Whether you're looking to become a business owner or expand your existing operations, buying an established business can be an excellent alternative to starting from scratch. This guide will walk you through the steps to buying a business, along with key considerations at each step.
As savvy entrepreneurs increasingly turn their attention to buying established businesses, entrepreneurship through acquisition allows buyers the opportunity to take over a business that already has proven cash flow, trained employees, and established customer relationships. This "buy then build" approach lets buyers skip the challenging early stages of business development and hit the ground running on growth and improvement.
One of the important steps to buying a business is understanding the timeline. The process typically takes one to two years and involves finding the right opportunity, negotiating terms, conducting due diligence (30-60 days), securing financing (30-90 days), and closing the deal. The process can be extended due to a variety of factors, but staying organized and working with experienced professionals helps keep things on track.
Many potential buyers jump into searching for businesses without first establishing clear criteria. Your goal is to find a business that matches both your capabilities and goals. This means honestly assessing your skills, determining your preferred level of involvement, and setting clear parameters for your search. Start by examining what you bring to the table. Are you looking for an active management role or a more passive investment? What skills and experience do you have that could add value to a business? Your target business should align with both your expertise and lifestyle goals.
You'll also need to establish practical parameters like maximum purchase price, geographic location, and industry preferences. Being clear about these requirements upfront will help you avoid wasting time on opportunities that aren't a good fit.
For more guidance on defining your search criteria, see our articles on the Advantages of Buying a Business vs. Starting a New Business and Buying a Franchise vs. an Independent Business .
Finding the right business to buy requires a multi-step approach that includes the search – where to search, how to search, and what to evaluate.
When searching for a business to buy, entrepreneurs have several paths to find sellers ready to exit their businesses. Online marketplaces offer thousands of businesses for sale that can be filtered by industry, location, and price point.
Additionally, working with professional business brokers can provide access to vetted opportunities and even perhaps access to off-market opportunities. And don't overlook your professional network – industry contacts, advisors, and even competitors may know of businesses preparing to sell.
The key to a successful search is to cast a wide net, stay organized in tracking your interactions with sellers and brokers, and maintain detailed records of the information you gather about each opportunity.
For more on how and where to find the right business, see Where to Find Businesses for Sale.
|
Industry |
Cash flow / earnings |
Sales / Revenue |
|
Automotive Related |
3.02 |
0.68 |
|
Beauty & Personal Care |
2.21 |
0.53 |
|
Construction |
2.62 |
0.59 |
|
Financial Services |
2.22 |
1.13 |
|
Food & Restaurants |
2.27 |
0.42 |
|
Health Care |
2.62 |
0.80 |
|
Manufacturing |
3.10 |
0.72 |
|
Online & Technology |
3.13 |
1.05 |
|
Retail |
2.53 |
0.54 |
|
Service Businesses |
2.59 |
0.83 |
|
Transportation |
1.86 |
0.61 |
|
Wholesale & Distributors |
3.16 |
0.54 |
|
All Businesses |
2.77 |
0.78 |
One of the most important steps to buying a business is understanding how to value a business, which is crucial for making a reasonable offer. Most small businesses are valued using a "market approach" – comparing them to similar businesses that have recently sold. These comparable sales, or comps, help establish typical multiples for different industries. A multiple is simply a ratio – for example, if a business sells for $500,000 and had $200,000 in annual earnings, it sold for a 2.5x earnings multiple.
Valuation multiples vary significantly by industry. However, don't take these numbers at face value. When reviewing a business's financials, work with your accountant or business broker to understand the true earning potential. Most owners minimize taxes through various deductions – like their salary, personal vehicle expenses, and family health insurance. These expenses need to be added back to show the real cash flow available to a new owner. This recasting process often reveals higher profits than tax returns suggest.
Look beyond the baseline multiples to evaluate factors that could affect value. Is the business growing or declining? How stable is the customer base? Can it thrive without the current owner? A business with long-term contracts and recurring revenue might deserve a higher multiple than one that depends heavily on the owner's relationships. Your goal is to pay a fair price based on the business's true earnings potential under your ownership.
For a deeper dive into pricing multiples used in business valuations, see our guide on How Multiples are Used.
After identifying a promising opportunity and determining its value, it's time to make an offer. Your initial offer should address both price and key terms while leaving room for negotiation. Remember that price isn't everything – terms can be equally important in structuring a successful deal. When structuring your offer, consider the training period, non-compete agreements, and working capital requirements.
A formal Letter of Intent (LOI) should outline the offer, including key contingencies like financial review and equipment conditions. It’s important to start at a price point that leaves room for negotiation while staying within your predetermined "walk away" threshold. A professional, well-structured offer, presented with a modest earnest money deposit, shows your seriousness and allows you to navigate the negotiation process with confidence.
For more on making an offer and deal structure, see Negotiating Terms When Buying a Business.
Among the final steps to buying a business is securing proper financing. Most business acquisitions require multiple funding sources. When it comes to financing a business acquisition, entrepreneurs have several methods to fund their purchase. SBA loans are a popular option, offering favorable terms for buying existing businesses. Traditional bank loans, seller financing, and personal assets like retirement funds or home equity can also play a role in funding your acquisition.
Remember to maintain adequate working capital reserves beyond the purchase price. You'll need cash on hand to operate the business and handle any unexpected expenses that arise during the transition.
For a guide to a popular financing option for buying an existing business, explore SBA Loans 101.
The final stage involves due diligence and document preparation. This is when your team of advisors – attorney, accountant, and broker – earn their fees by protecting your interests and ensuring a smooth closing.
During due diligence, you'll verify the accuracy of everything you've been told about the business. Review financial statements, examine contracts, inspect equipment, and validate any claims made during negotiations. Small discrepancies aren't unusual, but significant differences from what was presented may require adjusting the price or terms.
The closing process culminates in a meeting where ownership is transferred, and funds are exchanged. However, the work isn't done – you'll need to implement your transition plan and begin making the business your own.
For more details on the closing process, see our guide on Closing the Sale of a Business: Securing the Deal.