How to buy a business with as little money as possible.
Hint: The SBA 7(a) loan program is the best way to purchase an existing business without using much of your personal or business cash.
Whether you've been a lifelong employee and are ready to make a change, or you're an experienced operator looking to acquire some of your competition, acquiring an existing business has many advantages. If you're ready to finally make the leap from your career and work on something that's your own, kudos! New adventures are always scary due to multiple factors, but most often it's the unknown that keeps most people from diving in head first.
Benefits of Buying a Business
When you're starting a business from scratch all of your financial projections are nothing more than educated guesses. When you buy an existing business, part of the unknown has been dealt with for you. You can look at the last few years of financials, dig into the expenses, and have a pretty good idea of whether or not the business can sustain your lifestyle and that of your potential employees. An existing business has already done a lot of the leg work for you, and that's part of what you're paying for. There are processes in place for everything from marketing to operations, how to manage payroll, along with all the other little things that can be time consuming for a business owner. Granted, some of these processes may need updating or scrapping all together, but that is part of the excitement of figuring out ways to make YOUR new business grow.
Drawbacks to Buying Business
There are two sides to every coin. The exact business you dream of owning may not exist yet, or it may seem too costly to purchase one (this may or may not be true when you look at the sunk costs of a start up). But even when you think you've found the perfect opportunity, you can be assured there will be some hurdles. You'll have to come in to someone else's operation and work yourself in to the routine which may be hard for some folks. You need to look at the seller's reason for leaving, are they jumping off a sinking ship? Or are they just ready to pass the torch and let someone else run with it. There is a lot of due diligence that needs to be done before you sign on the dotted line. This may be something you do once or twice in your life, working with someone that does it day in and day out is imperative to making the right call.
How does buying a business work?:
To buy a business, you have to find a business. There are a few different ways to Do a google search for "businesses for sale near me" and you'll be met with a host of different listings you can browse through. Alternatively, search for a business broker in your area. They may know of some businesses that aren't quite ready to be listed, and can help walk you through some of the conversations with a seller. You could also let friends and family know you're in the market and come across something that way. The power of networking is not lost in the acquisition world.
Due diligence. Due diligence. Due diligence. Buying a new home site unseen isn't advised, and the same goes for buying a business. You or someone you trust needs to really dig in and start lifting rugs and checking behind couches. Whether or not you trust the seller has little impact on how much you should research what you're buying. Make sure there won't be any surprises when they hand you the keys and I can almost guarantee there will still be some.
Financing is critical. You have found the perfect business, and you're ready to make the purchase. How will you fund it? You may have the cash available, but you might not want to use up that portion of your savings. Or you may not have much cash available at all, and that's okay too. SBA loans have a requirement for buyers to put in at a minimum 10% of the costs. If the seller is willing to hold a note for a portion of the purchase, that minimum can be 5%. For example, if the sales price and all costs are $500,000, you would need to have at minimum $50,000. However, the seller may want to lighten their tax burden a bit and collect some of their payment at a later date. They could put any amount on a note and you would pay them back just as you pay the bank back (with some more detailed rules). So, if they are willing to hold a note for at least $25,000 then you would only need $25,000 to make this happen. There are thousands of different ways to make financing work, and we pride ourselves on being able to get creative. The most important factor is always making sure that the debt you're taking on isn't going to suffocate the business. After all, the whole point is to get in there and grow this thing.
Stock purchase or Asset purchase? These two methods of acquiring a business end in a similar result, but each of which has its own purpose. An accountant or attorney will be the best place to figure out what's right for you, but the basics are pretty straightforward. A stock purchase means that you are buying the seller's interest in their company. Seller John owns 100 shares of XYZ, LLC and you purchase 100 shares of XYZ, LLC and become the new managing member of the entity. An asset purchase means that your entity, ABC, LLC, is buying all of the ASSETS of XYZ, LLC. You will own the customer list, the equipment, the inventory, the website, etc. On the surface everything would look the same, but legally all of the items have a new owner.
Transitioning into your new role. Owning a business is different. Owning a business is hard. But owning a business is rewarding. When a customer has a problem, you don't get to point fingers anywhere, except to yourself. Every business has its own way of dealing with certain tasks, and you can't expect to jump right in and get moving. There is going to be a bit of a learning curve before you can really kick things into gear. Most often, a seller will stay on board with you for a few weeks to several months. They can help introduce you to long time customers, walk you through negotiations with certain vendors, and even show you the closest place to grab that afternoon coffee. Having a good relationship with the seller isn't necessarily a requirement, but it will definitely help you to settle into your new life.
Steps to take now
- Decide if this is what you truly want to do, if so, there is always a way to make it happen.
- Find a business for sale.
- Send us a quick loan request. With some basic information we can determine if the business is a good fit within just a few hours.
If you're stuck on step one, please reach out. Countless times I've talked to people who just didn't realize how easy it could be to purchase a business and start living their dream.
