How To Buy A Small Business: The Full Checklist

If you’re not a veteran acquisition entrepreneur, then you probably do not have a systemized method to close great business purchase deals consistently.

In this article, we’ll give you a checklist for buying a small business that’s tested and proven to make your purchase move smoothly to a successful close.

Buying a Small Business – Initial Insights

Buying a small business is a significant step on the path to becoming a business owner, and it’s a process that comes with both challenges and rewards. According to the Harvard Business Review Press, acquiring an existing business can be a smart way to enter entrepreneurship without the uncertainty of starting from scratch. With many baby boomers now selling their businesses, there’s a growing market of established companies available for purchase—offering unique opportunities for aspiring owners.

One of the key benefits of buying an existing business is the ability to step into a company with an established customer base, proven operations, and immediate cash flow. Unlike launching a start up, you’re not building everything from the ground up; instead, you’re leveraging the hard work and reputation already built by the current owner. This can make the process of becoming a business owner more manageable and less risky.

Another advantage is the potential to negotiate a fair price based on the business’s track record and tangible assets. By carefully reviewing the business, understanding its market position, and evaluating its financial health, you can ensure you’re making a sound investment. Throughout this article, we’ll guide you through the process of buying a business, from identifying the right opportunity to negotiating the best deal, so you can maximize the benefits and minimize the risks of your purchase.

Checklist for Buying an Existing Small Business

Before you get started on purchasing an existing small business, it’s smart to get a few things in order first. This way, you avoid your offer falling through the cracks and losing a great opportunity.

Many sellers pre-qualify their potential buyers before deciding on who to move forward with on the deal. As a buyer, you are responsible for conducting due diligence, negotiating terms, and making key decisions throughout the acquisition process. Ensure you have the experience, the right skill set, and/or knowledge to own the business you have your eyes on. Having a strong skill set is crucial for successfully operating the business and managing the transition.

Besides choosing a business that fits your experience, knowledge, and passions best, you’ll need funding, legal and accounting help, and preparation for a long purchase—about 8 months.

So, let’s dive into your concise checklist for buying an existing business:

1. Pick the Right Business to Buy

You can start your search with your interests and expertise. If you’ve worked as a service technician in a plumbing company in the past and loved it, you can make the simple decision to buy a profitable plumbing business. For many aspiring entrepreneurs, buying an existing business is a rewarding career path that offers an alternative to the traditional corporate ladder or founding your own start-up. Acquisition entrepreneurship can provide professional independence and financial success.

You can find a business for sale on

• BizBuySell
• BusinessForSale.com
• Classified Ads
• Craigslist, or
• Ask your broker to assist you

When choosing a business, consider whether you want to buy an established company or start your own start up. Buying an existing business can offer immediate cash flow and proven operations, while starting your own start-up allows you to build something from the ground up with your unique vision.

However, when it’s time to narrow down your choices, you’ll want to ask more in-depth questions. For instance, why is the business on sale? Is it because the owner wants to retire, or a court case has bankrupted the company?

Understand why the business is on sale to avoid buying a problem. Learn about the business history, operations, challenges, and if it has the potential to succeed. Talk to the employees, surrounding businesses, and customers to gather as much insight as possible..

Don’t underestimate the value of a deep conversation with the owner. You can learn vital details you won’t see on paper.

2. Figure out How Much the Business is Worth

You can draw up your own estimate of the business’s value. Usually, businesses are valued based on multiples of their EBITDA. This multiple varies according to the size of the business. The existing structure of the business—including its organizational, operational, and financial setup—can significantly impact its valuation, as a well-established structure often increases perceived value.

• 2-3x for businesses priced less than $3m
• 3-5x for businesses priced between $3m – $20m
• 5-10x for large businesses priced over $20m

However, the best person to value a business is an appraiser. They have a detailed technique for coming up with more accurate numbers.

3. Do your Due Diligence

This is the most detailed item on your checklist. It takes about 3 months to complete due diligence. For the best results (and minimal errors), you need a professional accountant and business lawyer by your side for this one. If you’re using our program and chatting with our team, you’ll have access to our vendors for this process too.

Due diligence involves getting intimate with the business on paper. The seller will give you access to vital documents, files, contracts, and statements belonging to the business. Before reviewing sensitive information, signing a confidentiality or nondisclosure agreement is essential to protect both parties. This way, you can gather enough information about the business to make an informed decision.

Usually, the seller will require you to sign a non-disclosure agreement to protect the confidentiality of the information you’ll unravel in this process.

Just in case you decide not to move forward with your intent to buy because of something you unraveled, they won’t want you discouraging others with that information.

During due diligence, lenders or sellers may request your personal financial information and may require personal guarantees to secure funding. When reviewing documents, make sure to carefully examine each contract to ensure all terms are clear and favorable.

Important documents to go through during your business purchase due diligence stage are:

Financial Documents

Such as balance sheets, cash flow statements, debt disclosures, tax returns, sales records, accounts payable, and advertising costs.

With your CPA by your side, analyze these documents. Find out if the business is making money and/or can make money going forward. A thorough understanding of the business's finance is crucial for making informed decisions during the acquisition process. Banks will review these financial documents carefully when considering a loan application for the acquisition, and each bank may have different requirements for financial documentation, credit checks, and collateral.

Contracts and Agreements

Review all agreements with suppliers or customers and ensure everything is okay. Pay special attention to the payment terms and how payments are structured in these contracts, as flexible arrangements or staged payments can significantly impact the deal. You may find a red flag here, so pay close attention. Additionally, consider how various financial tools, such as earn-outs or seller financing, can be incorporated into agreements to create more flexible and tailored deal structures.

Leases

Find out if the landlord is fine with transferring the lease of the business location (or equipment) over to you. If not, you’ll have to revisit the price of the business.

Licenses and Permits

Find out if the business, especially those in regulated industries like healthcare and food, have the required licenses and permits to operate.

Letter of Intent (LOI)

The seller should issue you an LOI detailing the agreed price, assets and liabilities included in the sale, and the terms and conditions of the transactions. This certifies that the seller wants to complete the deal.

Other Documents

Intellectual property rights, inventory, certificate of good standing, compliance with environmental regulations, compliance with zoning laws, and brand assets.

Review these documents—ideally, with a lawyer—and ensure you’re satisfied with the information you discover before proceeding.

4. Price Negotiation

This step can make or break the deal. Obviously, people are unique and value the business differently. The goal is to agree on a price.

If both parties involved in the deal use an appraiser or business valuation firm, this step can move smoother. Although their services cost between $3,000 to $5,000, nailing the right price for the purchase can save you way more than that.

Also, during this stage, you’ll typically negotiate how long the seller will stay on board after the sale. Most sellers are willing to remain involved for a transition period or provide advisory support to help ensure a smooth handover. You may need the seller to stick around to transfer everything and assist with the transition before totally letting go.

5. Secure Funds for the Purchase

It’s easier to secure funding to buy a business than to start a business. So you’re on the right track with several options for capital, such as

• Your own funds
• Funds from a partnership
• Seller financing — where the seller lends some part of the money in exchange for a periodic payment
• Equity financing — where you sell some company stocks to the employees to get capital 
• Debt financing — loans such as term loans, SBA loans, asset-based loan
• Leasing the business — as opposed to making a full purchase

When deciding to invest in a business, it's important to understand the potential risks and rewards involved. Investors are often more willing to provide capital for established businesses with proven track records, as these reduce perceived risk. The overall structure of the financing—combining loans, equity, and seller financing—can be tailored to fit the needs of both buyer and seller.

You and the seller will have to agree on a method (or combination of methods) before moving forward with the sale.

6. Close the Transaction

The last item on your checklist for purchasing a business is the close. You still require certain documents to certify that you’re now a full owner of the business after every other step is complete.

Get a bill of sale (an official document proving a completed transaction and change of ownership) as well as

• Adjusted purchase price
• Lease
• Vehicles (if available)
• Intellectual property (patents, trademarks, and copyrights)
• Non-compete agreement (so the previous owner doesn’t start a new business and compete against yours), etc.

Post-Purchase Planning

Once the purchase is complete, your journey as a business owner is just beginning. A well-thought-out post-purchase plan is essential to ensure a smooth transition and set your business up for long-term success. Start by thoroughly reviewing the company’s financial statements to get a clear picture of its current financial health. This includes analyzing the balance sheet, cash flow, and any outstanding debts.

Next, assess the company’s tangible assets—such as equipment, inventory, and property—to determine their condition and value. It’s also important to evaluate startup costs for any improvements or changes you plan to make, and to create detailed financial projections that account for future growth and potential challenges.

Consider your options for debt financing if you need additional capital to support operations or expansion. Attending industry conferences and staying informed about market trends can help you identify new opportunities and stay ahead of the competition. By taking a proactive approach to post-purchase planning, you’ll be better equipped to make informed decisions, manage expenses, and drive your business toward lasting success.

Managing Risks

Every business acquisition comes with its own set of risks, and managing these effectively is crucial for long-term success. As an investor and new business owner, it’s important to conduct a thorough risk assessment before and after the purchase. Start by evaluating your financial resources and credit history to ensure you have the capacity to handle any unexpected challenges.

Review all existing contracts and agreements to identify any potential liabilities or obligations that could impact the business. Consider the risks associated with debt financing, such as interest rates and repayment terms, and determine how these might affect your company’s cash flow and stability. Negotiating a comprehensive term sheet that addresses key issues—like equity investment, payment schedules, and exit strategies—can provide an added layer of protection.

Consulting with industry experts or a reputable consulting firm can also help you evaluate risks specific to your market or industry. By taking these steps, you’ll be able to develop strategies to mitigate risk, protect your investment, and position your business for ongoing success.

Building a Strong Team

A successful business is built on the strength of its people. As a business owner, one of your top priorities should be assembling a talented and motivated team that shares your vision for the company. According to the Harvard Business Review Press, investing in human capital is one of the most effective ways to drive business growth and achieve long-term success.

Start by hiring experienced professionals for key roles and providing ongoing training and development opportunities. Foster a positive company culture that encourages collaboration, innovation, and accountability. Offering competitive salaries, benefits, and performance incentives can help you attract and retain top talent.

Regularly review team performance and provide constructive feedback to help employees grow and contribute to the company’s success. By building a strong team, you’ll not only improve sales and customer satisfaction but also create a resilient business that can adapt and thrive in a competitive market.

Marketing & Sales

To ensure your business continues to grow after the acquisition, it’s essential to implement effective marketing and sales strategies. As a business owner, focus on building strong brand recognition and communicating your unique value proposition to your target audience. Develop a comprehensive marketing plan that leverages both traditional and digital channels, including social media, advertising, and public relations.

Industry experts agree that a well-executed marketing strategy can set your business apart from competitors and drive new sales. For example, using search engine optimization (SEO) can increase your website’s visibility and attract more potential customers, while engaging with your audience on social media can help build a loyal community around your brand.

Monitor your marketing and sales efforts regularly, and be prepared to adjust your strategies based on market trends and customer feedback. By prioritizing marketing and sales, you’ll drive business growth, increase revenue, and set your company on the path to long-term success.

Should You Buy a Business?

Starting a business is a wise financial decision. You get the freedom to pursue something you’re passionate about with income you control. It’s the American dream.

However, building a business—no matter the size—is laborious and risky. 50% of small businesses fail, and only 9% make it past 10 years. This can deter an aspiring entrepreneur.

There’s a better direction to take: Buy an existing business. Here’s why:

Pros of Buying a Business

• Less Risky than Starting a New Business – You’ll be taking ownership of a business that’s been proven to work for decades after someone else has borne the risks and headaches of taking it from scratch to a stable condition. Then it becomes a source of income (even passive income, if you want) without the grit and labor.
• Easier to Run than a Startup – You’ll have the office space, customer base, equipment, employees, supplier base, etc., needed to keep a business thriving. All without the usual initial struggle. They may not always be in great condition, but it’s a better starting position than position zero.
• Easier to Secure Funding – It’s easier to get funding for a business purchase than it is for starting a business. That’s because financiers favor a venture that has stronger evidence of working. And it is easier to prove that with the financial documents of an existing business than with the plan of a business you want to start from scratch.
• Possibility of Getting More Value Than You Pay for – Buying a business can come with a better value than paying for intellectual property. If the business has patented products, copyrighted taglines, or trademarked logos, you can often take ownership of these during the sale. This can represent a terrific foundation to expand the business further and grow its value.
• Operating an Already Existing Business is Cheaper – You can start with a lower operating cost than a business just off the ground. Since most essentials are already in place for the business, you spend less to run the business than a startup. This leaves more funds for rapid expansion.

Cons of Buying a Business

On the other hand, it is not always a rosy road to walk when buying a business. Some disadvantages are:

• Capital Barrier – It's hard to fund an acquisition deal with the steep upfront cost of buying a business. While saving money on capital and initial operating costs, you pay more for the other business elements that take years to build. These other elements include customer base, business assets, intellectual property (copyrights, trademarks, and patents), business plan, brand, etc.
• Invisible Underlying Issues – You can never know the invisible details about the business. Sometimes you may find something unpleasant after the purchase has been completed. For example, poor online reputation or outstanding legal issues. This is why the due diligence process exists: minimizing buyer's remorse risk.
• The Steep Learning Curve in Unfamiliar Territory – The learning curve for some businesses is tricky to navigate. It may be a business in a familiar field, but the details of business operations can elude you. Since you’re just coming on board, you won’t be fully familiar with the ropes. It’s worse if you have no experience or knowledge in the field.

Key Takeaways

Buying a small business instead of starting one from scratch is a smart financial idea. Operation costs are lower, securing funding for the purchase is easier, and you’ll be buying a proven source of income.

To get started, here’s your checklist for buying a business:

• Pick the right business to buy
• Figure out how much the business is worth
• Do your due diligence
• Negotiate a price
• Secure funding for the purchase
• Close the transaction

Work with professionals during these steps to avoid expensive errors. You need an accountant to audit the business’s financials and a lawyer when reviewing legal documents.

If you'd like to buy an existing business yourself, Acquira's training will teach you how to find and appraise a business. We'll walk you through negotiating the final closing price and drawing up the proper documents. But space in each cohort is often limited, so apply to the Accelerator Program now to hold your spot .