Small Business

How To Buy A Business And Avoid 1st-Year Disasters

4/8/22 Brian Cedeno

Buying an existing business is a great way to take advantage of a promising venture without having to deal with the initial challenges and risks associated with starting up a business. Instead of building a customer base or launching newly tested products, you’ll be more focused on scaling business efficiency and maintaining growth potential.

However, most business acquisitions frequently lead to unexpected changes in a company’s operations. Depending on how you navigate the purchase and transition period, this disruption could lead to booming growth and increasing profits, or it can fall into chaos.

Is this something you should be concerned about so early? If you’ve just started searching for a franchise or business practice to own, is this knowledge valuable to those simply scanning the horizon? The short answer is yes: knowing how to buy a business while avoiding common first-year disasters is the difference between success and failure in launching your venture.

To succeed, you’ll need to remember the three ingredients needed for business success, regardless of whether you’re looking to lead a growing startup or bring a promising, lucrative small business to market. These keys are just as important when you are new to an existing operation as when you are building one from the ground up.

But what are these keys to success? In this guide, we’ll uncover what you need to know about becoming a business owner, the strategies you’ll need to put into practice to succeed, evaluate how your business model could leverage your expertise, and other tactics related to helping you succeed in bringing your ideas to life.

Table of Contents

  • What do you know about buying a business?
    • Small business
    • Franchise ownership
  • The 9 steps to buying a business
    • Becoming a business owner
    • Business acquisition
    • Business ideas
    • Market research
    • Due diligence
    • Secure financing
    • Investing capital
    • Finalizing the purchase
    • Managing the business
  • Conclusion

 


 

What Do You Know About Buying An Existing Business?

Each year, over 9,000 businesses change ownership or are sold throughout the United States. Lots of business owners are deciding to hang up their gloves and continue towards retirement while others embark on their journey towards entrepreneurship.

What new business owners don’t know is that there’s a lot that goes into buying an existing business that many don’t realize, but will also tend to overthink throughout their journey.

Many jump into business ownership due to their love of their craft or their passion for their hobbies. However, running a business requires wearing multiple hats and learning from mistakes in order to prove that a business can become profitable.

Most companies that start from scratch have a rough time getting to where they need to be more so than franchisees, who leverage the power of an established brand to sidestep a lot of the early challenges that entrepreneurs face.

Small Business Versus Franchised Business

According to the International Franchise Association, buying a franchise may reduce your risk as a business owner by enabling you to associate with an established company that comes equipped with an established customer base, rather than having to claw your way into getting attention from your target market.

However, franchise costs can be quite high for a new small business owner, as you may be required to give up significant control over your business while you take on contractual obligations with the franchisor.

 


 

The Nine Steps to Buying A Business

Step 1: Becoming A Business Owner

It’s important to shape your understanding that becoming a business owner is more than just buying a business for the potential profits it can generate. What makes for a business owner is very different from what makes for a hobbyist, who’s mistakenly looking to have fun while not assessing the risk they’re undertaking (although running a business can be very rewarding).

Starting a business venture is a huge leap in regards to responsibilities, which include controlling finances, managing risk, eliminating loss factors, and constant business planning. For those that have run businesses before, it’s valuable to mention that starting a business requires elevated levels of patience and will, no matter how much experience or knowledge you have in the industry.

It’s recommended to start building your own network to learn from the experiences of other business professionals and entrepreneurs. Speak with prospective franchisees of existing businesses or business broker agents to learn more about what it takes to start a business.

Step 2: Prepare For Business Acquisition

If you know exactly what type of business you’re looking to buy, then you’re already in the right place. However, for those looking to break into new business entrepreneurship, it’s important to narrow your focus towards what aligns with your skills, experience, and passions.

It’s easy buying an existing business based on growth projections and financials, but it is fundamental to match yourself with the vision of the business. Most business founders who are experts in their field not only own business licenses that have prepared them for this exact role, but their determination to continue in the face of adversity is what makes for a successful business.

It’s kind of like being the head chef in a high-traffic kitchen; you’ll have to account for everything inside and outside of the business in order to become successful. You’ll need to manage front and back-of-house staff, supervise the weekly inventory of food and supplies, control the quality of the food being produced, coordinate with the owners of the restaurant to keep the business full of customers, and maintain healthy morale among your fellow cooks.

Also, think of your business goals: Are you selling to customers, businesses, or government organizations? Are you selling your services through vendors, retail stores, or online? Get acquainted with the entire business concept, along with the products or services you offer to existing customers, and everything else will fall into place.

Step 3: Validating Business Ideas

Once you’ve found the right business opportunities, the next step is to understand the business model itself. You’ll need to convince yourself on why the established business deserves your attention. Get comfortable with the trends, challenges, and opportunities associated with the business. Here are a few tips to know when identifying a good business venture to invest in:

  • Franchise ownership means being prepared to assume the overhead costs, including upcoming license renewals for franchise fees or costly equipment replacements
  • Businesses with employees have a higher value generally and tend to become equipped with higher overhead costs but higher revenues as well
  • Companies in financial trouble can be acquired cheaply and turned around if you know how, but it takes a lot of up-front capital investment
  • Owner-operated businesses without employees are frequently the least expensive to acquire, but they require a lot of market knowledge and experience with the field

Around a half million businesses change hands every year. Understand how buying an existing business that has a franchise fee is different from understanding the transition process for a sole proprietorship with its own brand. Similarly, targeting a profitable turnkey operation to generate guaranteed income requires a different funding approach than rescuing a company when the current owner is selling out of frustration.

Step 4: Market Research and Evaluation

Once you’ve found a solid choice for a business that is on sale, the next step is to uncover everything you can about the business and its market. You want to know why the business is for sale, exactly what you’re investing in, if the venture is even worth the risk, and how much energy you’ll need to successfully launch as the new owner.

You’ll be looking inside and outside the business; during this stage, you’ll need to become your own business detective and investigate everything about the company and its market without any assistance from the current owner (until much later).

Checklist for new small business owners

Ask yourself a few questions and find the answers you’re looking for through your research:

  • Is the purchase price of this particular business similar to what others would pay?
  • How much demand and supply exists in the marketplace?
  • Are there any competitors that are “eating your lunch” as of now?
  • What are the advertising costs and marketing strategies for a business like this?
  • Is the business’s location a cause for concern? Will you need to expand or relocate?
  • Is hiring employees a critical component to business success for the next 6 months?

Ultimately, what you’re trying to figure out is how much you are willing to spend to purchase and manage this business. Figuring out what it takes to meet the needs of the business can be a daunting expedition, but it’s necessary in order to find out if this venture is worth it for you.

Step 5: Conducting Due Diligence

Now that you’ve done your own outside research, it’s time to start looking in. Are the owners looking to retire? Is it such a demanding job that they are burnt out from working there? Is there a fundamental problem with the business that they are not easily willing to disclose? Whatever the reason may be, you’ll want to know why the current owners don’t feel compelled to work for the business any longer.

Set up a meeting with the current owner(s) and figure out what you can about the business from their perspective and why they’re selling it. Once you start digging around, and you’re confident that you want to keep pursuing this venture, then design a battle plan that will help your business buying journey:

  1. Draw up your own estimate of the business’s value based on multiples of the current EBITDA (earnings before interest, interest, taxes, depreciation, and amortization).
  2. What is the size of the business? How is the strength of the brand determined? How do you assure the quality of the products or services produced by the business?
  3. Interview the current personnel to find common issues in the business and any operational worries that weren’t made a point before
  4. Evaluate the financial health of the business, including accounts receivable, accounts payable, balance sheet, and financial statements of the past two years.
  5. What challenges have the owners faced before? Examine any holes in the business that may be causing any “bleeding” and bring it up as a cause for concern.
  6. What is the state of the current business inventory? Add up all of the assets tied to the business and record the total value of the business parallel to the purchase price.

Franchise Disclosure Document

If you’re going to buy a franchise license for a new franchise business, request a Franchise Disclosure Document (FDD) before paying out the cash. An FDD is a legal disclosure document that must be given to buyers interested in licensing a franchise.

It is a pre-sale due diligence process that contains information essential to potential franchisees before they invest in the business; this document may outline what the franchisee will expect to receive as part of the deal; management practices training, operations procedures, location placement, organizational documents, and marketing support are some of the features included as part of the disclosure. While not a franchise agreement, legal documents such as an FDD are required by law from the franchisor to new franchise owners.

Step 6: Strategies To Obtain Financing

Now that you’ve got your work cut out for you, it’s time to find the cash you need to buy the business. If you have saved up a stockpile of cash to invest in a business opportunity, then you’re in a good position. However, many first-time business owners favor opening up a business on borrowed funds.

To successfully finance a business startup, new owners will have to source their capital from any source willing to let them borrow. Crowdfunding, pre-sale orders, equity financing, and bootstrapping are all legitimate ways to fund a business, but they’re not the only ways for the average business. Therefore, debt financing (business loan) is a common vehicle that business owners leverage in order to get things off the ground quickly.

In order to get a business loan, your lender will request to see the financial performance of the business and assess the risk factors associated with the business. Business materials, such as monthly gross sales records, balance sheets, credit scores, cash flow statements, annual revenue statements, and a business’s intangible assets are all factors that a lender will take into account when grading your business for a loan.

Some entities, such as small businesses, may qualify for federal small business loan programs from the Small Business Administration (SBA) that enable startup ventures to utilize government-backed funds (SBA loans) in an effort to reach their goals and boost the local economy.

Step 7: Issuing Capital Investments

Once you’ve secured the funds you need, you’ll need to strategically invest your cash in the right business opportunities.

For new business purchases, the current owner will usually transact the sale through a business broker who facilitates and manages the purchasing process between the buyer and the seller. They help to maintain seller confidentiality and connect the seller to qualified prospective buyers interested in buying the business.

However, this isn’t commonplace for all business ownership sales; you can directly discuss the terms of the sale with the current owner and structure a deal that is legal and operates within the limitations of state and national laws.

In a franchise business deal, you can find options in each of these niches at almost any reasonable budget, but the key to knowing how to buy a franchise is financing; your budget should be bigger than the cash you have on hand.

Franchise licensing commonly requires a significant down payment (for costs such as franchise fees and equipment costs), but they come with supplemental terms that allow you to do a lot more with your money than you would otherwise be capable of accomplishing. The franchisor usually will introduce the prospective franchisee to the running business model of the franchise.

Step 8: Finalize Purchase Options

Once you’ve made your final decision, and agreed on a fair price with the owner, then it’s time to get the paperwork going for the purchase.

The business owner starts the purchase process by drafting a Bill of Sale, indicating the legal sale of the business and the official transfer of the business’s tangible assets from the seller to you. Along with the Bill of Sale, a receipt of the sale must be included that shows the prorated expenses of the business (adjusted purchase price).

If the business is leasing space on a property, then the landlord of the property must be included involved in the purchase process. Additionally, if a company car is owned by the business, you may have to transfer the vehicle to your name as the new owner.

Now comes the legal part of the business purchasing process; patents, trademarks, and copyrights may require you to become validated as the new owner. Forms provided by the US Patent and Trademark Office will provide all the relevant information for transferring ownership.

Lastly, finalize any agreements between you and the former owner, including a non-compete agreement (standard rule where the previous owner won’t establish a competing business near your enterprise) and any employment agreements (in the event the seller stays on your team as an employee).

Step 9: Managing An Existing Business

Now that you’ve purchased the business, the next part of your journey is effectively managing the future of the business. You’ll find yourself rewriting the rules of your business structure, creating new procedures in place to accelerate productivity, zeroing in on profitable opportunities, and establishing a clear marketing play to jumpstart sales.

As you’ll come to find out, running a business is more than just about turning a profit. You’ll be responsible for keeping a well-oiled machine (or lack thereof) on its feet and will become dependable through your customers to be able to deliver your service and products on time to them, with the quality they expect to pay for. If it seems like a lot now, just know that not every business is perfect and almost every entrepreneur/business owner never had the perfect playbook for growing their business either.

However, you can make your life easier by turning to tried-and-true business techniques that allow any sized organization to flourish. Here’s a list of growth activities you can focus on when optimizing your business:

  1. Take your projections for reserve capital needs and add a significant buffer to them to provide for contingencies outside your projections.
  2. Listen to your seasoned staff and leadership team and use their expertise to onboard yourself into the experience of managing this kind of company.
  3. Build a cash flow management strategy that includes targeted credit resources to deal with different capital needs as they arise.
  4. Unless your business acquisition was atypical, the startup operating costs will be much lower with the added equipment you’ll have access to, allowing you to strategize your budget allocation and energy placement.

Most first-year problems that derail small businesses wind up being caused by cash flow problems. If you are unable to keep your suppliers and staff paid, operations grind to a halt. After all, if you have the cash, you can buy the training to accommodate knowledge gaps due to staff turnover or other issues. That is why two of the three keys to making year one profitable have to do with your money situation.

 


 

Finding the Right Business Resources

Acquisition loans are important, but they are not the only form of financing you need on deck. To avoid a year-one disaster, you need a plan for working capital resources when expenses pop up and outside your budget projections. That makes it possible to absorb surprise costs, load up on inventory before a high-demand holiday, or redecorate for seasonal changes that keep your customers coming through the door.

With LoanMe, you can access business loans in just a few hours based on a quick online application, no matter when you need the money. The process of getting a loan can be confusing and stressful, but it doesn’t need to be. Multiple lenders (such as LoanMe) offer business loans specifically designed for those who need them, and our approval process requires fewer documents than traditional lenders.

With LoanMe offering same-day funding, applying for a business loan is an easy process. If you feel that LoanMe is the lender you need, then we’d be happy to help you find the right financing options and support you through the entire loan process.

Happy hunting and good luck!

 


 

This article has been prepared for general information purposes only. The information presented is not legal, financial, tax, or accounting advice, is not to be acted on as such, and is subject to change without notice. Credit approval is subject to LoanMe’s credit standards, and actual terms (including actual loan amount) may vary by applicant. LoanMe requires certain supporting documentation with each new application. If you have any questions regarding this, call us at 844-311–2274. California loans are made pursuant to LoanMe’s California Department of Business Oversight Finance Lenders Law License #603K061. LoanMe also offers loans in certain other states which may have higher minimum loan amounts. Wires are sent out by 5:30 pm EST Monday-Friday. The funds should appear in your account shortly thereafter, however, this is subject to your bank’s policy and procedures with receiving incoming wires. Copyright © 2022 LoanMe, Inc. All rights reserved. 

  • small business
  • buying a business
  • working capital