How to Buy an Existing Business: Everything You Need to Know

How to buy an existing business

Why you may want to buy an existing business instead of starting one from scratch

Let’s be honest. Building a business from scratch is hard, and there are no guarantees you will succeed. Actually, according to fundera.com, business failure statistics can go as high as 70%, depending on how long it has been since it opened. 

So, should you not become an entrepreneur? Well, actually, yes, but with a shortcut and less risk. 

Instead of starting a business from scratch, you can buy a successful one minimizing risk, cost and increasing the success rate. 

After buying multiple businesses and starting many from scratch, here are a few key reasons why you should buy an existing digital business and not build one from scratch..

First of all, Statista.com shows that over 2.14 billion people worldwide are expected to buy goods and services online, up from 1.66 billion global digital buyers in 2016. 

Digital businesses have a massive potential to make more sales than traditional businesses. For this reason, even brick-and-mortar businesses are coming online. 

Second, a current business already has an existing trackable record. In other words, you can research the company to see how it has performed and get a good idea of how it will likely perform in the future.

Also, an existing business already has customers and a reputation. Having a client base can save you a lot of time and money regarding marketing and advertising, as you won’t have to start from scratch to build up a customer base.

Finally, an existing business usually comes with lessons learned from someone who knows the ins and outs of the website you’re about to buy.

Success Cases

Let’s review this example. Look at Ramon’s experience buying a business on Flippa and getting 1.8 Million in revenue from it; yep that much! His Mojo is Buy, don’t build. How cool is that? 

Ramon Van Meer: Don’t Start Businesses. Buy & Grow Them | #MakingMillionaires

Another of Mr. Van Meer’s businesses bought on Flippa was able to make up to 35MM in revenue, we can learn valuable lessons from this veteran of online Flipping. 

From $300k to $35M+ Selling Dog Ramps with Ramon Van Meer, CEO & Founder at Alpha Paw

“We’ve had a really great experience with acquiring online-only businesses and have successfully taken over 2 in the last 4 months. It has been a brilliant opportunity for us to add to our internal portfolio and bring in additional revenue streams that help to drive and build a foundation for our parent business.” –  Matt Tomkin – Tao Digital Marketing.

Impressive, huh? If you say no, I won’t believe you. 

Of course, there are also some downsides to buying an existing business. One is that you may have to finance the purchase. Another is that you may not have as much control over the business as you would if you started it; 

For this reason, you should follow a process before buying an existing business, which is why I created this checklist for you, to make it easier.

Reasons to buy an existing business

While there are some challenges that come with buying an existing business, the pros can outweigh the cons for many entrepreneurs.

Pros of buying a business

An established customer base: When you buy an existing business, you’re not starting from scratch. You already have a customer base, which can give you a big leg up. Customers are familiar with your products or services, and they’re more likely to continue doing business with you if they’re happy with what they’ve received in the past. Additionally, an existing business usually comes with established relationships with suppliers, which can help you get the best possible prices for the goods and services you need to run your business. 

Proven track record: When you buy an existing business, you have the benefit of knowing that the business has a proven track record. This can give you a lot of peace of mind, as you’ll know that the business is capable of being successful. Additionally, an established business is likely to have procedures and systems in place that are already proven to work well. This can save you a lot of time and effort as you won’t need to start from scratch in terms of figuring out how to run the business.

Less risk involved: Starting a business from scratch can be a very risky proposition. There are no guarantees that your business will be successful, no matter how good your idea is. However, when you buy an existing business, the risk is significantly lower. This is because you’ll have access to financial statements and other information that can give you a good idea of the business’s chances for success. Additionally, an existing business is likely to have a proven track record, which can give you some assurance that the business will be successful.

Less time and money involved: When you buy an existing business, you don’t have to spend the time and money needed to build the business from scratch. This can save you a lot of time, as you won’t need to worry about things like developing a product, finding suppliers, or establishing distribution channels. Additionally, you may be able to get the business up and running quickly, which can help you start generating revenue sooner.

The employees are already trained and familiar with the company’s procedures: When you buy an existing business, the employees are already trained and familiar with the company’s procedures. This can save you a lot of time and money, as you won’t need to spend time training employees on how to do their jobs. Additionally, you may be able to retain some of the company’s key employees, which can help ensure a smooth transition and help the business continue to run smoothly.

Less paperwork and red tape involved: When you start a business from scratch, there’s usually a lot of paperwork and red tape involved. However, when you buy an existing business, much of the paperwork and red tape has already been taken care of. This can save you a lot of time and hassle, as you won’t need to deal with all of the bureaucratic details involved in starting a business from scratch.

Cons of buying a business

Potential problems:  One of the risks of buying an existing business is that there may be hidden issues you are unaware of. For example, the business may have hidden debts or liabilities that you will be responsible for; This only reinforces the importance of doing due diligence.

Doubtful profits projections: The owner of a business you are about to buy might willingly or unwillingly overestimate the current business market potential and benefits. If you as a buyer don’t do a proper valuation, you might be stuck with a tricky business to grow. 

Buying an existing business checklist

Figure out what type of business you want to buy

Down to business, one of the essential factors in buying an existing business is to find the right fit.  Buying a business is not like buying a car. 

When buying an existing business try to go for one that is in the same industry or field of expertise that you are, this will make the transition smoother. Plus it will have a much higher chance of success!  The second business I acquired from Flippa was just this, and it paid off in spades. One of my best investments yet. 

buying a business target
Photo by Mauro Gigli on Unsplash

You will hit the ground running faster because you will have an understanding of the market, customers, and competitors.

When looking at businesses to buy at Flippa.com, you have many choices. Some of the most popular and profitable online businesses are:

  • E-commerce Store Sites
  • Affiliate Marketing Sites
  • Auction Sites 
  • Dropshipping Sites
  • Digital marketing Sites
  • Blogging Sites
  • SaaS
  • Apps

Search for businesses that are for sale

Ok, you already know which business can be profitable. But, how do you search for an excellent opportunity to buy, you say?

Well, you can use a digital business broker, an online marketplace like Flippa.com, or contact the business owner directly.

If you decide to use a business broker or online marketplace, find a reputable site with experience selling the type of business you are interested in, such as Flippa.  Flippa is the #1 online marketplace to buy and sell online businesses, with over 3 million users worldwide and more than 300,000 business sales completed since 2009. 

Understand why an existing business is up for sale

When considering buying a business, it’s essential to look beyond the stated reason for the sale. In many cases, the real reason is something more complex or nuanced than simply wanting to retire or suddenly losing interest in the trade. 

existing business for sale
Photo by John Schnobrich on Unsplash

Instead, it’s essential to ask questions and research to properly understand the business and what’s driving the decision to sell.

Digging deep into the selling reasons it’s crucial in today’s entrepreneurial landscape, where market conditions can change rapidly, and sales unexpectedly fall or grow massively between days! Look at Netflix’s latest losses, for example.

By taking the time to understand the business and the seller’s motivations, you’ll be in a much better position to make a sound investment decision.

If you want quick help to guide you, mainly be aware of:

  • Competitors: Are other companies doing the same thing, and are they profitable?
  • Market Trends: Is this product on a growing trend? (Do your research, you can use tools like Ahrefs Keyword explorer). 
  • Costs: How much does it cost to create this product or service? Let’s assume you want to start a call center – is it easier, cheaper, or more efficient to buy an existing unit than to start it from scratch?
  • Business Plan: Does this brand, service, or product have a business plan or road map? Is it logical? 

Finally, try to reach out to past and existing customers to learn more about the brand and how they feel about the product or service they got from this already existing business. 

Narrow in on a business that aligns with your budget goals and resources

When considering buying a business, choosing one that aligns with your budget, goals, and resources is a priority. Otherwise, you may find yourself struggling to keep the business afloat.

 First, take a close look at your budget and set a realistic price range for what you can afford. It’s also important to consider the ongoing costs of running the business, such as inventory, rent, utilities, and employees. 

It would be nice to buy that tech development that is really promising; however you might not have the 500,000.00 asking price, so it narrows down your options. 

Next, think about what you hope to achieve by buying a business. Are you looking for a steady income stream? A chance to be your own boss? Or an opportunity to grow a successful company to sell it forward? 

Once you know what you want from the purchase, you can start looking for businesses that fit those criteria; this will help you sort the bad apples from the good ones. 

Finally, consider your own skills and resources. Do you have the experience necessary to run the business? Do you have access to the capital needed to get it off the ground? These are essential factors to consider when choosing a business to buy.

By keeping these things in mind, you can narrow down your options and find a business that is right for you.

Do your due diligence

Before considering making an offer on a business, you need to do your due diligence or hire someone to do so.

Doing your Due Diligence means conducting research about the company before proceeding and if everything regarding the business is in order. With this exercise, you determine whether or not it’s worth investing. 

A quick summary of the critical factors to look for are:

  • Business Financials: Review as many years of the financials as possible (Some experts suggest as many as three years). Revenue, expenses, inventory (if any), and tax returns
  • Customer Base: You need to understand the buyer persona and where the site gets its traffic. Not all sources are of equal quality. There is paid Traffic, Organic Traffic, and seasonal traffic, and not all customers have the same value.
  • Employees: Does this business have any employees? If so, you should meet with some of them. Ask if you can join their Slack channels for a few days. If there are engaging conversations, the company culture is likely good. If not, you may want to dig deeper. Don’t forget to review the turnover rate.
  • Contracts: Look if the company has any contracts or obligations you should be aware of, such as lengthy contracts with marketing companies.
  • Intellectual Property rights: Understand if the business you want to buy has any patents, trademarks, IP, etc., as well as if there is any legal process ongoing regarding the products or services offered.

For more details regarding due diligence, check out Flippa’s complete Buyer Due Diligence Checklist.

Evaluate the price of the business with the earnings assets or market approach

Valuation is one of the most uncomfortable but valuable exercises when buying an existing business. 

Doing a business valuation is not easy unless you have a solid financial background. You must consider many factors in your valuation process, such as net profit, traffic, market, growth potential, and competition. Some experts have come for a rule of thumb to make an estimation. Called the “earning multiplier.” 

This multiplier states that a website or an existing business is worth around 24 to 36 times its monthly revenue.

However, if you want accurate information, I suggest making a more thorough assessment to make an informed decision. 

 I would recommend getting some help to do a valuation.

Secure capital to make the purchase

capital to purchase
Photo by Christian Dubovan on Unsplash

We already talked about business valuation and due diligence. However, it is vital to secure enough capital to purchase the existing business and its maintenance after the transaction. 

In other words, consider the business’s value, the potential for future growth, and the extra cash flow you might have to support your future business.

Also, It’s important to consider the risks associated with the purchase. This business might not be profitable right away, or it may require significant investment to get off the ground.

You must consider these extra expenses and be on the lookout for others. You will have a better approximation of the capital needed for the purchase. 

In order to finance the purchase of a business, you could use your personal savings. Using your own money is often the cheapest option, as you will not have to pay interest on a loan. However, it may take longer to save up enough money, and you may have to make certain sacrifices.

Taking out a loan from the bank is another option. This option may be more expensive in the long run, as you will have to pay interest on the loan. However, it can immediately give you the money you need and may be easier to qualify for than other options.

Solicit investors is another method used to finance the purchase of a business. This option can be beneficial if you do not have the money to finance the purchase. However, it is essential to remember that you will be giving up a portion of ownership in your business, and you will be accountable to your investors.

No matter which method you choose, it is important to do your research and make sure you are making the best decision for your specific situation.

Close the deal with the appropriate documents

documentation
Photo by Romain Dancre on Unsplash
  • Letter of intent (LIO): The LOI is a document that outlines an agreement in principle for the buyer to purchase your business or assets, stating the proposed price and terms. It’s not binding until both parties sign it. It gives the cue for due diligence to start.
  • Patents, trademarks and copyrights: Intellectual property and/or copywriting might need some documentation to be transferred 
  • Non-compete agreement: A non-compete agreement is a contract between an employer that prohibits the seller from competing with your business. Non-compete agreements are typically used to protect trade secrets, confidential information, and customer relationships. 
  • Asset Purchase Agreement: Asset sales are transaction documents in which one party purchases the right to use an asset from another. You need these documents to ensure you legally own everything from the digital to brick-and-mortar assets. 
  • Entity Purchase and Sale Agreement This might be one of the most important documents when buying an existing business. The buy-sell agreement is a legal contract that specifies how the business interests of one party will be transferred to another, and it usually has some type or condition for this transfer.

It’s recommended that you have a professional such as the ones available through the Flippa legal services, draft these documents since they are really important for the legality and future of your business.  

Wrapping Up

Purchasing an existing business can be a great way to get started in the world of entrepreneurship. However, it’s important to do your due diligence and understand all the risks involved before making any decisions. By following the checklist and tips above, you’ll be well on your way to becoming a successful business owner. Thanks for reading! 

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