IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Addie Roberge of Live Oak Bank (www.liveoak.bank).

Building on a Strong Foundation: The Benefits of Buying an Existing Business

If you’re thinking about becoming a small business owner, purchasing an operating small business might be the best path for you. There are many advantages to acquiring an established business because you can build on what’s already there, significantly lowering the startup risks and helping you make money faster.

Key Takeaways

• Purchasing an existing business generally involves less risk and allows for a faster path to profitability.
• Acquiring an existing business provides immediate access to a customer base, established supplier relationships, and potentially experienced employees.
• Securing financing for the purchase of an existing business is often easier due to its proven financial track record.
• Conducting due diligence is paramount to understanding the business’s health and identifying any potential problems before finalizing the purchase.
• Seeking advice from experts like lawyers and financial advisors is important during the acquisition process.

Whether you’re considering entrepreneurship with a product or a service, be sure to compare the idea of buying a business with starting your own and do careful research before you move forward. This is important when you consider the possible risks and rewards of each choice. By closely looking into the details, you can make a well-informed and confident decision that fits your long-term business goals.

Establishing Groundwork

When you purchase a business that is already running, much of the hard work has already been done for you. You won’t have to create a company from scratch—getting supplies, finding office space, buying the first set of equipment, and so on. Plus, the basic work for selling the products or services is already complete, including figuring out the product, naming the business and product, researching the market, setting prices, and finding the right customers. You may have a much easier path to small business ownership by skipping the time it takes to build one yourself.

Established Product or Service

Operating businesses typically come with established products or services that have a proven track record, signifying that there are people who want what the business is offering. Customers already see the product as honest and trustworthy, so you can start with a certain level of confidence and reliability in the business’s products and services.

Since there are many websites where customers can leave reviews, you can find honest opinions about the product or service written by actual customers. This helps you see if the product or service is well received. Looking at customer reviews is a quick way to understand what consumers value and where you can improve.

Strong Customer Base

When you start a business, you have to develop your company before you know if customers will come. With an existing business, customers are already in place, so you’re already ahead in terms of success.

An operating small business can have a group of strong, returning customers. While you can always look to expand your customer demographic, existing customers enable you to earn profit immediately from repeat customers and customer referrals versus the typical ramp up period of startups. Understanding your customers, what they need, and what they prefer will be necessary to keep the business going. This will also give you a good starting point for targeted marketing based on your existing customer base.

Existing Supply Chain

Operating small businesses often come with existing vendors who provide supplies and necessary services – saving you the time of finding and building relationships with reliable suppliers. You’ll automatically have partnerships that you can trust in place.

Additionally, if the business requires employees, you likely already have trained and experienced employees that you can keep on board, saving you time and money in hiring and training new staff.

Financial Reliability

An established business can show a history of sales and profits, so financial institutions will see it as more trustworthy than a brand-new business. Because lenders like businesses with a proven track record, it may be easier to get funding, especially from banks that focus on small business lending, like Live Oak Bank.

Finding a Business

If you’ve decided that buying an existing small business is what you want to do, but you don’t have a specific one in mind, there are a few ways to find one that best aligns with your long-term goals. You can search websites that list small businesses for sale in your area, lean on your local network, or even contact local companies you might be interested in buying. Even if a business hasn’t advertised that they’re for sale, some owners might think about selling but haven’t advertised it, or maybe they’re just waiting for the right person to inquire at the right time. Another option is to use a business broker who helps buy and sell small businesses. Business brokers can guide you through the whole process, from connecting you with the right business, to researching and filling out the paperwork.

Conduct Due Diligence

If you’re considering buying an existing small business, it’s important to conduct careful due diligence. First, find out why the current owner wants to sell. Is it because they want to retire or pursue a different career, or is the business having hardships? Make sure to look for any potential issues.

Take a close look at the financial details—tax returns, balance sheets, the business’s budget, debts, leases, etc. You might want to hire a financial expert to confirm or assist in your research. Confirm the information you get directly from the business; do your own digging instead of believing what the current owner says. Look into how the company is organized and look for any signs that it hasn’t been managed well. Research the market thoroughly, and who your competitors are.

Have conversations with suppliers and customers about the business. Conduct your own research online to look for bad reviews or negative press about the company. See if you can spend time with the current owner before buying the business, and shadow them to see what their day-to-day is like. Also, be sure to check the condition of all the equipment included in the purchase; you don’t want to end up paying for equipment that’s broken or needs to be replaced.

Properly conducting due diligence can give you great insight into how well the business is doing and ideas on how to maintain or improve it to reach your goals.

Moving Forward

Once you’ve determined that the business is right for you, you can proceed with the purchase. You’ll need to agree on a price and create a letter of intent, which explains the terms of the deal—how the sale will happen, any conditions, the timeline, etc. It’s a good idea to hire a lawyer to review all the paperwork, including agreements not to compete, leases, and the final closing documents. Make sure that you and the previous owner have agreed on a detailed transition plan.

You’ll also need to figure out how you’re going to pay for the business, such as looking into a Small Business Administration (SBA) loan from a lender that focuses on small businesses, like Live Oak Bank. Before too long, you’ll be signing the final papers and planning how to make your new small business as profitable as possible.

Addie Roberge is a Vice President with Live Oak Bank specializing in financing for buyers acquiring privately held companies, family businesses, and owner occupied commercial real estate in Washington. If you have questions about the content of this article or any area relevant to business acquisition financing she would welcome you to contact her at (360) 510-1535 or addie.roberge@liveoak.bank.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.