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If you want to become a business owner, you can start a business from scratch—or you can purchase an existing business. Buying an existing business can allow you to skip the startup phase and go straight to the operations phase. But doing it successfully requires careful planning and strategy.
Owning a business is complicated. There are tax implications, wealth planning complexities and estate planning aspects that don't come with holding a job.
Before purchasing a business, it’s important to make sure you’re buying a venture that will be a good fit for your talents and will help you meet your goals. Consider working with a business broker, who is a professional that helps business owners buy and sell companies, in order to get guidance throughout the process.
Here are some things to consider.
What Are Your Reasons for Buying a Business?
Consider Your Lifestyle & Goals First
Start by taking time to consider your reasons for buying a business. Maybe you’re looking for flexibility, consistent income, an opportunity to give back to your community, or a host of other reasons. Some businesses will meet some of those goals while others will not.
For example, purchasing a beloved local restaurant may provide consistent income and an opportunity to be engaged in your community—but it may not provide flexible hours, as most restaurant owners need to be on site during busy hours on nights and weekends.
Some business owners aim to grow their businesses and add employees, while others simply want their business to make enough money to support their desired lifestyle. It’s important to understand your own goals and how your approach to business ownership will affect your lifestyle.
If your plan is to run a “lifestyle business,” or a business that is just intended to support you and your family, realize that the business must earn more than your desired salary. It will also need to earn enough revenue to cover overhead and continued investment in the business, whether that includes marketing, equipment costs, or other needs.
Steps for Buying a Business
In order to scout, vet, purchase and run a business successfully, you’ll need to follow a number of deliberate steps.
Here's a quick overview of considerations you'll need to make before, during and after selling your business.
Ask Why the Business Is For Sale
Some business owners may try to sell their businesses because the business is failing or has other problems. Before purchasing, it’s wise to understand all the reasons the current owner is selling.
Also, the current owner may be asking a certain price for the business, but that doesn’t mean the business is worth that price. It’s crucial to conduct due diligence and undertake a valuation process to objectively determine the worth of the business.
Request Documentation & Financial Statements
Ask the existing owner for proper documentation and financial statements, which will help influence your decision on purchasing the business. If the owner is serious about selling the business, they should expect to share financial details and other documents with a potential buyer. You may have to sign a non-disclosure agreement or letter of intent stating that you are serious in order to get access to these documents, which are typically not public information in a privately held company.
Value the Business
Once the owner provides you with the proper information, begin to calculate the value of that business. Understand the importance of business valuation to avoid overpaying and losing money before you even get started.
Working with a business broker can help you make sure you have an informed opinion when handling the valuation process.
Explore Your Financial Options
If things continue to look good, you will need to consider funding options. There are a variety of avenues you can choose: using your savings, taking out a business loan, or looking for investors.
For example, an SBA 7(a) loan can be a great option for purchasing a business. Using a loan for a business acquisition can help you make the purchase while preserving cash for its operations post-sale.
But don't stop planning the financial strategy for your business after the purchasing process.
Be sure to explore options that will help you manage cash flow, such as:
No single financial strategy works for all businesses. That's why it's important to work with a business bank that will take the time to understand your needs and goals.
Purchasing the Business
After learning everything you can about the business and its current value and potential value, and receiving guidance from a trusted financial service provider, it might be time to purchase the business! But the planning doesn't stop there.
Before you purchase the business, talk to the existing owner about developing a plan to ensure a smooth transition. You might consider paying the former owner a salary to continue working with you and the staff for a certain number of months or years to ease the transition.
If the previous owner was renting the business property, you might consider whether you want to purchase the business property as well as the business.
Have an Expert in Your Corner
Buying a business is not a simple process and participants in the process almost always benefit from working with a financial professional. Reach out to the business planners at City National Bank today to learn more about what you might want to consider about your business purchase.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice, and any information provided should not be construed as such. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances. Trust services are offered through City National Bank.
City National Bank's Small Business Administration (SBA) Lending Programs are subject to credit and collateral approval. A due diligence fee may be required upon approval, and other fees and other restrictions may apply. For SBA 7(a) and 504 products, SBA eligibility is also required. Terms and conditions subject to change.
Loans and lines of credit are subject to credit and property approval. Additional terms and conditions apply. Not all applicants will qualify.
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