Risk is a major reason entrepreneurs point to when they’re on the fence about starting their own businesses. However, one potential option on the table with less risk is to purchase a separate small business and make it your own. Bert Seither, The Startup Expert™, offers a few tips on buying a company from someone else:
1. Find the right business out there that’s for sale.
You might have the desire to find a list with dozens of businesses that you’d love to own some day. But this isn’t realistic. You must find a company that is right for you – and that is actually for sale or could be something you could invest in. This would likely be one in your local area, industry, and one you would absolutely love to operate yourself. Just because you enjoy shopping at a local retailer or love the services an online business provides doesn’t mean you would be the ideal individual to run it every day.
2. Do your due diligence and research on the business.
When getting into a new business or taking over the reins of one already existing, the word “research” should be at the top of your to-do list. Conduct as much research as you possibly can on a company you have your eyes on to buy. What is its history? Who is its current CEO? What is most appealing about it, and what has made it successful? What could you do to make it even better or turn it around from a low point? In some ways, this research is similar to preparing for a job interview. You should know everything you can about the entity. In addition, once your conversations start with those at the business leading up to a possible purchase, you’ll learn a lot more insight about who is behind it and what they are like. You’ll then be able to see if your style matches theirs to determine if you’d be a good fit for it.
3. Make sure it’s in your price range.
If a small business has a price tag on it already, you should determine whether this purchase price fits your budget. If a business isn’t officially on the market, but you think you could persuade its owners to eventually take it over, you should be prepared to present a very competitive offer. Buying a small business could cost you over six figures in many cases, depending on how large it is and how many assets it owns. The location of a business plays a big role as well. If a retailer owns a building, the cost of this facility would obviously factor into the price. Bert Seither, The Startup Expert™, says to make a list of all potential costs that would go into the purchase price. Add them up and come up with a ballpark figure.
4. Consider the tax implications involved.
What entity structure is the small business you’re targeting? Is it an LLC? An S corporation? A C corporation? When you buy it, you’ll be taking on a specific IRS tax structure. You should be aware of the tax implications you will face, such as being taxed at the corporate level for a C corp or as a pass-through entity like an LLC. Sales and property taxes may also be at play, so find out how much they are in a particular area.
5. Make the purchase and transfer of ownership.
Bert Seither, The Startup Expert™, says once you’ve found the right situation to get into, make the purchase and transfer ownership of the small business to yourself. There are important contracts, agreements, and rules you must follow when buying a new business. It may be worth consulting with an attorney and an accountant to ensure you cover all the bases and stay compliant. The last thing you want is to start off on the wrong foot by missing a step in the purchase process.