Buying a business is a life-changing decision that requires careful consideration and planning. At Unbroker, we’ve guided countless entrepreneurs through this exciting journey.
If you’re thinking “I want to buy a business,” you’re in the right place. This guide will walk you through the key factors to consider before making your purchase, ensuring you’re well-prepared for this significant step in your entrepreneurial career.
Are You Ready to Buy a Business?
Buying a business is a significant step that requires thorough preparation. You must ensure you’re ready for the challenges and opportunities ahead. Let’s examine key areas to assess your readiness.
Financial Preparedness
Take a hard look at your finances. How much can you invest? The average cost of launching a retail business is $32,000, and some store owners have reported starting with only $5,000 saved. You’ll typically need 10-30% of the purchase price as a down payment. Ensure you have enough saved not just for the purchase, but also for operating costs in the first few months.
Check your credit score. A score above 700 will give you better loan options. If your score is lower, improve it before you start shopping for businesses.
Skills and Experience Assessment
Inventory your skills and experience. What industries do you know well? What management experience do you have? Be honest about your strengths and weaknesses. If you’re eyeing a restaurant but have never worked in food service, you might want to reconsider (or plan for a steep learning curve).
Goals and Preferences Clarification
Think about what you want from this business. Do you seek a steady income or rapid growth? Do you want to be hands-on or hire a manager? Your goals will guide your search and help you evaluate opportunities.
Consider location too. Do you want a local business you can visit daily, or are you open to remote ownership? The National Federation of Independent Business surveys small business owners about potential business problems, including public policy-related issues. Your location choice can impact your ability to hire good staff.
Time and Lifestyle Considerations
Be realistic about the time commitment. Are you ready for long hours, especially in the beginning? How will this impact your family and personal life?
Buying a business is a major decision that requires careful thought and planning. If you’re unsure about any aspect, consider seeking advice from a business advisor or using a platform like Unbroker to connect with experienced sellers. These resources can provide valuable insights into the realities of business ownership.
Now that you’ve assessed your readiness, it’s time to move on to the next crucial step: conducting thorough due diligence on potential business opportunities.
How to Conduct Thorough Due Diligence
When you buy a business, due diligence protects you from costly mistakes. This process uncovers the truth about a potential business purchase. Here’s how to investigate thoroughly and make an informed decision.
Financial Health Check
Analyze financial statements and tax returns for at least three years. Look for trends in revenue growth, profit margins, and cash flow. If finances aren’t your strong suit, hire an accountant. They’ll identify red flags like unexplained revenue dips or suspicious expenses.
The Small Business Administration reports that 20% of businesses fail in their first year. Don’t become part of this statistic. Examine the balance sheet for debt levels and asset quality. A business with high debt or outdated equipment might require significant post-purchase investment. Unrealistic financial projections can also be a disadvantage when buying an existing business.
Operations Under the Microscope
Review business operations and processes. Observe daily activities on-site. Talk to employees about their roles and challenges. This approach reveals inefficiencies and improvement opportunities that financial statements won’t show.
Request standard operating procedures and employee handbooks. Their presence (or absence) indicates the business’s organization level. Well-documented processes facilitate smoother transitions and easier scaling.
Market Position and Competitive Landscape
Evaluate the market and competition rigorously. Use industry tools to assess market health. Check local business directories and review sites to gauge customer sentiment about competitors.
The U.S. Bureau of Labor Statistics provides industry-specific growth projections. Use this data to understand if you’re buying into a growing or shrinking market. (A declining industry doesn’t always mean a bad purchase, but it requires a solid turnaround strategy.)
Legal and Regulatory Compliance
Assess legal and regulatory compliance meticulously. Request copies of all licenses and permits. Verify their validity with relevant authorities. This step is critical; operating without proper licensing can result in hefty fines or forced closure.
Check for pending lawsuits or regulatory actions. These can be deal-breakers or, at the very least, powerful negotiating points. The U.S. Courts website provides access to federal court records, which can offer valuable information.
Customer Relationships and Loyalty
Examine the customer base and relationships closely. A diverse customer base reduces risk, while a few large clients might signal vulnerability. Ask for customer retention rates and lifetime value data. Customer retention programs such as loyalty programs and VIP memberships can be instrumental in driving customer lifetime value by reducing churn and extending customer lifetimes.
If possible, speak directly with key customers. Their feedback on product quality and service provides invaluable insights. Be cautious of businesses that heavily rely on the current owner’s personal relationships. These can be hard to transfer and might disappear with the previous owner.
After you complete your due diligence, you’ll have a clear picture of the business’s potential. This knowledge will prove invaluable as you move to the next crucial step: financing your business purchase.
How to Finance Your Business Purchase
Traditional Bank Loans
Banks provide a primary source for business acquisition loans. They typically require a strong credit score (700+) and substantial collateral. The U.S. Small Business Administration reports that the average small business loan amount is $663,000.
When you approach banks, prepare a comprehensive business plan and financial projections. Many banks prefer to lend to businesses with proven track records, so emphasize the target company’s financial stability and growth potential.
SBA Loans
SBA loans offer more accessibility than traditional bank loans. The SBA doesn’t lend directly but guarantees loans from approved lenders. This reduces the lender’s risk, potentially leading to more favorable terms for you.
The SBA 7(a) loan program stands out for business acquisitions. It offers loans up to $5 million with terms up to 25 years. Lenders and borrowers negotiate the interest rate, and there is no SBA maximum interest rate limit. Revolving lines of credit have terms of 36 months.
Seller Financing
Seller financing presents an excellent option, especially for smaller businesses. In this arrangement, the seller acts as the lender, allowing you to pay for the business over time.
This option often comes with more flexible terms than traditional loans. However, sellers typically expect a higher interest rate to compensate for the risk. Negotiate terms carefully and ensure clear outlines in the purchase agreement.
Alternative Financing Options
If traditional methods don’t work, consider these alternative financing options:
- Asset-based lending: Use the business’s assets as collateral. This works well for asset-rich businesses but can pose risks if the business struggles.
- Rollover for Business Startups (ROBS): Use retirement funds to finance your purchase without early withdrawal penalties. This option lets you use your 401(k) or IRA to fund business startup costs, tax-free. However, tapping your retirement savings is risky.
- Crowdfunding: Platforms like CircleUp focus on equity crowdfunding for established consumer brands. While potentially effective, this method requires a compelling pitch and can take considerable time.
Combining Financing Sources
Financing often involves combining multiple sources. A mix of personal funds, bank loans, and seller financing is common. Creative deal structuring can help make your dream of business ownership a reality.
Try to start the financing process early. It often takes longer than expected and can impact your negotiation strategy. With the right financing in place, you’ll position yourself well to close the deal and start your journey as a business owner.
Final Thoughts
Buying a business transforms your life and requires careful planning. You must assess your readiness, conduct thorough due diligence, and secure appropriate financing. These steps form the foundation of a successful business acquisition and help you avoid potential pitfalls.
The path to business ownership differs for each entrepreneur. Your financial situation, skills, goals, and lifestyle determine the right business for you. A deep dive into financial statements, operations, market position, legal compliance, and customer relationships provides invaluable insights to inform your decision when you think “I want to buy a business.”
Unbroker offers a modern, efficient platform to connect with business sellers. Our transparent, low-cost options eliminate high brokerage fees (providing you with more resources to invest in your new business). Whether you’re a first-time buyer or a seasoned entrepreneur, Unbroker’s AI-driven processes and expert support can streamline your search for the perfect business opportunity.
