Buying an Existing Business

Buying an existing business is a unique experience with many rules and procedures. While all big purchases usually require research, information about cars and houses is often readily available. On the other hand, data on existing small businesses for sale can be hard to find.

Before writing a check or securing a business loan, it's important to research and understand exactly what you're getting into. This article covers all aspects of buying an existing business, from understanding valuation and accounting terminology to closing the deal.

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Do Your Research

Entrepreneurs must exercise due diligence when buying and selling a small business. This means reviewing the existing business documents and current owner information. There are legal documents and financial documents that help you figure out the value of the business you want to buy.

Some states have laws that address business opportunities in order to minimize fraud and increase transparency in such large transactions. Many of these laws ban the sale of a business unless the seller provides a potential buyer with a pre-sale document filed with a state agency giving certain disclosures. In general, state business opportunity laws address every type of business opportunity that could be offered. You must research the business laws of your state before buying an existing business.

Financial Documents

There are many documents a potential new owner needs to review before making an offer to buy an existing business. Financial documents help determine the viability of financing options and the company's health.

Some documents to review include:

• Tax returns
• Financial statements
• Cash flow statements
• Liabilities of the company, such as debt, small business loans, and bank loans
• List of accounts receivable

You also want to look at the company's balance sheet. A balance sheet is used to determine a business's valuation and assess its financial health. Balance sheets use a standard accounting format, allowing people to compare the financial statements of various companies.

Don't be in such a hurry to purchase your own business that you skim these records. Hire a business broker or accountant to help you review them.

Legal Documents

There are also other documents and information that can help determine the business valuation of the business. Getting a list of all of the assets, liabilities, and legal documents of the business helps a potential new business owner know if it is worth their time.

Some of these documents include:

• Articles of incorporation
• Corporate bylaws, or operating agreements if the business is a limited liability corporation
• Minute books
• Company's organizational chart of directors, managers, departments, and positions
• Certificate of good standing from the existing company's secretary of state
• Personnel and employee information such as job titles, wages, and benefits
• List of current customer base and existing contracts
• Current business plan
• Deeds to real estate or current leases connected to the company

For a full due diligence checklist, visit Buying a Business: Due Diligence Checklist.

Timeline To Buy an Existing Business

Even when you find a small business you would like to buy, thoroughly researching the business and closing the deal can take a long time. Knowing the timeline of a business purchase can help you decide if it's right for you.

The typical timeline for buying an existing small business includes:

• Researching businesses to buy
• Hiring a business broker (optional)
• Pre-qualification with lenders for financing
• Making a purchase price offer
• Letter of intent to purchase the existing company
• Closing the sale

The exact amount of time depends on the size of the existing company, the time it takes to secure a business acquisition loan, and the type of business.

Understand Sales Agreement Terms

Business owners should educate themselves on common accounting and valuation terms to prepare for negotiation.

• Contract terms checklist
• Valuation and accounting terms
• Accounting terms for small business owners
• Typical loan documents and terms

You can visit FindLaw's Small Business Law section for information and resources related to running a business.

Know What Kind of Sale You Want

Entrepreneurs need to determine what kind of sales agreement works for them when buying an existing business. Do they want to buy the current owners' stock, purchase the assets, or merge?

• Stock purchase is buying a previous owner's shares in a company (equity).
• Asset purchase is buying the business's assets, such as equipment, inventory, and facilities.
• A business merger combines two existing companies into one new business.

Whether you're merging or buying stocks or assets, it's important to be well-informed about the repercussions of a business acquisition.

Secure Business Financing

Like startups, you will likely need business financing when buying an existing small business. There are multiple sources to finance a business acquisition.

• Seller financing
• Traditional bank loans, including term loans
• Small business administration loans (SBA loans) when you cannot secure traditional bank loans

Your credit score determines if you will qualify for the asking price of the company or not.

Understand the Disadvantages of Buying an Established Business

There may be no startup costs or formation headaches with buying an existing business, but be aware of some disadvantages before signing your sales agreement.

• Pre-existing debt of the company
• Pre-existing lawsuits or settlements to be paid from judgments of those lawsuits under the previous owners
• Employees or customers could resist the new owner or any changes made
• Require a much larger downpayment or investment than with your own new business

Getting Legal Help

Getting help from an experienced business organization attorney when buying an established business is a good idea. To prepare for your initial meeting with your attorney, you should gather as much information about the business opportunity and yourself.