How to Buy Companies

Four Parts:Buying Companies to Operate ThemBuying Companies to FlipLearning about your Target CompanyMaking the Purchase

Buying an existing company can be a smarter and easier way to go into business for yourself, because you can reap the advantages of the hard work that the other owners have already done. You get to inherit a customer base, employees, and even equipment, fixtures, and real estate. While buying a company is a process that requires attention to detail, research, and hard work, it is a process that anyone who aspires to own a business can master.

Part 1
Buying Companies to Operate Them

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    Take your own skills into account. While you might very well be looking to buy a business because you want to change your line of work, you should at least keep the skills you already have in mind when you’re looking for the right business.[1]
    • Just because you’re a waiter doesn’t mean you have to buy a restaurant, but keep in mind classes you've taken and transferable skills you’ve picked up from jobs you’ve had in the past.
    • One of the reasons to keep your own experience in mind is because you don’t want to get taken for a ride. For example, if you are a waiter who’s looking to buy a diner, you’ll understand that the owner’s claims of pulling in $100,000 per month are probably lies. There’s no teacher like experience to help you spot a good deal.
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    Shop locally. Before you hit the pavement, think about business owners you or your friends are personally connected to.[2] You can often get a better deal by dealing with friends, family, and acquaintances, and you can find out about opportunities before anyone else.[3]
    • Ask your boss or a family member if there are any portions of their companies they might be willing to spin off and let you purchase. Your experience at your workplace or observing a family member’s business gives you a better idea of how the business functions.
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    Scour the classifieds. If no one you know is willing to sell anything you’d be interested in running, the next place to look is in local classified advertisements.
    • Don’t just look in newspaper advertisements. These days, classified listings on will probably be just as numerous as those in a newspaper. In addition, you’ll want to look at trade magazines, business newspapers, and the website of your local chamber of commerce or local realtor’s association.[4]
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    Talk to a bank. Another great resource to tap are local banks. Banks will often have loans on the books for businesses which are in the process of foreclosure or are simply under-performing.[5]
    • If you can convince the bank you would be a better steward than the current owner, you might be able to work out a deal with the bank to take over the loan. When you approach the bank about striking a deal, make sure that come armed with detailed business plan that includes information on how you plan to turn the business around. Learn how to write a business plan at Write-a-Business-Plan.
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    Contact a business broker. Finally, you can contact a local business broker. Business brokers are individuals who search for and negotiate the purchase of businesses for investors to buy according to the buyer’s given specifications.[6][7]
    • You should be able to find a business broker with a simple google search. Before you agree to work with a business broker, make sure you feel comfortable with the broker, as you will typically sign a short term contract obligating you to use them for the life of the contract.
    • Make sure to ask the prospective broker about their experience, credentials and licensing, and success rate. The biggest advantages of using a business broker are their networks and experience in evaluating the potential of a business, so these questions are important.[8]
    • Evaluate the broker’s suggestions carefully, as they get paid when the buyer purchases the business. They have an incentive to persuade or pressure you into buying one of their selections.

Part 2
Buying Companies to Flip

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    Keep a time frame in mind. Buying a company to flip can be a better investment than flipping other assets, like real estate, because it makes money while you're waiting on it to sell. However, it is a short-to-medium term investment strictly for moneymaking purposes.[9]
    • If you're looking to buy a company to flip, begin your search with a clear target date for selling the business off. That way, you don't get bogged down trying to make the business perfect--you just want to improve it enough to sell it at a profit.
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    Make sure the business has identifiable problems. If you're going to be able to improve the business and make money off of its sale, be sure the business has specific, articulable problems. You can't fix what you don't understand.[10]
    • For example, maybe the business' underlying concept is good, but it's been poorly marketed. That's a specific problem you can fix. You can market the business differently, keep its other operations substantially the same, and ideally the business will become more profitable. Then, you can sell it at a profit.[11]
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    Look for businesses that are poorly managed, but still turn a profit. This is nearly an ideal situation for a flipper to come into--as long as they have better management skills than the current owners. It means the business is such a good idea that it makes money in spite of itself.[12][13]
    • These are the kinds of businesses that are perfect for short-term turnarounds. By trimming dead weight, bringing in new employees, finding better suppliers, paying closer attention to detail, or making other superficial changes, you can significantly increase profit on a short-term basis. Then you put it right back on the market and walk away richer.
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    Avoid buying into a saturated market. The more saturated the market, the more competitive it is. The more competitive it is, the narrower the margins. While you can make improvements in a business like this, it's going to take longer and it's going to be harder to sell in the future. These are long-term projects rather than short-term ones.[14]
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    Buy with your head, not your heart. Even if you're fascinated by a nascent technology or love an underlying concept, you still need to make sure you can make it work. Just because it's a good idea doesn't mean it's a good idea for you.[15]
    • For example, some great ideas (like electric or hydrogen powered cars) need an infrastructure not yet in existence to realize their potential. Not only do you need to identify the problem holding a business back from maximum profits, you need to make sure you can solve the problem as well.

Part 3
Learning about your Target Company

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    Get your team together. When you find a business you think you’d like to buy, you should find an attorney and an accountant to help you research the business.[16]
    • You’ll want to find a business lawyer and an accountant who are experienced, relatable, responsive, and familiar with the kind of business you are buying.[17]
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    Check with the Better Business Bureau. Before you get too far into the buying process, you should make an inquiry about the business you are buying with the Better Business Bureau. Many businesses rely heavily on reputation and word of mouth to be successful. If the business you’re looking at has a bad reputation, you might want to reconsider.
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    Have a detailed conversation with the owner. There are some questions you need answered that the present owner of the business can answer better than anyone else.[18][19] You should ask:
    • Why the business is for sale and what the outlook for the future is. Pay special attention to income projections, because you don't want to pay more for the business than it can pay you.
    • How the business has changed over its lifespan. This can give you an idea of changes to come.
    • How the business markets to customers and retains them.
    • Which employees are the most important and why. How long have the other employees been with the company?
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    Talk to suppliers, customers, and staff. This is going to give you more nuanced information about the business’ reputation. When a business doesn’t have loyal customers, a happy staff, and satisfied suppliers, it can indicate a problem too big to fix.[20]
    • So much of this comes back to reputation. Reputation is one thing that can’t be bought. It can only be earned, and if a business has alienated local suppliers and customers, it can be impossible to change.
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    Review income projections and financial records. You’ll need to have your attorney and your accountant do a thorough review of financial records. A lot of the necessary information will be available publicly, but you should ask the owner first, as a reluctance to share key information can give you an idea of concealed problems. You should:[21]
    • Search for liens against any of the business’ property. This is a matter of public record.
    • Review lawsuits the business has been involved in and any judgments against it. If you’re purchasing a corporation, you’ll likely be inheriting the judgments against it. These are also a matter of public record.
    • Examine articles of incorporation for any provisions that would conflict with your business plan.
    • Look at accounts receivable, profit and loss statements, and balance sheets. You should be able to get this information from the owner.
    • Review all information relating to salary, wages, and employee benefit plans.

Part 4
Making the Purchase

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    Hire an appraiser. If you can afford it, it’s a great idea to hire a business appraiser to certify a value of the business. They can cost anywhere from $3,000-$10,000, depending on the detail of the appraisal. You can search for a business appraiser in your area at the Institute of Business Appraisers directory, located at
    • If you can’t afford that, ask to see the business’ tax return. Add the business’ profits, owner’s salary and benefits, interest, amortization, and depreciation. Take the average of the sum for the past three years. If the result is less than $100,000, multiply it by two. If it is more than $100,000 but less than $300,000, multiply it by three. If it is less than $500,000 but more than $300,000, multiply it by 3.5. Finally, if it is greater than $500,000, multiply it by four. The result is the approximate value of the business.[22]
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    Negotiate for assets. You’ll probably want to buy more than a name and a piece of real estate. If you do, you’ll have to buy at least a portion of the business’ assets. Negotiate for the following:[23]
    • Inventory. Make sure that everything the owner claims is in the inventory is actually there. Then verify that the owner’s valuation of the inventory is accurate.
    • Equipment. Negotiate for any machinery or equipment that you think is integral to the business. Factor depreciation into your offering price.
    • Furniture and other fixtures. Finally, if you want to keep any of the furniture or fixtures, negotiate a price for that as well. Again, be sure to factor in depreciation—it isn’t new furniture.
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    Agree on a purchase price. Unless the business has the rights to valuable intellectual property or real estate, the purchase price should be fairly close to the valuation you calculated before. Try to get a discount based on any new equipment or furnishings you may have to purchase.[24]
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    Obtain funding. Unless you have a wallet bursting with cash, you’ll probably have to find a way to fund your business venture. While this is by no means an exhaustive list, consider the following methods:[25]
    • Seller financing. Most sellers aren’t going to be willing to do 100% financing, so you’ll still need a down payment.
    • Peer to peer networks. Peer to peer networks are private investors online who are looking for projects that will give them a high return on investment. The borrower sells each individual investor on his vision for the business. The advantage of these are the convenience of having a list of willing investors in one place.
    • Conventional business loans. Most banks are more willing to lend for the purchase of an existing business than a brand new start-up. You’ll have to go through the rigmarole of developing a business plan (although it won’t be as involved, since you have most of the numbers provided to you), undergoing a credit check, and the interview at the bank. On the plus side, banks often lend at more favorable terms.
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    Write a sales agreement. Finally, get your lawyer to write up a sales agreement that covers everything you’ve negotiated, including price, what’s included in the sale, and the terms of payment.[26]

Sources and Citations

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Categories: Buying & Forming a Business