What to Know About Buying a Small Business

You don’t have to start a business from scratch if you’re an aspiring entrepreneur. Buying a business may let you skip past some early-stage growing pains and get right into the action.

However, buying a small business comes with complexities of its own. Doing deep research on each company is key to finding a healthy company you could see yourself running.

This article walks through seven things to know about buying a small business to make informed decisions along the way.

1. Know the Kind of Business You Want to Buy

Think about what kind of business you’d like to buy. Consider your skills and experience, as knowing the field you go into may help you understand the specifics of the industry so you can guide the business to success.

For example, buying an insurance agency could be a good choice if you’ve worked in insurance for several years, helping customers find reasonable life insurance quotes.

Having specialized knowledge in products such as term life insurance could help you navigate regulatory requirements and find the right customers.

However, it may be easier to succeed if you like the industry. So, it’s okay to look for a business that also fits your passions and interests.

Striking a balance between skills and passion could make you a formidable business owner, increasing your drive to succeed.

2. Understand Why a Business is Being Sold

Business owners sell their companies for various reasons. Some could be harmless, such as the owner looking to retire or simply exit this business for another. However, they may also be selling a business that is not doing well.

That’s why studying aspects of the business before moving forward is crucial. Look out for things like:

• Substantial business debts
• Unfavorable locations
• Poor reputation
• Significant market changes
• Tough competition that is ahead of the business

You could learn some information about the business from the owner, but they may naturally have bias.

Speak with existing employees, customers, locals, and other businesses that may interact with them. Check out any online reviews, ratings, or news articles as well to see if there are any underlying issues you aren’t aware of.

3. Evaluate the Business’s Financials

Thoroughly reviewing the business’s financials helps you see if buying it is a good potential investment.

It’s a good idea to review income statements, balance sheets, and cash flow statements for the past three years. Watch for any trends in revenues, profits, and expenses. Look for patterns, such as seasonal slowdowns, to gain more insight.

If you need help identifying what to look for in these statements, you can work with a business accountant or financial advisor to guide you.

4. Issue a Letter of Intent

A letter of intent (LOI) is a nonbinding document that tells the seller you intend to purchase the business.

This letter outlines an agreement in principle and contains the proposed price and deal terms. It also grants you the right of refusal, meaning you have first claim to enter into a contract with the seller — even if another seller comes along before you’re ready to sign anything officially.

Finally, this letter allows you to start gathering detailed information about the business that the owner would not otherwise share. 

5. Perform Due Diligence

Due diligence involves conducting detailed research on the business to learn as much about it as possible. Due diligence takes effort but helps you understand the full picture and avoid unpleasant surprises after buying.

Things to look for include:

• Bank and tax records
• Financial projections
• Permits and licenses
• Business founding and entity paperwork (such as LLC filings)
• Any legal issues relevant to the business or current owner (such as threatened or pending litigation)

The more information you have, the better understanding you’ll have of the business you’re trying to buy. You can also work with professionals, such as CPAs, business attorneys, or industry consultants, who could help you navigate all the information you receive. 

6. Secure Your Capital

There are many ways you could raise the capital for the acquisition:

• Installment loans
• Small Business Administration (SBA) loans
• Seller financing
• Employee stock issuance
• Lease-to-own
• Partnerships with other buyers
• Savings

Ultimately, your decision will depend on your current financial situation and future business needs. Do thorough research and carefully consider each option at every step of the process.

7. Close on the Sale

After due diligence, securing capital, and agreeing to a price, the last step is meeting with the seller to close the sale.

There are two options many may use to complete the transaction:

• Asset purchase: You purchase the business’s assets while the seller legally owns the business entity. This lets you choose which assets and liabilities to take on, and it may offer tax advantages but may be more complex.
• Stock purchase: You purchase all the company stock, assets, liabilities, and contracts. This is simpler than an asset purchase but offers less choice in which assets and liabilities you buy and reduces potential tax benefits.

Legal and financial professionals may be a great help here. They could help you avoid overlooking anything and smoothly transfer the business from the seller to yourself.

Successfully Buy a Business

Buying a small business is a major decision that can offer exciting growth opportunities. 

Keep in mind that you don’t have to do it all yourself. Hire professionals if needed to help make the transaction smooth so you can confidently start your business ownership. 

With the right preparation, you can find a business that aligns with your vision and supports your future goals.