Not every new business owner opens a brand-new business: they may opt to take over an existing, successful small business. For some, choosing to acquire or take over a small business presents serious advantages in sales, marketing, and market share. Here, we’ll break down these advantages.
Why would you buy an existing business?
Opening a new business requires lots of tasks that buying an existing business expedites. You’ll need to acquire capital, obtain business licenses, register with the IRS and your state tax authorities, sign up for insurance plans, and purchase the right software, among many other tasks -- not to mention making your first sales and marketing to new customers.
While you might decide to change the brand, offerings, or employee structure of the business you take over, having a template upon which to build saves significant time and effort. This template also means easier paths for entering a new industry since you won’t have to build a reliable staff or thorough supply chain for your company. When you buy an existing business, many key frameworks are already in place.
How to know if an available company is the smart buy for you
Although taking over a small business may be lower-risk than launching a brand new venture, it’s not entirely risk-free. Make sure to look into the following before you agree to buy a small business:
- Basic criteria. The company you’re buying should be located somewhere relevant to your industry and be large enough to make your profit goals realistic. It should also offer most or all the products and services you want to sell.
- Company health. Ask the current owner for financial statements, legal files, contracts, sales records, UCC liens, and other documentation that prove the company’s health. You should also ask around within the industry and do some online research to determine whether the company has a strong reputation or, at worst, a slightly imperfect one you can reasonably improve.
- Understanding the industry. If you’re buying a business in an industry new to you, don’t rush into it. Know your market thoroughly before diving into it based on just a superficial understanding -- a certain industry may have challenges that aren’t obvious on the surface.
Do you need a business broker?
Hiring a business broker can save you time and increase your chances of business success. These brokers can help you find businesses to buy and determine your industries of interest. They’ll also make sure you don’t have any documentation gaps throughout the sale and transition processes. Eventually, your broker can help you finalize and sign a deal with someone selling a business.
These benefits don’t necessarily mean you’ll flounder without a business broker. Forgoing one is certainly cheaper: You’ll likely pay as much as 15% of your sale price to your broker in addition to what you’re spending on the purchase itself. Check a broker’s ratio of sales made to all attempted sales and only work with brokers whose track records demonstrate success.
Eight questions to ask before taking over a small business
Whether or not you hire a broker, be sure to ask the current business owner – or yourself – the following eight questions:
1. Why are you selling the business?
If the business owner is just retiring, you might not have any red flags to worry about. If the owner instead says the business hasn’t been able to keep up with demand or changing customer interests, you may want to think twice about your purchase.
2. Who are the partners?
If you’re buying into a share of a business rather than the entire operation, you should get to know your prospective partners. If you wind up disagreeing with their business practices or just not getting along with them, don’t buy the business. Otherwise, you can likely look forward to a meaningful partnership.
3. How will I fund the acquisition?
While taking over a small business makes funding everyday operations much easier than with a new business, you can’t access the company’s current and future until you buy the business. You’ll thus need to figure out how to fund the acquisition with what you have now. Small business loans are among your many viable options.
4. Am I documenting everything?
It’s easy to overlook certain documentation needs, and to do so would be a mistake. If anything goes wrong in the sale process, proper documentation can shield you from liability, loss, or other dangers. As previously mentioned, business brokers can prove especially helpful for documentation matters.
5. Will the current employees stay or go?
Although a major advantage of taking over a small business is the built-in staff, you always have the option of axing the current team and building a new one. If you’re bringing a team with you, such as in a merger, laying off the current employees may be more feasible, but if you’re brand new to owning a business, keep the current team around for an easier ownership transition.
6. What are my plans for growth and expansion?
Chances are that you won’t run the company in exactly the same way as did the previous owner. As such, you might have ample opportunities for business growth and expansion. When you look at the company’s financial statements, marketing plans, and current suite of products and services, you should determine how you can feasibly grow and expand the company.
7. Who are the customers?
You should have a general idea of the clients and customers to whom you’ll be selling the company’s products and services. In getting to know the customers, you can determine the overlap between current customers and the people with whom you’ve worked in other roles. You can also figure out how to grow the customer base – and thus bring in more profit – if you buy the company.
8. Why would the owner sell to me of all people?
You might not be the only prospective buyer for a business. Go into all business takeover situations with a clear idea of what distinguishes you from others as the company’s potential new owner. Be prepared to support your claims with case studies, statistics, presentations, and other information that shows how well you fit the company.
Know your stuff, but be patient
No matter how much you follow the above steps, taking over a small business can be a lengthy process. As long as you do your due diligence, keep in constant communication with the current business owner, and remain prepared to quickly take over, you’ll be in great shape to lead almost any small business you see fit.
To discover how your business financials stack up for funding, use our easy-to-use online tool. SmartBiz Advisor™ helps you track the financial health of your business and learn how banks typically evaluate your business.* SmartBiz Advisor also suggests ways to help you improve your credit and strengthen the financial health of your business as needed. Read feedback from real SmartBiz Advisor users and sign up here.
*The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes only. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.