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How to protect yourself when buying an existing business

For many, owning their own business is the ultimate dream. Business owners gets to be their own bosses, guide a business to success and create an investment that will pay off year after year. However, starting a business from scratch can be daunting. You have no idea if your business will succeed, and the startup costs are expensive.

Buying an existing business can provide a good alternative for people that want to become entrepreneurs. It eliminates some of the risk and potentially provides many of the same payoffs. Before you jump into a sale, there are several factors you should consider.

Know what you want

Prior to starting your search, you must determine what you want in a business. Perhaps you have an industry in mind, or maybe you are more concerned about the location. You also want to figure out whether you are looking for a relatively small business or a larger enterprise. Also consider what kind of hours you want to keep. Some businesses will require more time and more travel, so decide if that is something that you want.

Find the right business

You can search for businesses for sale a variety of ways. There are online options like BizBuySell or even Craigslist. You could search your local newspaper's classified section. You may also want to consider reaching out to your contacts. Maybe you have a friend who owns a business, but is ready to move onto something new. Or perhaps there is a local business that you adore and would love to own. There is no harm in inquiring if the owner may want to sell. They could just be waiting for the right opportunity to present itself.

If you are not having any luck with any of these options, you could also contact a business broker. Brokers are like real estate agents, so they get paid when you purchase a business. Just be cautious that you do not get pushed into making a purchase that is not right for you.

Do your research

After you find a good candidate, conduct your due diligence on the business. If you do not already know, ask the owner why he or she is selling the business. The owner may want to retire or move on to a new venture. He or she could also be selling because the business is starting to fail. You want to be on the lookout for:

  • Outstanding business debts
  • Vague business plan
  • Bad location
  • Too much competition from other businesses
  • Recent PR issues for the business
  • Costs too high for merchandise
  • Many updates needed at the business location

You can ask the owner many of these questions, but you will also want to do some independent research. Contact an accountant to go over the business financials and make sure everything looks good. You also need to get a business valuation completed, so you know how much the enterprise is worth.

Seek funding for the purchase

Since buying an existing business is expensive, you may need additional money for the purchase. You could ask the owner about paying him or her in installments. There are also investors that may be interested in your helping you buy the business. However, keep in mind that investors take a part of your profits. You could also get a business loan from a bank. Typically, banks are more willing to take a risk on a business that is already established.

Create a purchase agreement

Once you find the right business, determine a sales price and figure out financing, you are ready to draft a purchase agreement. This agreement must be written carefully to avoid any legal issues later. You probably want to contact a business law attorney to ensure your purchase agreement protects you and your future business.

Buying an existing business can be a great way to start a career as an entrepreneur, if you figure out what you want, find the right business, do your research and draft a comprehensive purchase agreement.

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Lawrence R. Jensen & Associates
95 S. Market St.
Ste. 550
San Jose, CA 95113

Phone: 408-465-0293
Fax: 408-899-2403
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