Buying a Business Over Starting From Scratch


Why Buy a Business?

The majority of people associate owning a business with starting from scratch. However, starting from scratch presents a set of unique and abstract challenges. With these challenges come elevated risk. Most notably: building a brand, establishing relationships with various stakeholders, forming an effective team, and, above all else, generating cash flow!
More often than not, buying an established business over starting from scratch eliminates most of the above risks - or at least diminishes them. When you buy an established business, you take over the ship while it’s moving. Meaning, the company is revenue positive on day one. Albeit in this day and age, taking the start-up route is perceived in society as the more seductive path, as plenty of lucrative opportunities exist in the acquisition arena.
Entrepreneurship through acquisition is a term used to describe the action of buying an existing business and running it as CEO. Running your own company is profoundly different from climbing the corporate ladder within a company. It allows you, the entrepreneur, to determine your desired lifestyle and career path.

Some of the many examples of this include (but are not limited to):

  • You don’t have to succumb to the insane idiosyncrasies of management who have no good reasons for their policies other than to control you.
  • You decide the value of your time, not your boss.
  • Your performance is recorded based on your customers, not upper management.
  • You can surround yourself with people you want to work with.
  • You are not held to a strict nine-five regiment. You decide the hours you want to put into your business.

So What Does Buying a Business Look Like?

While there are several strategies to consider upon deciding to pursue entrepreneurship, there are a few specific methods to consider when buying a business. The majority of business-buyers start with an online search. Some people already have an idea of a type of business, a particular industry or its location, and others don’t. However, once you have sourced a business you think you might want to buy, the steps are fairly consistent.

Some of the high-level steps in the business-buying process are as follows:

  1. Source a business that fits your criteria.
  2. Begin initial conversations with the seller.
  3. Use given financial information and overall company background to judge whether their business is the one for you.
  4. Discuss the terms and expectations surrounding the deal with the seller.
  5. Sign a non-binding Letter of Intent (LOI). Note: sometimes a Non-Disclosure Agreement (NDA) might also be required.
  6. Perform a final round of due diligence. It is advised you seek outside resources to help you (accountant, lawyer, advisor, etc...)
  7. Begin raising debt in form of a small business loan. The Small Business Administration (SBA) offers government-backed loans aimed at supporting small business entrepreneurs (generally about 30-50% of the purchase price).
  8. Some deals also include seller's debt as well. The exact terms should be discussed with the seller but it generally results in 20-25% of the business purchase price.
  9. Begin raising equity. Pool together capital from a group of investors to fill the remaining purchase price.
  10. Finalize and sign the Sales Agreement Document.
  11. Close the deal.

In Summary

Although the process may seem intimidating at first glance, there are a plethora of resources - both human and technological - that you can use to leverage your search and capital-raising efforts.

In the coming few years, due mainly to the retirement of baby boomers, millions of quality businesses will be listed for sale and ultimately change hands. The opportunities to both control your career advancement and to create unbounded amounts of wealth for yourself are on the horizon. Exploring your options and entrepreneurship through acquisition is certainly an option worth considering.