Updated: March 1, 2023
Purchasing an established company can be a great way to become your own boss and start your own business. Whether it's a start-up or an established small business, the potential for success is immense
But, the key to success is making the right investment. Taking the time to understand the financials, market trends and legalities of buying a company can be daunting for any new business owner. As a firm that has advised, supported, and represented business clients over the years, we've created the ultimate 2023 guide on how to buy an existing business – a comprehensive guide that covers everything you need to know about investing in a business.
As a not-so-common blog post, this guide will walk you through the entire process from start to finish – from evaluating potential opportunities to due diligence and negotiation to the final deal.
For more information contact our experienced Glendale business purchase attorney, Patrick Monahan, today!
What are the Reasons for Someone to Sell Their Business?
When people put up their Glendale businesses for sale, there are usually several reasons why they would want to do so. Though each seller’s situation is unique, some of the most common reasons include:
Retirement or Relocation
In this case, a previous owner may have invested in the business for many years and now wants to use the proceeds from the sale to enjoy their retirement. Alternatively, they could be relocating and unable to manage the business from another location.
The proceeds from the sale of a business entity may provide liquidity for a seller if they are in need of cash to invest in other opportunities or simply to cover their own personal expenses. This usually happens when a business owner has invested in the business for many years and can now use the money to manage their own personal finances.
Research Study Fact: According to the U.S Chamber of Commerce, a study found that the majority of current business owners who purchased an existing company reported higher profitability than those that started from scratch.
Inability to Operate
Another reason why someone might want to sell their business is that they are unable to continue operating it. This could be due to a lack of experience, time, or financial resources. In some cases, the business may not be profitable enough for the seller to continue running it.
It's not uncommon for business owners to become burned out and no longer have the same passion and enthusiasm for the business that they once had. In this case, they may decide to sell their business and move on to something new.
In some cases, a business owner may want to sell the business entity due to family disputes or disagreements. This might be because of differences in opinion between the business partners, such as how to run the business or what direction it should take.
A business owner may decide to divest from his or her company in order to focus on other investments. This could be because they are no longer interested in the industry, or simply because they feel another venture would offer a better return on their time and money.
The ultimate goal of most business owners is to maximize their returns. They may decide to sell the business in order to realize these returns and reinvest them into another venture where they feel there is more potential for growth.
What are the Benefits of Purchasing an Existing Business Entity?
When considering buying a business, it's important to understand the benefits that come with it. These include:
1. Established Relationships and Current Customers
One of the biggest advantages of buying a business is that you can leverage existing relationships and a loyal customer base. This can provide an immediate source of revenue and help provide stability for your business in its early stages.
2. Proven Business Model
An existing business usually has an established reputation and a proven business model made of quality content. This can provide some security in terms of understanding what works best for the company and also provides insight into potential areas of improvement that could be explored.
3. Experienced Employees
A successful business entity often has experienced employees who have been with the company for many years. These employees can provide invaluable insight and knowledge that could help you manage the business better.
4. Cost Savings
Buying an existing business can be more cost-effective than starting a new one from scratch as you don't have to pay for things like branding, marketing, or initial set-up costs. This can give your business a head start and help you save money.
5. Easier Financing
Banks and other lenders are often more willing to provide financing options for existing businesses as they have a proven track record. This can make it easier to access the funds you need to grow your business.
Key Issues to Consider When Buying an Existing Business?
Purchasing a business is a complex process that requires due diligence and thorough research. As an investment that carries with it many risks, potential buyers must understand the legal, financial, and operational aspects of the business.
To ensure that you are making an informed decision, consider the following key issues:
Determine What Kind Of Business You Want To Buy
Before you start researching potential businesses, it's important to understand the different types of businesses and which may best suit your goals. Do you want to buy a traditional brick-and-mortar store? An online e-commerce business? A service company like a restaurant or plumbing business? It’s important to do research on the various types of businesses and the associated costs and benefits. With this, you can narrow down a list of potential businesses to target.
Deciding what type of business you want to form is important before making any big purchase decisions. Contact an experienced business formation attorney in Glendale for more information.
Look for Businesses That are Available to Purchase
When you’ve identified the type of business that interests you, it’s time to start looking for potential businesses to purchase. The most common way to find a business is through an existing search. This could include searching online listings or contacting local business owners who may be looking to sell their companies.
Related Content: Common Mistakes to Avoid When Buying a Bussiness
In addition, there are also business brokers and agents who specialize in connecting buyers to sellers. They may have access to a wide range of businesses that are on the market but are not publicly listed. Moreover, if you are looking for a specific type of business, brokers, and agents may be able to help you narrow down your search.
Evaluate Potential Customers
The most critical component of any business is its customer base. This refers to the people who purchase or use products and services from the business entity you've selected. Before you invest in a business, it's essential to understand its customer base, how they are acquired, and what its lifetime value is.
How many potential customers does the existing business have? What kind of customer service does it offer? Do these customers have a history of repeat purchases or regular orders? Knowing the answers to these questions can help you understand the business’s customer acquisition efforts and customer churn.
Create a Business Plan
Once you've identified a potential business opportunity, it's necessary to create a comprehensive business plan that outlines your business goals and objectives for the new venture. The business plan should include financial projections, marketing plans, product tips, additional services, and more. It's important to be realistic in your business plan and set achievable business goals so that you can measure progress throughout the year.
Select a Business That Fits Your Budget, Goals, and Resources
More often than not, it's best to select a business that fits within your budget, business goals, and resources. If you're limited in terms of capital, look for businesses with lower start-up costs or those that can be operated on a smaller scale.
Additionally, consider businesses with potential for growth as this could help improve profitability later down the line. This means researching the industry, evaluating the customer base, and assessing business operations to determine the most promising opportunities.
Also, consider businesses that require minimal resources or those in industries where you have expertise or experience. This will make it easier to manage the business and also reduce your learning curve as an entrepreneur.
Make sure you’re selecting a business that aligns with your goals and interests. If you're passionate about the industry, have knowledge of the sector, or have connections in the community, then this could also increase your chances of success.
Make Sure You've Thoroughly Done Your Research and Due Diligence
Once you have selected a business that fits your budget, goals, and resources, it's time to start researching the company in more detail. This is generally critical to avoid any potential issues down the line.
Start by understanding the financials of the business – such as business assets, liabilities, income, and expenses. You should also take a look at customer reviews, competitors, and market trends to get an understanding of the industry's landscape.
Related Tips: How to Maximize Value When Selling Your Business
Additionally, evaluate the legal documents associated with buying a business, such as the articles of organization and annual registration costs. Make sure you have a clear understanding of any additional costs or legal liabilities associated with owning the business.
Also, review customer acquisition channels to determine how customers are acquired and retained. Understanding this is key to improving profitability and creating a sustainable business model.
When you've completed your due diligence, it's time to start negotiating with stakeholders. This could include the seller, potential investors, or banks. It's important to understand their needs and interests in order to reach a mutually beneficial sales agreement.
Be prepared ahead of negotiations by predicting and addressing possible objections, while also being aware of your own goals and objectives. Make sure you are aware of the legal implications of any agreement, as well as the financial transactions that could occur throughout the process. This ensures everyone is business ready.
Negotiate the Purchase Price and Agreement
Once you have thoroughly researched the business entity, it's time to start negotiating the purchase price and terms of the agreement. During this process, consider all the factors that affect the business such as the current customer base, market trends, and competitive landscape. Additionally, research similar businesses in the same industry to understand the going rate for these business types of transactions. For more information on what a business transactions lawyer can do for you, call Monahan Law!
It's also vital to take into account any additional costs associated with buying a business such as legal fees or taxes - including personal income tax. Similarly, for quality content, make sure to understand the terms and conditions of the purchase agreement and ensure you are getting the most favorable deal possible.
Assess the Company Cost by Examining Earnings, Assets, or the Market Overall
When assessing a business, it's important to understand the company's cost by examining earnings, physical assets, or market indicators. This could include looking at profit margins, cash flow, and market share as well as researching competitors and industry trends. Additionally, look into the company’s balance sheet and evaluate past financial statements to gain an understanding of the company's financial history and health.
Moreover, consider the company's current asset base such as inventory, equipment, and property to get an idea of what it would cost to replace them. This is important in order to gain an understanding of the true value of the business.
Finally, for the content team, it is recommended to examine broader market indicators such as consumer confidence or economic trends that could affect the company’s business valuation. This could help you assess the current market value of the business and also better understand any potential risks associated with buying a legitimate company.
Develop a Budget Plan for the Purchase and Assess Additional Costs
Before you move forward with purchasing a business, it's important to develop a budget plan that outlines all costs associated with the purchase. This should include costs related to legal fees, taxes and tax returns and how they affect your business, marketing expenses, and employee salaries. Additionally, consider any additional costs such as repairs or improvements that may be necessary in order to operate the business.
Once you've identified the costs associated with buying a business, it's important to assess whether these are feasible within your budget. This will help ensure that you do not overspend or take on too much business debt in order to purchase the company.
Submit the Necessary Paperwork to Finalize the Deal
Once you have identified a business, developed a budget plan, and reached an agreement with the seller, it's time to submit the necessary paperwork in order to finalize the deal.
This involves signing contracts and what to include in them and transferring funds in accordance with the agreement. It's important to understand the legal documents associated with finalizing a business purchase and also be aware of any tax implications.
Additionally, you should be aware of any additional paperwork that may need to be filed in order to transfer ownership of the business.
Invoice Of The Sale
When the paperwork has been finalized, it's important to obtain an invoice for the business sale from the seller. This is necessary in order to prove ownership and also for tax returns purposes. Make sure you understand the details of the invoice such as when payment was received and any additional paperwork that may need to be filed with government agencies.
Learn More: Do I need a lawyer to sell my business?
In addition, it's important to note any additional costs that may be associated with the purchase such as legal fees, taxes, or improvements. These should also be documented on the invoice for future reference.
Lease or Deed
Once the purchase has been finalized, it's important to obtain a lease or deed from the seller. This document is necessary in order to prove ownership of any real estate associated with the business. Additionally, this document will outline all rights and responsibilities related to occupying the property as well as any restrictions that may be applicable.
It is important to obtain insurance for the business in order to protect against potential liabilities and damages. This could include liability insurance, property damage insurance, worker’s compensation, or any other type of coverage that may be applicable. Make sure you understand the details of your policy and also research different providers in order to get the most favorable deal.
Legal Protections Such As Patents, Trademarks, And Copyrights
In addition, it's important to understand the legal protections associated with any intellectual property such as patents, trademarks, or copyrights. If applicable, you should ensure that appropriate paperwork is filed in order to register and protect these rights. This will help prevent competitors from copying your product or service and also protect against potential lawsuits.
Take Time To Celebrate and Plan for Growth
Once you have finalized the purchase of a business, it's important to take time to celebrate and reflect on your achievement. This is also a good time to plan for future growth and consider strategies that could help improve profitability or increase market share.
It's important to stay up-to-date with industry trends, research competitors and develop new products or services in order to remain competitive. Additionally, look into marketing channels such as digital advertising or social media campaigns that could help increase brand awareness, keep a loyal customer base, and attract new customers.
Speak to an Experienced Business Attorney Today at Monahan Law, PLC
Overall, buying a business is a big undertaking and requires significant research and due diligence in order to be successful. If you are considering buying a business, it's important to speak with an experienced business attorney who can help guide you through the process.
At Monahan Law PLC, we understand the legal complexities associated with buying a business and strive to ensure that our clients receive the best possible outcome. We will take the time to review all documents, negotiate terms and ensure that you are making an informed business decision.
We completely understand the importance of this decision and are committed to providing our clients with the best possible legal advice and step-by-step guidance. We walk you through the process from start to finish and ensure that all your legal needs are taken care of. Contact us today at (623) 300-2727 to book a consultation and let us help you make the best decision for your business.