1: Determine Your Budget for Buying a Small Business
It may seem trivial, but you’ll want to do your research on how much purchase a small business will cost first before you even get to step number two. Many small businesses for sale on the market may have low start up costs or they may even want to be purchased outright. But if you don’t have much cash to spare, either in dollars or in terms of time and energy, then it may be wiser to look elsewhere. Perhaps you’re still young and in school, maybe you’ve already started looking ahead, and have already got a long term plan in place for the future. Either way, for your first step, you’re going to focus on discovering how much a small business costs.
Your research will need to go into identifying the cost of purchasing a business mainly based on three main factors: the initial purchase price, the startup costs involved, and the losses involved if you wanted to sell the business in the future.
2: Find the Right Business for Sale
There are so many types of businesses for sale, it can be overwhelming. To maximize your chances of finding the right business, you’re going to need a general idea of what the business does and what you’re interested in doing.
Is the business in your local area or would the business be suitable for online sales? Are you interested in operating the business yourself or looking to make a full-time living? These are just some examples of questions you may want to ask yourself to narrow down your search. You could also start a google search with –[Business Name] for sale”.
Once you’ve settled on a few businesses that seem right for you, give them a call or make an appointment to discuss the business and the various options available for selling it. Here’s a list of things to discuss with the seller:
- Why do they want to sell?
- What are the pros and cons of the business?
- What led them to where they are and what do they want to do next
- Are there any licensing or permits?
- Are there any hidden costs or liabilities?
Typically you’ll also have access to some financial records to see exactly how the business is performing.
3: Know What Questions to Ask When Buying a Small Business
This is the number one issue because it is the biggest mistake startups make. They go into a business without first asking the right questions beforehand. It’s the single biggest mistake people make when buying a business. They come in already believing that everything is going to be perfect, and there’s no need to ask questions.
The biggest mistake that people make is to not ask the right questions because they think it’s a waste of their time, that it’s going to be too complicated, or that all the information is going to be there.
But no, the data is not there for you to have beforehand. You’ve got to go out there and you’ve got to do your research. You need to find out the answers to these important questions before you make any investment in a business.
Questions to Ask Yourself
// How much do you want to make?
The first question to ask yourself is what type of income you are looking to generate and whether that income is sufficient enough to pay your bills.
The next question to ask is whether you are looking to build a home based business or a business that operates out of a storefront.
The third question to ask is what is my desired income per month, or year?
If you answered no to these questions, then you may want to investigate another type of business such as a franchise, where you already know your desired income and are willing to stay with a company for a specified time in exchange for a salary or income.
// Are you willing to work HARD?
Businesses need owners who are willing to work hard to run the business. Your incentive will be to make profits while keeping costs low. That means you will be doing a lot of work.
If you expect to enjoy the lifestyle of a millionaire, you may be in for a rude awakening. Every business has its own unique business model that may not be sufficient to guarantee your desired income. Before you decide to buy a business, you will have to ask yourself do you want to work hard or would you rather sit back and relax?
Questions to Ask the Seller
- What’s the business like?
- What are the agreed upon terms?
- What are the terms which may be open to negotiation?
- Does the business have any competition or is it an exclusive niche?
- Does the business have a large market share?
- Are employees wages paid on time and in full?
- Are sufficient funds for working capital available?
- Level of profitability/turnover?
- What are the plans for the future?
4: Conduct a Business Valuation
5: Get Your Documents Together
Step 6: Know Your Financing Options
Whichever method of funding you’ll go with, you’ll need an enormous amount of it. Banks are notorious for being conservative when it comes to lending out money and, in the case of financing a business startup, not completely understanding the risks involved. But don’t let this worry you. Because you’re likely to need more money for the business startup than you can earn, you’ll be able to access loans that are more flexible and more appropriate to your startup needs.
Once you’ve decided on a business idea, your first step is to determine the true cost of that business. Call your banker or a certified accountant to discuss the realistic investment required to make your business idea a reality. Before you start selling, you need to build a certain level of reputation for yourself in your chosen market and build a loyal client base. In order for your business to be successful, you need to take steps to build a reputation and develop happy customers. Many startup businesses are forced to close during the first year due to lack of funding.
Step 7: Build the Right Team
How Buying a Business Works
Often, business buyers look for a business that is a good fit for their lifestyle, values and knowledge. When starting a new business, you are basically establishing a new life for yourself. You need a new place, new equipment, new business skills, and new employees to run it properly.
Often, due to the high investment cost, business buyers have to look for a business that is already established. As with buying any home or other item, you can also buy a business, but it is advisable to seek prior consultation from professionals and the help of a business broker.
Find the right business for you: Business buyers need to decide what type of business they want to acquire, how much to invest, how much of their time they will devote to the business, and whether they want it to be a full-time or part-time business.
Business buyers need to decide what type of business they want to acquire, how much to invest, how much of their time they will devote to the business, and whether they want it to be a full-time or part-time business. 2. Find the right business for the business. Based on your business and its industry, check if a business is available. A professional business broker can help you find the right business for you.
Buying a Business vs Starting a Business
There are lots of myths about business ownership. I’m not going to argue whether the owner/president/CEO is the most important person in the company (they are) or whether you need a good salesforce (you do). Here, I’m going to tell you how to buy a business. It’s the best thing you can do if you want to start a business, but if you want to purchase one, you’re in good hands. We are in no way experts, but we have spent years evaluating businesses and in our experience, these seven steps are everything you need to know to evaluate and purchase a business.
In the next section, you’ll find instructions to assist you in visiting the business. Once you are there, you will be armed with these steps to evaluate whether it is worth buying and what the specific terms of your deal should be.
Mistakes to Avoid When Buying a Business
Don’t Settle for the First Business You Find
There are many things to consider when choosing a business, but it all begins with knowing what you want and what you’re looking for. With the help of this guide, you will be able to identify your business requirements and be able to narrow down to a list of potential businesses.
Once you have done that, you can begin considering the businesses that meet your requirements. From there, you can further narrow down to a select few that you plan to look at on your next visit to the area. It’s important to know your area so that you can identify the best spot to set up shop.
If you’re an active bargain shopper, you may even find that you can negotiate a deal for your business.
Don’t Underestimate the Value of Current Employees
When purchasing a business, it’s easy to get tunnel vision and to focus exclusively on the bottom line. Here’s the cold truth, though: a lot of your cost savings may be offset by a straightforward transfer of costs from your old system to your new one. Which includes monotonous daily tasks and a slew of support services that make running a business run smoothly.
The truth is, your current employees can potentially help you make your business run more efficiently. For the right price, of course.
One way to maximize the cost savings you can gain by combining the two businesses, is by retaining your current employees as workers for your new business. Those who are loyal, hardworking, and familiar with your current business would easily fit seamlessly into your new operation.
I’m not going to sugarcoat this – it’s going to be a hard sell trying to recruit these employees to join the new team. It’s likely they won’t understand why you don’t just let them keep working where they are, but chances are that, once they understand how a merger will help their existing team and their community, they’ll be much more open to hearing you out.
Don’t Value a Business Solely on Multiples of Earnings
When pitching for business investment money, it’s common for business owners to calculate a business’s cash flow opportunity by pricing it based on a multiple of an assumed earnings (ROE). Why? Because this is widely touted as being the dominant investment valuation measure for business investments.
However, I would argue that valuation is a much bigger deal than this. In fact, I believe that equity investments are not only about buying business for cash flow. Instead, they are more about reinvesting profits and reinvesting earnings into the business to increase the business’s competitive, strategic and financial strengths. The problem with pricing a business solely based on a multiple of its earnings is that this limited perspective misses the bigger picture.
Imagine you’re pitching for investment money to purchase a business. You’re giving your potential investor a slide presentation with your business’s financial performance highlighted. Your entire argument for valuation is based solely on the business’s profitability.
Don’t Sell Yourself Short Trying to Save Money
It’s common practice for business owners to defer their income taxes until later down the road – generally, until they’ve sold the business. But sooner or later, you’ll need to begin taking quarterly taxes and you’ll want to buy tax-advantaged investments such as, municipal bonds, corporate bonds, tax-free municipal income funds and units of real estate investment trust (REIT) funds.
If you’re purchasing a business, one of your primary goals will be to minimize your taxes. It’s important to remember that there are many different tax benefits available as a business owner, so it’s easy to put off making qualified investments.
Businesses generally classify their owners as either –50% – owners or as –pass-through” businesses. Either way, it’s important to get the most out of your investments, so let’s take a look at how to maximize your investment dollars to help save on taxes.
Don’t Overlook the Tax Consequences of Buying a Business
Buying a business can be a large and exciting step that provides you with financial freedom and ownership of a much-loved company. However, buying a business can also introduce a whole new set of opportunities and circumstances you’re not used to dealing with.
One rule of thumb to remember is that if you spend your life working for a company and paying income taxes, you’re likely to pay extra in taxes if you purchase a business.
This is because the profit you make buying a business will be taxed as income, while your wage income is taxed on your personal income tax return.
To learn more about how income tax works, you can check out this article from BC TEC.
Here are some additional tips you’ll want to keep in mind as you consider buying a business.
Consult With an Accountant
Many people deal with basic accounting issues, but if you want skilled and experienced tax advice, you need to hire a tax accountant.
You should make sure your tax accountant does more than just prepare your income tax returns. Your accountant will also be the expert to help you avoid business expenses tax traps.
A good tax accountant can also make your business investment go smoothly, as part of the business purchase process will involve completing and filing the necessary tax paperwork.
Scenario Analysis Does Matter
Don’t Gloss Over Financial Planning
Financial planning is one of the most essential activities of a business owner. It involves balancing the books and tackling the challenges that threaten to derail your business. But how should you go about preparing a plan for your business? It’s a complicated question without a definitive answer, but this step-by-step guide can help you develop a plan that’s aligned with your ambitions, acceptable for your investors and puts you on the path to success.
According to the Small Business Administration (SBA): –The purpose of a business plan is to prepare a written document that spells out an entrepreneur’s plans and objectives, and lists the resources needed to reach the objectives.”
This seven-step guide is based on the SBA’s seven-step business planning process, which is frequently used by entrepreneurs to put together a business plan for their start-ups. Be warned though: businesses are still left with the task of turning a business plan into a feasible reality.
Step 1: Ask yourself: What is the need?
Bottom Line: How to Buy a Business
Believe it or not, business ownership can be one of the more intimidating things you can engage in. Unless you’re actively looking to start your own business, you may have little idea what to look for when looking to purchase an existing business. Here are some things to consider regardless of whether you are looking to buy an existing business or just start your own business.
Before you even start looking for a potential business, you should have a good idea of what business you want to own. There are a lot of things to think about and not all of them are dependent on the type of business you want to own. For example, if you plan to run a restaurant, you want to ensure the possibility of a high-traffic location, a high-profit margin, suitable financing, strong staff, and a good location. All of these things would be dependent on the type of restaurant you want to open.
Before you start the search and get firm on your business requirements, you may want to think about your personal finances. If you already have a business, are you doing better than your previous business is doing now? You may also want to position yourself and your business for the future. Are you planning to start a business to run yourself out of business, retire, or perhaps move to another location?
And of course, this is the most important question you should ask of whoever you are dealing with or hiring.