How to Buy a Business

If you’re interested in entrepreneurship and have a particular business idea in mind, you may be asking yourself whether it’s the right move to buy an existing business or start one yourself.

This guide will help you navigate the process by exploring whether buying is the right choice for you, how it compares to starting a business from scratch, and the key steps to follow when making a purchase.

Whether you’ve saved up or are just exploring your options, this article will provide the insights you need to make an informed decision about buying a business.

Tip: If you’re unsure which type of business to buy, we recommend having a quick look at our Business Idea Generator tool.

Should I Buy a Business

While buying a business comes with its own unique benefits, it’s important to assess whether it’s the right path for you by weighing it up against starting your own venture.

Starting vs Buying a Business

Both buying and starting a business from scratch come with their own set of pros and cons, which are important to understand before you can determine which path is best suited to your situation.

One of the biggest advantages of buying a business is that it’s far less risky than starting one from scratch. While about 90% of startups fail, buying an established business has a much higher success rate — with around 98% still functioning three years after sale.

This is because you’re purchasing a business model that’s already proven to work, while startups are often untested and uncertain. For the same reason, it’s often easier to secure financing for the purchase of a business since lenders are more willing to invest in something with a proven track record of success.

Additionally, the pre-existing relationships with suppliers and stakeholders make the transition between owners far smoother, while also granting you immediate access to customers, sales, and profits — which can provide you with instant cash flow from day one.

Another key benefit of buying a business is that it usually comes with an established brand, which means you won’t have to spend time and money building awareness and customer loyalty as the business already has a reputation in the market.

On the other hand, starting your own business gives you much more control. When starting from zero, you have the freedom to design everything to fit your vision — from the business model to branding, operations, and company culture. As a result, you’ll be far better able to quickly adapt to changes in the market as you’re not tied down by the business’s systems or decisions under a previous owner.

Did you know?

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Steps to Buy a Business

After confirming that buying a business is the path for you, it’s natural to feel a little lost with regard to what your next steps may be. 

To help you with this, we’ve broken down our advice on how to purchase the right business for you into the following five steps:

1. Determine What Type of Business you Want to Purchase
2. Identify Businesses Available for Sale
3. Figure Out Why the Business Is Being Sold
4. Arrange Financing for the Purchase
5. Finalize the Required Legal Paperwork

We’ll walk you through each of these steps in greater detail in the sections below.

Step 1: Determine What Type of Business you Want to Purchase

When thinking about buying a business, the first step you’ll need to take is to try and begin narrowing down the types of companies you’re best suited for.

While a business’s current and potential future financial performance is an important consideration, your decision should be based on a number of different factors, including:

• Your personal interests, skills, and experience in the industry
• The business’s model, products, and services and how familiar you are with them
• The location, size, and sales volume that align with your goals
• The amount of time and energy you’re willing to commit to running the business
• How many changes or improvements you want to make and the costs involved

By refining your search for businesses in areas that you’re already knowledgeable about — or which you have a lot of industry experience in — you’ll be far better equipped to manage the business and make informed decisions, which greatly increases your chances of success.

This is because if you opt to buy a business in a field that you’re unfamiliar with, you’ll either need to invest a significant amount of time into quickly learning the ropes, or money on hiring individuals that are qualified and experienced in this industry to ensure a smooth transition.

Ultimately, the best business for you to buy is one that most aligns with your goals, experience, and budget. When thinking about your budget, remember to also factor in the changes or improvements you’d be looking to make to any businesses you’d buy, as these could increase your costs significantly.

Step 2: Identify Businesses Available for Sale

With a better idea of the types of businesses that are best suited to you, you’ll be ready to move onto finding those that meet this criteria and are actually available for sale.

If you’ve never done this before, completing this step might seem quite challenging as — unlike buying products in a store — businesses for sale don’t always openly advertise this. In fact, to start your search, you’ll typically need to be proactive and explore several different avenues.

One of the first places to look when starting your search is your local business community. Reaching out directly to business owners — even if they aren’t actively advertising a sale — can be a great avenue for finding an owner looking to sell.

This is because many business owners that are looking to sell opt to keep their sale private (i.e., in order to avoid unsettling customers or staff). However, even if they’re not trying to sell their business, these individuals may be able to refer you on to others within the industry who are.

Alternatively, you can choose to work with a business broker, which is an individual that specializes in connecting buyers and sellers in return for a small commission. This can be a massive help as they often have access to listings you might not find on your own and are able to guide you through the buying process — from identifying the right business to negotiating the deal itself.

Finally, don’t overlook the power of your personal network. Many opportunities come through word of mouth, and you may hear about a business for sale before it’s officially on the market through your industry contacts.

Step 3: Figure Out Why the Business Is Being Sold

After identifying a business that both meets your criteria and is available for sale, it’s crucial that you gain an understanding of why it’s being sold before you commit to making a purchase.

There are a host of reasons why a business may be up for sale, such as the owners looking to retire or move into another line of work. However, your task will be to find out whether there are any more serious underlying issues with the business itself that are motivating the sale.

Attempting to get answers to the following questions from the current owner can be a good starting point for this:

• Is the business struggling due to strong competition?
• Is there a lack of demand for the product or service?
• Is there a financial burden, such as heavy debts or costly operational expenses?
• Are there any other red flags facing the business (e.g., location challenges, outdated equipment, or problems with the brand’s reputation)?

Alongside the current business owners, it’s important that you also talk to third parties that interact with the business on a regular basis, such as customers, employees, and other business owners in the same industry.

These individuals can give you a more objective overview of how the business is truly performing as they should be completely indifferent about whether or not you decide to buy it.

Doing Your Due Diligence

As part of this information-gathering stage, you’ll need to undertake what’s known as due diligence — whereby you conduct a more in-depth review of everything to do with the business, including its:

• Licenses and permits
• Formation documents (i.e., Articles of Organization if an LLC)
• Certificate of Good Standing
• Currently-valid contracts and leases
• Key financials (e.g., balance sheets, cash flow statements, tax returns, and sales records)
• Full inventory (e.g., tangible and intangible assets, such as intellectual property)

Working with an accountant at this stage is vital to help you accurately evaluate all this information, alongside a good business attorney to fight your corner when it comes to negotiations later on.

For example, you’ll need to have a certified accountant look over and audit the business’s tax returns and financial statements. You should NEVER accept these documents directly from a seller as — despite being illegal — it’s not uncommon for people to alter or hide the information in these documents to paint their business in a favorable light.

Note: Remember that there’s a high chance you’ll be required to sign some form of nondisclosure agreement (NDA) before you can complete this step — this way, the seller is protected against you potentially releasing confidential information pertaining to their business if you decide not to buy it.

Step 4: Arrange Financing For the Purchase

Once you and the seller have reached a figure during negotiations that both parties are happy with, you should receive a Letter of Intent (LOI) as a formal representation of this proposal.

When it comes to financing your purchase, there are a number of different avenues you can pursue, including:

• Buying it outright with your own personal funds
• Financing with staggered payments
• Applying for a small business loan
• Splitting the cost with a partner
• Selling non-voting stock to current employees

Make sure to evaluate which of these options best aligns with your financial situation and long-term goals. While using your personal savings might seem like the simplest route as it allows you to avoid taking on debt or paying interest, it also ties up your personal funds and leaves less available for operating and growing the business.

For this reason, seller financing is a popular option since it allows you to spread the cost over time. This greatly eases the immediate financial burden and can give you more flexibility (e.g., if you need time to gather more resources). On top of this, some sellers will prefer this option as it should guarantee them consistent income for the foreseeable future.

Another way of managing the cost of buying a business is to take on a partner — this not only reduces your initial financial responsibility but also gives you an opportunity to bring on someone with expertise in areas you lack. However, you’ll need to set clear terms and expectations from the start to avoid future conflicts.

If you’re set on maintaining full ownership of the business you’re planning to buy, debt financing (i.e., bank lending and SBA loans) is another route worth considering. While it will require a strong credit history, loans for business acquisitions are generally quite accessible as they’re typically seen as lower-risk by lenders since they have a track record to assess.

Step 5: Finalize the Required Legal Paperwork

After completing all of the steps outlined above, you’ll be ready to complete the purchase of the business by finalizing the necessary legal paperwork, which typically includes the:

• Adjusted purchase price
• Asset acquisition statement
• Bill of sale
• Consultation/employment agreement
• Franchise paperwork (if applicable)
• Lease
• Non-compete agreement
• Patents, trademarks, and copyrights
• Vehicle documentation

The most important of these documents is the bill of sale, which is what officially transfers ownership of the business and its assets to you. You’ll need to make sure to look after this document, as it will be essential for legally proving that the business now belongs to you.

Another important document worth noting is the non-compete agreement, which is often signed as standard practice in these sorts of deals to protect your investment and reduce the risk of direct competition.

The final thing you’ll need to do before wrapping up all the paperwork is to inform your local tax authority of this prospective sale. This is required for you to be compliant with bulk sale laws, which are in place to ensure that the seller settles any outstanding taxes or debts before the business changes hands.

Should I Buy a Business FAQs

Is it a good idea to purchase a business?

If you carry out your due diligence properly and can find a business that aligns with your skills, interests, and budget, purchasing a business can be a very good idea.

Not only do they come with existing customers and proven revenue streams, they also often have established systems, supplier relationships, and brand recognition — which can save you time and risk compared to starting a business from scratch.

Is owning a business worth it?

Owning a business can be a highly rewarding venture due to the potential financial independence and chance it offers to build something of your own.

However, this doesn’t come without its responsibilities, risks, and significant time commitments — whether it’s worth it will depend on your personal goals, willingness to manage challenges, and the business’s potential for success.

How do you know if a business is worth buying?

When looking to buy a business, keep an eye out for those that show consistent profits, have a strong customer base, and which ideally operate within a growing or stable market.

In order to get an idea of this, you’ll need to review financial statements, investigate liabilities, and assess the business’s reputation.

What is the average lifespan of a business?

While the average lifespan of a business varies greatly depending on industry, location, and economic factors, it’s typical for around 50% of new businesses to survive beyond five years and for approximately one-third to make it to ten years.

However, it’s worth noting that there’s a much higher success rate associated with buying an existing business compared to starting one.