How To Buy An Existing Business: A Guide For First Timers

If you want to know how to buy an existing business for the first time, you are in the right place. In this guide, you'll learn the essential steps, from finding the right company to closing a deal successfully.

Additionally, you'll get advice on what to keep in mind when assessing potential options for acquisition, the most common mistakes when purchasing a business, and how to avoid them.

This could be the first step to business ownership. Keep reading!

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How to buy an existing business

Buying existing businesses is a great option for first-time owners, especially if you want to save all the work that starting from scratch entails. At Boopos, we only showcase profitable companies and connect serious buyers with sellers who have built SaaS or other online businesses that make money and have the potential to grow.

Here's what you can do:

1. Identify the type of business you want to buy

Narrow down your options by establishing what businesses are the best fit for you. To find out, sellers recommend going after companies that appeal to you based on your interests and experience.

It'll be easier for you to passionately engage with an industry you like and develop a product that you know a bit about. You can better understand the company and make strategic decisions when you have a background in a particular business.

The more you know about the industry, business, and market, the higher your chances of being successful and developing innovations that can help your company stand out.

2. Look for businesses on sale

There are several ways to find businesses on sale. You can join business owners' networks, go to industry events like conferences, meet-ups, or summits, hire a business broker, or explore marketplaces like Boopos.

Online business marketplaces not only showcase potential deals, but their experts can guide you through the acquisition process, including the due diligence, negotiation, and paperwork for the ownership transfer.

Boopos even offers expert's advice and guidance through the acquisition process.

3. Consult with experts

Understanding why a business is up for sale can provide valuable insights into whether purchasing it would be a good decision. Knowing whether the owners listed the business for sale due to financial problems or partner issues tells a different story.

Before moving on with the purchase, learn why the current owner is selling it. Besides directly asking the seller, you can hire an accountant, get legal advice, or get help from M&A or industry experts to understand the situation of the existing business. On some occasions, business brokers can also help.

4. Conduct due diligence

Due diligence is one of the most important processes when buying an existing business. It is not only about reviewing documentation but also deep diving into the business financials, operations, and customer base, to name a few areas to look into.

You can conduct due diligence yourself or gather a team of specialists to help you since there'll be plenty of information and documentation to review. If it's your first time buying a business, we recommend getting advice from experienced professionals.

Some documents you'll need to look at are financial statements, business licenses, permits, intellectual property files, contracts, leases, a list of business assets in the sale, cash flow, balance sheets, accounts receivable, debt disclosures, an operations manual, and tax returns, among others.

Keep in mind that when reaching this point, the seller will ask you to sign a confidentiality agreement or NDA as a means of protection for the seller's information.

5. Assess the value of the business

An important point to discuss when buying an existing business is the business value. This will help determine if the venture has a fair price or not. You can do the business valuation through several methods at once, such as Market Capitalization, Earning Approach, or Asset-Based Approach.

The most common valuation method for subscription businesses is the multiples approach. However, there are still more business valuation methods to choose from. It also varies by industry and company type.

Also, you can hire an independent business valuation professional who can assess the business and reach an impartial conclusion or use a calculator.

6. Issue a letter of intent

Once you have conducted due diligence and have a deal in mind, it's now time to issue and sign a letter of intent. This document states your intention to purchase the existing business. Overall, the letter includes the terms and conditions for the transaction, price, stipulations, and timelines for the deal.

7. Secure financing

You can purchase the existing business using your own capital, borrowing from friends ar family or by working with equity partners. If you need additional financing, Boopos can guide you in exploring options like seller financing, traditional banks, SBA loans, or other structured financing solutions.

Related: Ecommerce Funding: What Are Your Ecommerce Financing Options?

8. Review the required documentation for the deal

The last step for acquiring your own business is closing the deal. For this, you'll need documents such as a bill of sale, vehicle documentation, patents, trademarks, and an asset acquisition statement, among others.

What to do before buying an existing business

After learning about all the steps you have to follow during the acquisition process, here are some important details you have to remember when doing the transaction.

1. Assess your capital for the purchase

Before purchasing a business, assess how much capital you have available and explore additional financing options if needed. Carefully compare terms and conditions to ensure they align with your goals.

2. Research the business and the industry

Learn the most you can about the business you're interested in buying and the industry you want to be a part of. You can talk to the current owner, clients, staff, entrepreneurs, leaders, and more.

3. Ask for debt disclosure

Ask for debt disclosure and review accounts payable during due diligence. A debt disclosure will show you all the loans or any other forms of debt to which the business has agreed to pay, while a review of accounts payable will reveal any outstanding bills. Both can help you understand the business's financial obligations and identify potential issues requiring additional resources.

Long-term obligations from the business owner can point out deeper issues within the organization that can translate into extra resources to fix them.

5 Common mistakes to avoid when buying a business

1. Not comparing the business’ ROI to alternative investments

Before buying an established business, compare the ROI with alternative investments, but consider industry growth rates, market trends, and competitive landscape to assess the opportunity.

For example, if the ROI of the business is less than the interest rate from bonds or a savings account, you'll have a higher chance of making more money at a lower effort by investing in financial tools than buying an existing business.

However, doing a benchmark and considering the company's potential is also essential.

2. Going into debt and having no cash

Maintaining enough cash flow post-acquisition is critical. Consider financing options such as seller financing or structured payment plans to manage your resources effectively.

3. Purchasing all the receivables

Buying all the receivables from an existing company is risky since you can have some challenges collecting those accounts. An alternative to avoid this is to ask the seller to warrant the receivables from beyond 90 or 120 days with the option of charging back the uncollectible accounts against the business price.

4. Heavy payments

Relying on high income to pay for business acquisitions can put you in a stressful situation. It's possible that in the first year after the purchase, you encounter many extra costs that you weren't accounting for, which can impact your revenue.

When using business acquisition loans for a buyout, it's recommended to have light payments at the beginning and gradually increase through time.

5. Not having a plan for the business 

Finding the right business for you is not the end of the story. After the deal, you'll need to establish new goals and objectives to bring to life the vision you have for the business. During the transition, it's possible that staff or some of the existing customers leave the organization. To avoid that, you must address any concerns regarding what's to come as soon as possible and reassure clients and your staff, so they are confident that you know what you are doing.

How to grow an existing business after acquisition

After a successful business purchase comes another challenge: Growing the business. Although the strategy depends on the industry and the company, here are some standard ideas to think about:

1. Increase the customer base

After purchasing the business, you'll want to dive deep into the existing customer base to learn how to grow it. Additionally, you might want to upsell or cross-sell your products to your most loyal customers.

2. Expand your target market

You can also try expanding to other markets to grow your existing customer base. They can have similar demographics to your current audience or be in a different location.

3. Improve internal processes 

Besides looking for new clients, you'll want to ensure that your internal processes are efficient and, if not, work to improve them. You can try new tech, bring in new staff, or switch to a different equipment.

4. Reinvest profits into the business

Invest the business's profits into innovative solutions that can help your business stand out in the long run. You can hire staff for R&D or train your current employees to help them become more efficient and experts in what they do.

Looking to buy an existing business?

At Boopos, we specialize in helping buyers find and acquire profitable online businesses. Our team conducts thorough due diligence before listing opportunities, ensuring you’re evaluating businesses with proven growth potential.

We can provide advisory and help you with the acquisition process, so you can focus on finding the right fit for your goals. Contact our advisors.