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How To Buy A Small Business

11/23/2022 11:15:34 +0000
Many people have dreams about owning their own business, but most of us will be aware that building a successful business from scratch is extremely difficult.

 

Luckily, one of the ways you can achieve your dream without the headaches of starting right from the bottom is by buying an existing small business.

There are other benefits too, like buying out competitors.

Whatever your rationale is, you will want to know how you can buy a small business and what the steps are to do so.

Luckily, we've got everything covered with this handy guide. We'll explain everything you need to know about buying a small business and why you might want to do so.

So, if you're interested and want to learn more - then read on!

Find The Business
Of course, you can't just buy a business out of nowhere. You will want to know what business you are buying and why you are buying it.
 

Not any old business will do. You will want to find a business that has plenty of financial prospects, or at least some sort of incentive to purchase the business in the first place.

Look at the following points:

- A positive and clear cash flow, or at least the evidence of a trajectory that shows there is growth
- An industry that you understand enough about to be able to help grow your business
- A diverse set of customers
-A long term plan for growth
-A business that you know you will enjoy running

If you already have a small business and you're looking to buy out your competitor, these points will still be very important, but you will likely be adding some extra data into the equation.

In other words, you will be looking at when the competitor has ceased to exist, how many more sales will you be expecting? Will you decide to use the space to add an extra store or are you just looking to get rid of the competition?

On top of this, you have to remember that you will likely also be purchasing the assets of the business, so you could tally up the potential sales of these too.

Where Do You Find A Business?
You should try to widen your search as much as possible to give you the extra edge. You will likely be able to find a hidden gem when you are making this wider search.
 

Once you have found a business that you think is right for you, it's a good idea not to just stop there. Flag or save this business for later thought, and continue your search.

It's important not to be narrow minded on a business that you think is a great fit, because you might miss out on a much better idea later.

Consider looking in places like:

- Broker websites such as BizBuySell
- Small, local business brokers
- Lawyers
- CPAs
- Franchisors
- Established, local small business owners

Value The Business
Now that you've discovered what business it is that you are looking to buy, it's now a good idea to figure out exactly what this business is worth.
 
It's important to point out here that a lot of small businesses will exaggerate and overvalue their business.
 

This is why it is so important that you make objective decisions and research yourself so that you do not overpay for the business.

There are two ways that you can value a business. You could choose to do it yourself or you could decide to hire a professional to do it on your behalf.

Of course, if you do decide to hire a professional, then you will need to recognize that this service will not be cheap. In fact, in some instances it can reach over five thousand dollars.

However, this might be a great investment if you are really unconfident in your abilities to make a valuation correctly, as you may end up paying much more than just five thousand dollars.

Valuing businesses involves the calculation of business revenue, net income and EBITDA. Every business valuation is handled in a different way, so it's not a case of one size fits all.

Negotiate For The Purchase Price

Okay, so you've discovered the business that you want to purchase and you've done all the research on how much you think this business is actually worth. However, now it's time that you negotiate the purchase price of the business.

You'd normally start by making an unbinding offer which can be either in writing or verbally communicated.

Typically, if your offer is somewhere in the ballpark of what the business owner is willing to sell for, they will normally open a negotiation with you.

It is at this point that there will be plenty of back and forths between you and the business owner. Eventually, if you do agree to a price, you will draft some provisional terms of the sale.

Later, you can make changes to these terms and conditions if you have noticed something in the business that makes a significant difference to the businesses valuation in your eyes.

Submit An LOI
A letter of intent is a formal document that outlines all of the intended terms of the sale, including the timeframe, who is involved in the sale, the price that will be paid, how it will be paid etc.
 

Once you and the business owner agree and sign the terms, you simply need to inform the relevant parties and do your due diligence - and that's it!

As soon as the purchase agreement is signed and everyone is informed, you are officially the new owner of that business.

Final Thoughts
Buying a small business can be a little tricky, but once you know a few of the stages - it can make everything just a little more clear.
About the Host
Sophie Howard is the founder of Aspiring Entrepreneurs, a community designed to help people develop the skills and confidence to build a business and a life that serves them. Sophie began online in 2013 with an Amazon firm, which she sold for more than $1 million in 2015.

Sophie has lectured on stages all around the world, encouraging and teaching other ambitious entrepreneurs. She has established instructional programs educating thousands of students how to sell online, in addition to releasing over 1000 products.

Sophie has also written a book titled "Aspiring Entrepreneurs: A Guide to Finding Your Best Path to Financial Freedom."
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