Buying a business, whether a franchise or not, is a tried-and-true method for business success.
The ability to utilize:
- Pre-existing resources
- Knowledge, and
- Brand equity
Not to mention, saving big time on startup costs, gives buying a business a number of unique advantages over starting one yourself.
Below, we’ll cover everything you need to know to buy a business, including:
- Franchising vs. starting a business yourself
- How to buy a business (step-by-step)
- How to get a loan
- And even how to buy a business with no money down in some cases
Let’s get started.
Buying a Business: Where to Start
Let’s get our bearings first. Where should you start if you’re considering whether you want to buy an existing business?
The first step is to understand what that entails.
If you’ve owned and run a business yourself before, you’re a step ahead. However, even if you have, if you’re reading this you likely haven’t purchased a business before.
That means there are some things about the process you’ll be unfamiliar with no matter your experience level.
So, the first step is to understand what the process looks like:
- What can you expect
- How much time will it take
- How much capital do you need
- Other resources
- Etc.
Throughout the guide below, we’ll cover every one of those points. The goal: to give you a complete view of what buying an existing business (franchise or not) is like.
Not only to help you decide if it’s for you but also know what to expect.
Before we get into the how, though, we need to cover the differences between franchising and buying an existing business.
Franchising vs. Buying an Existing Business: Pros and Cons
First, let’s talk about franchising.
Franchising
Franchising involves purchasing the rights to a business’s resources and use of its branding to open one of its establishments.
Most commonly, that includes:
- Restaurants
- Fitness centers
- Shipping centers
- Hotels
- And other recurring service-oriented retail businesses
Pro: Resources
By purchasing a franchise, you get access to a suite of resources that not only reduces your initial startup costs compared to starting your own business (over the course of the first few years, at least), but gives it instant credibility which typically takes several years to build at least.
Con: Higher startup costs in most cases
However, it’s important to note that a franchise has a higher startup cost compared to starting your own business in many cases.
Compared to purchasing a pre-existing business that isn’t a franchise, franchising can be either cheaper or more expensive depending on the price of the business you’re purchasing.
Purchasing an existing business
Purchasing an existing business involves locating and purchasing a business that’s currently operating in its entirety.
Pro: Greater control
Purchasing an existing business gives you the highest degree of control, as a franchise owner will typically have a slew of rules that you must follow in order to own a location under their brand.
Pro: Ability to resell the business in the future
Another pro of purchasing an existing business is that you can resell it later on down the line.
This requires you to have done a good job building the business up after purchasing it. However, if the numbers are in place, there’s nothing keeping you from selling the business yourself if you decide to do that.
Con: Less support and guidance
Purchasing a franchise can be nice because you get lots of guidance, resources, and support from the franchise owner.
Lots of questions and things you’d typically have to figure out yourself are already in place for you.
When you purchase an existing business, however, everything is in your hands.
You may be able to benefit from existing systems, branding, and other resources, but chances are you’ll usually want to change things up once you purchase the business as you should be buying it because you see room for improvement.
This means more work and less overall guidance when purchasing an existing business.
How to Buy a Business
Now, let’s talk about how to go about buying a business, whether it’s a franchise or not.
1. Find businesses
The first step is to find businesses that you’re interested in buying. This is one of several steps where there isn’t a major difference in how you go about things whether franchise or not.
In the case of a franchise, you can find lists online of existing franchises. From there, locate their franchise webpages and resources and consider which makes the most sense to you (we’ll talk more about evaluating businesses in the next step).
For purchasing an existing business, you can do a few things:
Use a website to locate businesses for sale
Websites like Bizbuysell.com make it easy to find both existing businesses and franchises, greatly simplifying the process of locating potential candidates:
Use a business broker
Another option you can use is to find and contact a business broker.
A business broker can not only help you locate businesses who are willing to sell but also evaluate those businesses, making them a useful partner in the process.
Call local businesses directly
A lesser-used but additional method you can use is to contact local businesses directly.
This allows you to build a relationship early on and get to know the owners, potentially making for a smoother purchase process.
However, this is much more time intensive than the above two methods so you may want to use it sparingly depending on the time you have.
2. Run a preliminary evaluation of the businesses you’re interested in (Part 1)
Now that you’ve located a few attractive businesses that you believe might be good candidates, it’s time to actually find out if they’re a smart buy.
This topic has entire books and courses written about it, so we’ll only be covering the tip of the iceberg here. It’s vital that before you purchase a business you study how to properly evaluate if a business is a good candidate for purchasing or not.
Some important high-level items you’ll want to evaluate include:
- General business growth
- Cash flow
- Cash on hand
- Profit / Spread
- Debt
- Churn / repeat customers (depending on the business type)
- Market share
- Market growth and potential
- The team themselves
Keep in mind that this is just a surface-level, “what you can find online” evaluation.
If the business passes that, you’ll need to do a more professional evaluation afterward to ensure you’re making a smart decision (you can never be too thorough when considering purchasing a business).
3. Officially evaluate the business’s finances (Part 2)
If the business passes the first stage, it’s time to get some professional help.
Next, you’ll want to hire a business broker to run a financial-based valuation.
There are a few ways to run a valuation assessment for a business:
Market valuation
A market valuation evaluates other similar businesses in the same industry that have been sold to get an estimate of how much that business would sell for using the comparison.
Income-based valuation
An income-based valuation takes the net income of the business and projects future income over a certain period of time (usually 5-10 years) to calculate the current value based on that projection.
Asset-based valuation
This method takes the:
- Fair market value of the business
- And subtracts liabilities
The resulting number is the asset-based value.
Keep in mind that rarely is just one of these methods used when evaluating a business. You’ll likely want to consider more than one method depending on the business and other factors to make reasonably sure you’re making the right move.
4. Contact the business and send a letter of intent
A letter of intent is a written declaration stating your interest in purchasing the business.
This not only allows you to move the process along and often receive more sensitive information that the business otherwise wouldn’t be comfortable giving out until they know you’re serious.
It also gives you “right of refusal”, which means you’re legally first in line to purchase the business in case another person or company comes along and wants to make an offer before you.
5. Obtain documents and verify information
It’s at this point that you need to verify all the information you’ve used throughout your evaluation process.
Don’t assume that the information you’ve gathered thus far is 100% accurate.
The only way to know is to receive the actual documents proving said information. These can include:
- Bank records
- Internal reports
- Legal documents
- Federal and state documents (business licenses, permits, etc.)
- Physical inventory
- Existing agreements, contracts, and partnerships
Anything you can get your hands on here is essential. Double and triple check and verify everything.
6. Obtain financing
Now that you’ve narrowed down your list, fully evaluated the business, sent your letter of intent, and verified that everything looks good, it’s time to purchase.
To do that, you’ll need to secure funding. The most common financing methods include:
Small business term loan
A term loan is a single lump sum of capital that can be used toward any business purpose, including purchasing another business.
At Excel Capital, we’ve helped thousands of business owners obtain the capital they need to reach their business goals with term loans and other financial products
If a term loan sounds like the route for you, see what you can be approved for today by clicking below to fill out our short one-page application:
Get the capital your business needs– fast. Apply for a term loan with Excel Capital:
Cash
Simply and to the point, cash can be used as well (who doesn’t like cash?). This is, of course, a matter of whether you have the amount of cash necessary for the purchase or not. However, it’s universally accepted.
There are a few ways you can go about this:
- Your own personal cash fund
- Or a partner
If you don’t have the cash but the know-how to make the business a success, you can partner with someone that has the cash. They may accept a smaller ownership percentage (or not, depending on the terms) and provide the capital while you run the operation.
Seller financing
Seller financing is a rarer option but one which can work in some cases.
In seller financing, the business owner who is selling you the business finances the purchase by loaning you the money and then turning around to collect payments from you over time.
7. Finalize the purchase
Now that you’ve obtained funding, it’s time to finalize the purchase.
At this point, you should have already agreed on the purchase method. But know in advance that there are typically two major options when it comes to purchasing a pre-existing business:
Asset purchase
In an asset purchase, you’re essentially purchasing all of the business’s assets while the person selling the business stays the legal owner of the entity itself.
It may sound odd, but there are great benefits to this method and it’s often.
Stock purchase
In a stock purchase, you purchase all stock from the company in addition to the assets and all other items (including contracts, which aren’t usually purchased in an asset purchase).
Make sure to take the time to understand each option better before deciding how to purchase the business so you’re aware of what you’re getting into.
How to Get a Loan to Buy a Business
Assuming you’re not able to purchase all cash, the next best option is to obtain a business loan.
Obtaining a business loan isn’t as hard as you might think, especially if you have an established business of your own (otherwise, you’ll need to try to obtain a personal loan for the purchase of the business, which will be harder).
There are a variety of business loans, which is the best fit for you mostly depends on how you obtain capital and how frequently you want and need to borrow:
To apply for a business loan, you’ll need a few basic documents:
To learn more about how to get a small business loan, including increasing your chances of approval, check out our complete guide: How to Get a Small Business Loan: Complete Guide [2024 Edition]
How to Buy a Business with No Money Down
Purchasing a business with no money down is possible, but extremely difficult.
In some cases, you can use seller financing to use the seller’s own finances to fund the purchase.
However, this is generally only done when the buyer and seller have a connection to one another as getting a stranger (the seller, no less) to finance your purchase is a big ask.
Another option is when you have heavy working knowledge of the type of business and are willing to go into a partnership as the sole operator.
If you can find a partner that is willing to invest the capital in purchasing the business, you can come to an agreement where they provide the capital to purchase, you operate full-time, and both profit.
Obtain the Capital You Need to Purchase Your Next Business from Excel Capital
Obtaining capital via traditional methods can be slow and difficult.
However, with Excel Capital, you can obtain the capital you need to purchase your next business in as little as 24-48 hours.
We’ve helped thousands of business owners obtain financing faster and more efficiently than ever before, so they can focus on moving their business forward.
Find out how much you can be approved for by completing our short one-page application:
Get the capital your business needs– fast. Apply for a term loan with Excel Capital:
