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Maverick Adams
Maverick Adams

How To Buy A Small Business



Buying a business, as opposed to starting something from scratch, can streamline your path to profitability. It can also be less risky, in some cases, if the brand is already successful and established.




how to buy a small business


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If you have the funds to make a 10-20 percent down payment, industry experience or business management skills, and good credit scores, an SBA loan would be ideal. If yours is a large business, you can apply to the big banks (this is one of the toughest sources of financing for small businesses to tap into).


See your funding options for a business acquisition loan. Lendio will ask you a few basic questions, and will narrow down the lenders that are right for your purposes. Doing business this way saves you a lot of time, and it will help you take over your business and start making a profit much sooner than if you take the traditional route.


Having your own business is great. Building one from scratch? Really hard. Which is why some entrepreneurs opt to buy an existing business outright. There are other reasons to buy a business too, like acquiring an up-and-coming competitor, or just building your investment portfolio.


At some point, while jumping through legal hoops, you might have forgotten that you just became a small business owner. Congrats! Your new life awaits. And if your brand new business needs bookkeeping, Bench can help with that.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.


Depending on the nature of the business, you will have additional questions. Do your due diligence by checking the amounts from the cash flow statement against those from the balance sheet and income statement.


Go beyond the quantitative data and check the pulse of the state of affairs of the small business within its community. Here are some places to check the reputation of a small business and its owner(s):


Supplement the sentiment of the community about the small business with research on plans of large competitors, such as large franchises and big box stores, to move into the area. What would happen if you buy a hardware store and a Home Depot would move into the area next year? During your research, inquire directly with franchises and big box companies about their plans to move into the area. Despite the lack of a physical store, some corporate moves are ongoing and well documented. For example, Whole Foods has already announced the location of 16 new 365 by Whole Foods Market stores in several cities, including Akron, Ohio; Decatur, Georgia; and Gainesville, Florida. These stores are scheduled to open in 2017 and beyond and may affect the operations of many local small business operating in the same industry.


You can borrow up to $1 million, and terms from one to three years. Using the latest cash flow statement from the small business and making your own cash flow projections for the next three years, you can determine whether or not a term loan is the right financing option.


The first one is that unsecured personal loans are often capped under $50,000, which would only cover a small portion of your small business acquisition. The second one is that unsecured personal loans often charge much higher interest rates (as much as 80%!) than other types of loans. The third one is that unsecured personal loans have several fees, such as an origination fee of up to 5%, a service charge, a late payment fee, and, sometimes even, a prepayment fee.


When done right, buying a small business allows you to become your own boss faster and gives you a leg up on the competition with a proven business model. Spend some time evaluating your options and doing the necessary legwork to back up any claims. Be patient throughout the entire process and be willing to try alternatives particularly when it comes to finding financing.


Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.


But some reasons for selling may be red flags, and it might take a little more work to uncover them. For example, if the business is losing business to a more popular competitor, or has a bad reputation, you could be facing an uphill battle from the moment you take over.


Some business valuation experts use a blend of two methods, such as the market approach and the income-based approach. In any case, the process of determining the value of a business is complicated, so you might want to consult a professional business broker or accountant who specializes in business valuations.


Better survival rate: Many new businesses fail in their first few years in business. According to a study published in Industrial and Corporate Change, business takeovers have a higher survival rate than new venture startups.


Existing cash flow: Because an existing business has all its operational processes and staffing already going, as well as an existing customer base, you can start generating cash flow on day one. In contrast, when you start a new business, it can take months or even years to turn a profit.


High upfront costs. Buying a successful business can be expensive. You may be able to buy a struggling business for less, but then you run the risk of acquiring a tainted brand, unhappy customer base or a dying product or service. Simply put, you get what you pay for.


Challenging to make it your business. When you buy an existing business, you also buy an existing company culture, mission, vision and values. It can take a lot of work to make changes that reflect your goals and turn a struggling company culture around.


But, buying a franchise business can be expensive. You typically need to pay an upfront franchising fee, in addition to the normal business startup costs, such as buying or leasing a location, purchasing inventory and equipment and hiring employees.


For example, according to LendingTree research, it can cost anywhere from $1.24 million to $3.53 million (not including land) to open a Sonic Drive-In, and $1.3 million to $2.3 million to open a McDonalds. And while you may be able to get financing to cover some of those costs, many companies require franchisees to have significant personal net worth and invest a large amount of their own money into the business.


But there's still risk. Whenever you buy an existing business and look at its records, you're looking at the past. There's no guarantee things won't change going forward. If you're negotiating to buy a business and you think the seller is giving you a great deal, be very suspicious--there's probably something heading down the road at 90 miles an hour that will blow this business apart when it hits.


Demographic and political changes:If lots of business owners in town are looking to sell, there's a reason. How is the community changing? Is the population increasing, or declining? Is the population skewing older, or younger? Is a "miracle mile" shopping strip diverting traffic? Go to the local Planning and Development Office and see if there are any proposed zoning law changes that would change the "permitted use" at the business location.


Owner's Discretionary Income, or ODI:This is what the seller is taking out of the business after paying his suppliers, his employees, his rent, his overhead expenses and his taxes. If you can't live on the current ODI, or if ODI has been declining for several years, watch out! The business is going downhill. If the ODI seems healthy, get the seller to put it in writing, and hold back on naming your purchase price for a few months so you can confirm the seller's ODI numbers are accurate.


Beware the seller who tells you his actual ODI is greater than what he reports--if he's taking extra cash out of the till, understating income on his tax returns, or treating personal expenses as business write-offs, what are the odds he is being scrupulously honest with you?


The location of the nearest big competitor:If you're looking to buy a retail or service business, chances are there's at least one franchise or "big box" competitor that will wipe you off the map if they ever come to town. Where's the nearest outlet or franchisee? If you're buying a local hardware store, don't be afraid to call Home Depot and Lowe's and find out if they have plans to build a local store anytime soon. You might just learn what they're going to build on that 2-acre parcel just off the interstate.


Sales taxes:When you buy the assets of a business, you avoid responsibility for the seller's debts, obligations and liabilities (other than his lease and other debts you expressly agree to assume and continue paying). Except . . . for sales taxes. If your seller has been underreporting his sales taxes, and the state tax authority finds out about it, they can come after you for everything the seller owed. You can sue your seller, of course, but by then he's fled to Timbuktu and can't be tracked down.


Don't pay a penny for a small business until you know the seller has filed all state and local sales tax returns. Ask your attorney if you can get a "clearance certificate" from the state tax authority saying they won't come after you for any sales taxes your seller owed.


Local business reputation:Don't rely on just "hard data." Go to the library and skim the local newspapers going back at least five years. Is the business active in the community? Is it written up frequently? Is there negative publicity? Go to the local police station and ask if there are frequent complaints by or against the current owner. 041b061a72


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