small businesses to list their brands and connect with buyers. You can sort by industry, location, and even price. This is a great place to get a feel for your local markets and customer demand. 

You might also want to keep a lawyer on retainer to help negotiate the sale and handle various contracts related to the transition. This extra assurance can give you peace of mind and help you to protect your investment.

Do you want to buy an existing business or a franchise?

You don’t only have to look for small or local businesses to buy—it’s also possible to buy a franchise of an existing business and operate under that brand. Companies like McDonald’s, ACE Hardware, and Massage Envy rely on franchisees to buy into their businesses and operate companies on their own. 

Buying a franchise has its pros and cons, as explained by the Small Business Administration. One of the main benefits: support. There will be less decision-making because the brand and its processes are established and set. For example, if you decide to open an ACE Hardware, you’ll already know the brand’s color choices and the employees’ uniforms. You’ll also gain access to the company’s internal systems and marketing materials. 

While some people embrace the structure of opening a franchise, there are also limitations to what you can do. You can’t get creative with new products and must stick to established guidelines. This might not be ideal if you want to build a unique business or want more influence on the systems within the organization.

You can find franchises for sale across almost any industry or company size. Different franchises have different license fees and varying startup costs. For example, it costs more to build an Anytime Fitness than a PJ’s Coffee stand. Some franchises require $250,000 or more to get started, but others require much less. To explore different franchise opportunities and costs, look at sites like Franchise Direct or Franchise Gator to learn more. These sites can help you to find the best franchises to own based on your budget and goals.

Know yourself before you buy a business

You may be tempted to buy your favorite bar that can’t afford to stay open or invest in a bakery based on your passion for cake design—however, it’s important to be realistic about what you know and what you can handle. There are a few key factors to consider with your business choices:

  • How much time do you have to run this business? Are you looking to acquire a company and run it day-to-day as a full-time job, or do you want to be a silent partner who is more hands-off? You may want to look into a business investment rather than exclusive ownership if you don’t plan to be involved in the operations of the company.  
  • What is your expertise in the field? How much do you know about the industry, the current local market, and the business plan of the business you want to acquire? Think about the “cupcake bubble” of the past decade, where the market became too saturated with cupcake shops as the trend faded. You may need to spend some time learning about the industry before you enter it.  
  • What is your expertise in business? Even if you have industry experience, you may need additional business acumen to succeed. Take steps to bolster your accounting, marketing, HR, and management expertise to prepare yourself to lead your employees to success. 
  • How will you fund the investment? You can absolutely follow your dreams of becoming a business owner, but you need a funding plan first. Look into a loan to buy a business and other professional funding options—this way, you’ll have enough money to acquire the company and make any modifications needed.

You don't have to have an MBA or 10+ years of experience in a field to buy a business. However, you will need a plan to manage your finances, operations, and marketing as soon as the business becomes yours.

When is the right time to buy a business?

The right time to acquire an existing business is when you find one with a good labor pool, a strong customer base, established procedures, growing sales, and most importantly, positive cash flow. It should also be the type of business where you can leverage your strengths and your experience. Once you find what you’re looking for, get in contact with your attorney and your banker to thrash out the details.

Existing cash flow and a proven track record will make it easier for you to secure financing for the venture of your choice. You’ll have better access to cash flow once your customer base is good, and you have strong distributor and supplier relationships in place. All of these factors save you a lot of time and money. You may also be able to draw on the experience of the previous owners if they are willing to guide you as you take over the business.

Understand why an existing business is up for sale

Before you sign on the dotted line and purchase a business, determine why it’s on the market in the first place. Maybe the owner is ready to retire. Or perhaps there are serious issues with the business, like a damaged reputation or poor product line. Don’t be afraid to ask the current owners why they’re selling their venture and what challenges they’ve encountered over the years.

You should feel confident that you can solve these challenges or can find resources that can help you do so. Some of the most common challenges you might come across include a poor business plan, excessive business debt, location issues, branding confusion, outdated equipment, and staffing shortages. 

Take the time to learn as much as possible about the successes, failures, challenges, and opportunities of the business. In addition to the owner, consult current and former customers, employees, and competing businesses. They’ll provide you with an unbiased opinion of how the business is performing and why it’s for sale.

Decide on a business that fits your needs and resources

After you shop around and consider all your options, it’s time to make a decision. The right business will line up with your budget, goals, and resources. Once you hone in on the ideal venture, do the math and figure out the best size, location, sales strategy, and staffing needs.

If you know you’d like to make drastic changes, determine what resources you’ll need to implement them and how much they’ll cost you. Remember to think about the time and energy you’ll need to invest in addition to the monetary cost. 

The money, time, and energy you’ll have to invest will depend on the business type and your particular experience and connections. For example, if you’ve worked in real estate in the past and are purchasing a real estate business, you’ll have to invest less than you would if the industry is entirely new to you.

Creating a plan for buying a business

There’s no way to proceed confidently with a business purchase unless you have a plan. And the process of creating your plan will make it possible to determine whether or not the timing is right for you.

The best way to build your business plan is to answer questions related to your motivations and goals. Here are some possible questions to think about:

  • What’s driving you to buy a business now?
  • How much experience do you have in the industry?
  • How passionate are you about the industry?
  • What’s your mission statement?
  • What’s your main objective?
  • What are your primary strategies?
  • What has your market analysis revealed?
  • What has your competitor analysis revealed?
  • What will your financial needs be?
  • What are your financial projections?

You won’t have all the answers up front—research and review will be required for clear answers. But you should start the process now in order to proceed when you feel the time is right.

“Research and analyze your product, your market, and your objective expertise,” explains a business report from the Houston Chronicle. “Consider spending twice as much time researching, evaluating, and thinking as you spend actually writing the business plan. To write the perfect plan, you must know your company, your product, your competition, and the market intimately.”

Once you’ve compiled your business plan, you’ll be able to confirm your choices regarding timing and whether you should buy a business or take the franchise route. A business plan is a living, breathing thing—you’ll want to revisit it regularly to make sure it reflects your current situation and aligns with your future goals.

Do your due diligence

Due diligence is when you collect as much information as you can before you go ahead and purchase a business. It’s a good idea to work with professionals, like a lawyer and an accountant to make sure you have all your ducks in a row before you move forward.

While the accountant can help you with financials, an attorney may support you with negotiations and all the legalities of the purchase. Be prepared to sign a nondisclosure or confidentiality agreement and agree that you won’t reveal any confidential information you learn as you do your due diligence. In the event you decide to back out of the deal, this agreement will protect the seller. 

There is no shortage of documents and statements you’ll want to gather during the due diligence process. Several of the most important ones include: 

  • Business licenses and permits - The business you’re interested in should already have all the licensees and permits it needs to operate legally. If the business is in a highly regulated industry (Ex: childcare) you won’t be able to stay open without them. 
  • Organizational paperwork - This involves documents that state the business has been officially registered as an LLC or corporation. An LLC requires an articles of organization, while a corporation must come with an articles of incorporation. A certificate of good standing from the secretary of state is crucial as well. 
  • Zoning laws - Make sure that the business operates in accordance with all zoning laws. Some localities impose serious restrictions on where certain businesses can and cannot be located. 
  • Environmental regulations - There are many environmental regulations for small businesses set forth by the Clean Air Act, Safe Drinking Water Act, Pollution Prevention Act, and more. The business you purchase should be in accordance with them. 
  • Letter of intent - Also known as an LOI, the letter of intent is written by the seller after you’ve agreed on a price, as well as which assets and liabilities will be included. The conditions of the sale should also be outlined in the LOI. 
  • Business financials - You’ll need to work with an accountant to review a few years of various financial documents. Some of the most popular ones are tax returns, income statements, cash flow statements, balance sheets, and debt disclosures.
  • Organizational chart - An organizational chart will come in handy as it will inform you of all of the current employees and how they relate to one another. Ideally, the chart will also include details on compensation, benefits, PTO, and management processes. 
  • Other documents - The particular business and industry will determine any other important documents. Ask your accountant or attorney if there is any additional paperwork or forms you’ll need. 

Financing your business acquisition

Most small businesses close their doors for one reason or another within a few years of starting up. An existing company gives you the advantage of business systems that have been honed over time.

If you have the funds to make a 10-20 percent down payment, industry experience or business management skills, and good credit scores, an SBA loan would be ideal. If yours is a large business, you can apply to the big banks (this is one of the toughest sources of financing for small businesses to tap into).

On the plus side, it can be easier to get financing for an existing business than for one that has not yet proven itself profitable. Take the case of a reputable business with an asking price of $500,000, and steady yearly cash flows of $200,000. Match that with taking out a $300,000 loan to bankroll a startup, where forecasts may or may not be realized. A bank may be more prepared to fund the half-million deal if you have a realistic down payment, and if the company you're purchasing has historic income and adequate cash flow to service the debt.

Closing the deal

Last but not least, you’ll close the deal. After you’ve found the right business, performed your due diligence, agreed on a price, and collected all the capital you need, you can officially purchase the business. Here’s what’s involved in the closing process: 

  • Bill of sale - The bill of sale will prove the sale of the venture and officially transfer the business assets and ownership to you. 
  • Adjusted purchase price - This refers to the final cost of your purchase and includes rent, utilities, inventory, and other prorated expenses. 
  • Lease - A lease is important if you plan to take over the current lease of the business. If you’d like to negotiate a new lease, be sure to work with the landlord and finalize its terms.
  • Vehicle documents - Vehicle documents are key if your business will come with vehicles. You’ll need to work with the local DMV to transfer ownership. 
  • Trademarks, copyrights, and patents - If you have negotiated for them,  when you purchase a business, every patent, copyright, trademark, and related form become yours. 
  • Employment or consultation agreement - If the seller will help you through consulting services during the transition process or work as an employee, be sure to create an agreement. Additionally, if there are key employees, they should also be signing new employment agreements with your entity. 
  • Franchise agreements - If the business follows a franchise model, franchise agreements will outline the rules and regulations you'll need to follow.

Know the benefits of buying a business

While you can start a business from scratch, investing in an already established venture comes with many benefits, including:

  • Established brand and reputation – Buying an existing business comes with an established brand and reputation in the market. It takes time and effort to build a brand from scratch, and it can take years before you start seeing a significant return on investment. On the other hand, buying a business that already has a loyal customer base and a solid reputation in the industry means you can hit the ground running.
  • Pre-existing customer base – Purchasing a business with an existing customer base is one of the biggest advantages of buying a business. A loyal customer base is the backbone of a successful business venture, and buying an existing business ensures that you have immediate access to this customer network. You can leverage these relationships to generate sales and build a stronger customer bae.
  • Established processes and operations – When you buy an existing business, the processes and operations are already established. You don’t have to waste time and resources trying to figure out the best ways to run the business. Instead, you can focus on improving, streamlining, and optimizing those processes.
  • Existing staff – Another significant advantage of buying a business is that it comes with a pre-existing workforce. You don’t have to recruit, hire, and train a new team from scratch. Instead, you can acquire a knowledgeable team that already knows the ins and outs of the business. Additionally, existing employees can be a source of valuable insight and knowledge.
  • Proven financial track record – Buying an established business also means you have access to the business’s financial track record. You can analyze its revenue streams, profitability, and other financial metrics to determine the business’s overall health and profitability. You can also use this data to make informed decisions about how to grow and scale in the business.
  • Financing flexibility – Along with a proven track record, you’ll have financing flexibility. When lenders and investors see you want to purchase a business with a successful track record, they’ll be more likely to lend you money. There’s no need to prove your business concept or potential worth.
  • Access to intellectual property - As the new business owner, if you purchased them, you’ll enjoy all the rights to the slogan, logo, and other intellectual property that can be costly to obtain when you initially start a venture. 
  • Reduced risk - There's no denying that starting a business comes with a great deal of risk. When you purchase an existing one, you'll already have a strong foundation and can focus your efforts on improvements and innovations.

Keep the downside in mind

On the downside, purchasing a business is often more expensive than starting from scratch. Think long and hard about the kinds of establishments you’re attracted to and which best match your experience and skills. You can find great ventures for sale if you contact a business broker. If you’d like to go it alone, you’ll need to take several things into consideration, such as business size, geographical area, and industry.

You also have to consider that the owner may try to downplay any business problems. These problems may be inherent, and may not become apparent until after the sale. Existing staff can offer valuable insight into areas that can be upgraded and how the business runs, and they can give you an active perspective of the business as opposed to the theoretical one you’re likely to get from the boss.

Another problem is that equipment and inventories may be obsolete. In addition, customers may owe the business, and these bills may be virtually uncollectable, making them worthless.

There are other disadvantages to purchasing a business, and you must obviously consider them seriously versus the advantages. When you’re negotiating a business acquisition loan, you must assess the existing operations of the venture thoroughly and diligently, which can be an overwhelming task.

If a business is doing badly, scrutinize it to find out what the reasons are. Inadequate resources and poor management are two common causes. Your investment may turn out to be lucrative if you can turn the business around and make it profitable; on the other hand, you’re taking a huge gamble if it doesn’t work out.

See your funding options for a business acquisition loan. Lendio will ask you a few basic questions, and will narrow down the lenders that are right for your purposes. Doing business this way saves you a lot of time, and it will help you take over your business and start making a profit much sooner than if you take the traditional route.