The basics of buying a business

If you have a great idea, a solid work ethic and the right knowledge and skills, you might have considered starting your own business at some point. But with all the hoops to jump through, one oft-overlooked alternative is simply buying an existing business instead. In some respects, it can be easier and more cost effective than starting a company from scratch. However, the process comes with its own unique costs and complications that need to be carefully weighed against each other.

Large corporations merge with or acquire one another all the time, but the experience is much different for the average small-business owner or entrepreneur. As listed by the U.S. Small Business Administration, there are many financial and legal obligations that must be met before any business sale can be finalized. These may require more resources than a small organization can handle, but it's not impossible.

Start by asking the big questions:

  • Why are you looking to buy a business rather than start your own? What kind of business are you looking for? This question cuts both ways - for example, it's important to consider why a business is up for sale in the first place.
  • What skills and experience do you have to succeed in your chosen industry or specific business?
  • What conditions need to be met by the seller before you will go forward with the purchase?
  • Adding it all together, what is the business worth to you? How will you justify that amount to the seller?

Due diligence

After narrowing the field a little bit, you may have found one or more prospects that you think would make for a wise purchase. Now comes the hard part: the legwork that goes into researching the business and constructing an offer.

Perhaps the biggest obstacle to purchasing an existing business is the work involved in certifying that it is a sensible investment. Owning a business doesn't just mean taking a cut of earnings - it means inheriting its debts, liabilities and any legal issues it is facing. By exercising due diligence, it's possible to understand a particular business on a deeper level, allowing you to either make a reasonable offer or walk away from the prospect altogether.

BusinessBuying an existing business presents some advantages over starting one from scratch.

According to FindLaw, buyers should run down a checklist of items in the process of due diligence, which include but are not limited to:

  • Certifying the company is in good standing according to its articles of incorporation, bylaws, organizational structure and the like.
  • Understanding the company's financial situation, including all assets and liabilities.
  • Understanding who works for the business and what each employee does.
  • Checking all licenses and permits that apply to ensure they are still active, and renewing them if needed.
  • Taking stock of environmental issues involved in the business, like waste disposal or energy use.
  • Obtaining an overview of any pending lawsuits or threatened legal action.
  • Reviewing insurance policies and active coverage.

The sales process

Some of this research may be done using publicly available information, but the bulk of it will require the permission of the current owner to access. To get that access, prospective buyers can go through a formal process that begins with a letter of intent. The letter of intent will outline the offer amount and the terms and conditions of the agreement. This will usually require a separate confidentiality agreement, which certifies that all pertinent information and discussions will be kept private in the course of the sale.

The sale is finalized by a sales agreement. This document will list everything being purchased in close detail, including intellectual property and goodwill toward the owner. 

At almost every step of this process, it will benefit both the buyer and the seller to work with a lawyer specializing in business purchases. Reviewing an intent letter, conducting due diligence and making a final offer will each require a legal professional - possibly more than one - to complete. Be prepared for the fees involved in contracting out this professional service.

When it's all said and done, you could end up with a fully functioning business ready to shift into high gear, if you've played your cards right. Don't forget to look into other possible methods of planning and financing before jumping in.

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