Buying a Small Business

Searching for the perfect business for sale isn’t easy, but it can set you up for success and help you earn freedom over your time and money. For many aspiring business owners, purchasing an existing business is the way to go because you already know that the idea works. Instead of spending years trying to think of the perfect product or service, finding a location, and working out how many employees you need, you can hit the ground running.

While buying an existing business has many clear benefits, the process can be daunting. In this article, we’ll answer common questions like:

• How do you buy into an existing business?
• What’s the difference between buying an independent business and a franchise?
• How do I find the right investment for me?

Why Would Someone Purchase an Existing Business?

Purchasing an existing business allows the buyer to experience the benefits of owning a business without having to build one from scratch. While there is still inherent risk involved in buying a business—or owning a business at any stage in its growth—purchasing one that has already had a chance to grow comes with several advantages, including:

• A Market-Tested Product or Service: Over 30,000 new products are introduced each year, and 95% of them fail. When in the market to buy an existing business, you’re looking for the 5% of offerings that have connected with their audience. This removes the trial-and-error period that can be costly in terms of both time and money.
• An Established Brand: Your brand is how potential and current customers see your business, offerings, quality of service, and values. When starting a business from scratch, you also have to create an entirely new story and do the work of telling it to an audience that hasn’t heard of you yet. According to Forbes, getting started with branding can cost up to $5,000 for small businesses. When buying an existing business, you’re also buying its established reputation. In other words, people already know who you are and why they should buy from you.
• A Proven Business Plan: The day-to-day operations of running a business likely sit toward the back of an aspiring business owner's brain. Although it may not be as exciting as providing value to customers, businesses can’t function without a thorough and well-executed plan. When you buy an existing business, you also get the information you need to run it well, such as how many employees you need, which software is best for inventory management, when busy times are, and so much more.

Purchasing a business is often a creative solution to a common problem: your income is limited by how many hours you work, and you can only work so many hours. Owning a business allows your money to work for you. And one of the most creative ways to buy a business is to become a franchisee. When you buy into a franchise, you become better equipped to deal with risk, which is another common problem for aspiring business owners.

While buying an independent business can still lead to success, think of the far-reaching appeal of brands like Minuteman Press and Bruster’s Real Ice Cream. Your brand won’t just resonate with customers in your immediate area, but also with people passing through who already trust your business’s reputation.

Franchises also come with the added benefit of guidance. If you buy a stand-alone business, the original owner is likely headed to their next business or retirement—they’re not sticking around to show you the ropes. That’s not the case with franchises, especially with brands like FETCH! Pet Care and Pickleman’s Gourmet Cafe that offer comprehensive training programs.

Is Owning a Small Business Worth It?

Owning a business is not easy work, even if you buy it after it found its footing in the market. For individuals pursuing financial and time freedom, however, owning a small business is often worth it. Those willing to take the plunge can be rewarded with the benefits of owning a business, including—but not limited to—the following:

• Being Your Own Boss: Owning a business means you only answer to yourself. You also get the chance to put your ideas to work, and when they pay off, you get the credit.
• Controlling Your Own Schedule: When you’re the boss, you can decide when you work and when you make time for your personal life. Once you have a firm understanding of what makes your business successful, you can even hire managers to handle most of the day-to-day work, which frees up even more of your time.
• Having a Source of Cash Flow: Successful businesses put money in your pocket and continue to do so at a higher rate over time. The longer you own your business, the more you’ll benefit from its success. You can also expand your portfolio by purchasing additional businesses that provide more sources of cash flow.
• Pursuing Your Passion: When you buy a business, you can choose which industry you work in. You can explore how your personal interests and work life can support each other by browsing franchises sorted by industry at Franchise.com.

What Are 3 Risks of Owning a Small Business?

The top risks of buying a small business and operating it are financial, liability, and strategic. While these disadvantages of buying an existing business can be intimidating, there are ways to work around them and still be successful. Let’s take a closer look:

• Financial Risk: Making sure that you have enough money to pay your bills, your employees, and yourself isn’t always easy. Customers change their spending habits, equipment breaks down, and seasonal business cycles can affect demand. One way to mitigate financial risk is to invest in businesses that are in high-demand, even during slow economic periods. The food industry is resilient, so buying into franchises like TaKorean Korean Taco Grill can set up for success in the best and worst conditions.
• Liability Risk: If something goes wrong at your business, you could be held financially responsible. Employees can get hurt on the job, and customers can sustain an injury on your property. As a business owner, you should protect yourself in multiple ways. The first way to protect yourself is by legally filing your business as a sole proprietorship, an LLC, a partnership, or a corporation. Doing so can separate your personal assets from your business assets. You should also make sure that your business is properly insured, so if there is an incident, you can cover your costs without breaking your budget.
• Strategic Risk: The future is uncertain, and as a business owner, you need to be adaptable to change. Otherwise, shifts in the market or competitive landscape could leave your once-successful business falling behind. One way to stay ahead of the competition is to open a franchise. Franchisors train their franchisees and provide marketing direction, so you can get up to speed quickly and tackle challenges as they come your way. Franchisors also provide other key strategic guidance, such as team structure, sales goals, and financial forecasting.

You can also reduce your risk by avoiding these red flags when buying a business:

• Urgent seller
• Declining sales
• Questionable tax history
• Lack of transparency
• Past lawsuits
• Poor reputation in the community

How To Buy a Small Business

The first step to buying a small business is narrowing down your choices. Here are a few things to consider:

• Industry: Is pursuing your passion more important, or is profitability your main goal?
• Independent Business vs. Franchise: Would you rather have total control over your branding or have the reliability of a proven brand and business model?
• Budget: How much can you afford to spend on purchasing a business, and what do you think a worthwhile investment would be?

At Franchise.com, you can narrow your search by industry and starting costs. You can also request more information on each franchise with the click of a button.

What Should You Do Before Buying a Business?

Once you’ve found a few businesses that you’re interested in, it’s important to conduct thorough research. The information you gain during these steps can give you a good idea of whether or not you should buy a particular business:

1. Value the Business: There are different ways to value a business. Some buyers care mostly about revenue. Others prefer subtracting all of a business’s liabilities from its assets. Other buyers prefer hiring a professional to value the business using a variety of factors, which can cost up to $5,000.
2. Negotiate the Price: Like other major purchases, such as buying a home or a car, you can negotiate the price of a business. It’s important to have an idea of the market you would be entering so you don’t end up paying more than the business will end up being worth. At this step, the purchasing price isn’t set in stone, as you will continue conducting research that may affect how much you are willing to pay.
3. Submit Your Letter of Intent: Your letter of intent communicates your intention to buy the business at the negotiated price. This step is important because it often gives you exclusive purchasing rights for the next 90 days.
4. Continue Your Research: After submitting your letter of intent, you will typically gain access to more detailed information about the business. This includes data such as existing contracts, tax returns, and marketing materials. With this information, you can renegotiate your offer if you feel that it changes the value of the business.
5. Secure Financing: In most cases, you won’t pay the entire cost of the business in cash. Instead, you’ll pay some in cash and the rest through a loan. You can acquire a loan to buy a business through a commercial bank, a credit union, or the Small Business Association (SBA).
6. Seal the Deal: While working with a lawyer is important during the entire purchasing process, it is essential during closing. During this step, your funds will go into escrow while ownership of the business is signed over to you. You will then need to start applying for any licenses that are required to run your new business.

What Documents Should You Ask for When Buying a Business?

Your buying an existing business checklist should contain the following documents:

• ☐ Balance sheets
• ☐ Income and cash flow statements
• ☐ Existing business debt
• ☐ Commercial lease and property documents
• ☐ Employee information
• ☐ Legal records
• ☐ Franchise disclosure agreement (franchises only)
• ☐ Organizational documents

How Much Does It Cost To Buy an Existing Business?

When determining the cost of a business, you will need to pay for the value of the business, the interest on your loan, and any upgrades or new hires you want to make once you become the owner. To anticipate these costs, you should typically try to borrow 10-20% more than you need to close the deal.

Franchises are a unique purchasing opportunity because of how transparent many of their costs are. For example, while browsing Franchise.com you can see the cash required to start and how much you can expect your total investment to be. For example, Healthy YOU Vending requires you to have $60,000 in available cash, and you should expect to invest a total of up to $185,000 to successfully run your franchise.

How Much Do You Need To Get a Business Loan?

The minimum down payment required for many business loans, including the SBA 7(a) loans, is 10%. Down payments will usually range up to 30%, and the higher your down payment is, the lower your principal will be, so you will pay less in interest over the life of the loan.

Invest in Businesses You Can Trust

When buying a small business, two qualities are absolutely essential: confidence and transparency. You want to feel confident that you can continue to run the business successfully, and that requires access to important figures, such as costs, as early as possible.

With the businesses listed on Franchise.com, you get both. When buying into a franchise, you can feel confident that the brand has succeeded previously in multiple locations and different types of markets. And while browsing through our listed franchises, you can filter by cost so you know exactly what opportunities are within your budget before going any further. Ready to see what your future holds? Get started finding franchise opportunities near you.