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How to Buy a Business

Part 2: Business Valuation & How to Buy a Business


You've discovered why the business is for sale, you're clear about what's actually for sale, you've pored over the business's financial statements and you still want to buy the business. The next steps in the how to buy a business process are:

Step #4) Find out what it's actually worth.

Find out what you should actually pay for the business. When you're buying a used car, this is a simple matter of comparison shopping, but business valuation is considerably more complicated. It's common in business valuation to use several different methods of business valuation to arrive at a price. When preparing the asset list (spec sheet), for instance, the seller could have used:

  • Book Value (based on the company's balance sheet),
  • Modified Book Value (book value adjusted to reflect the current market value of the assets),
  • Replacement Value (based on what it would cost to replace the asset),
  • or Liquidation Value (based on what the asset would bring in if the business was liquidated).

He may also have incorporated some Earning Value methods into the business valuation process to arrive at his final asking price.

Before you buy a business, you want to know how the seller arrived at his estimate of the business's value, and arrive at your own estimate of how much the business is worth. The important "how to buy a business" point is that a business is not worth x amount of dollars just because the seller says so.

Remember that the real value of the business depends upon the income that the business generates. Examining the business's financial records should have given you an accurate picture of the business's gross revenues, costs, and profit. You want to buy a business based on the return on investment, not on the stated price. In other words, what you are really buying is the annual profit.

If you're having trouble figuring out what the business you want to buy is actually worth, seek advice from a professional business valuator.

Step #5) Take it for a spin.

Before you buy a business, get an inside perspective by asking the seller's permission to sit in on the business for several days. If he or she is agreeable, this can be a great way to find out how the business you want to buy truly operates. (If he or she doesn't agree to this, it's not necessarily a bad sign. He may still be thinking of you as a "looky-lou", as you haven't made an offer yet.)

Step #6) Investigate your financing alternatives.

Just as when you buy a car, you need to see if you can truly afford the business you want to buy. If you don't have the cash in your pocket, this is the time to see who's interested in financing the business you're buying and how much that financing help will cost. The usual small business financing sources are friends, family and traditional lending institutions (such as banks and credit unions).

You may find that said traditional lending institutions are friendlier than usual, as financing an established business is generally considered to be less risky than financing a start up. The Small Business Financing section of this site will help you find Canadian sources of small business loans and grants.

You may also want to consider asking the seller to finance part of your purchase of his business. One common arrangement is for the seller to carry a promissory note for part of the purchase price. (Note that if you're going to approach the seller for financing, you have to make the option attractive to him. You may need to offer a rate of interest above the going rate, for instance.)

Step #7) Make an offer.

Assuming that the process hasn't broken down at some point before this, and you do want to buy the business, it's time to make an offer and start negotiating. (See 5 Ways to Negotiate More Effectively). You make an offer and the seller makes a counter-offer. The two of you will go through a process that will hopefully see you meeting on middle ground.

Don't be surprised if you're asked to accompany your offer to buy a business with a non-refundable deposit; sellers are typically only interested in dealing with serious buyers. The usual rules apply. Always be prepared to walk away and don't get so caught up in the process that you get pulled past the price you're prepared to actually pay.

Step #8) Get a purchase/sale agreement drawn up.

Once you and the seller have reached the point of agreement on terms, the details need to be specified in a contract. Because the contract needs to itemize every aspect of the sale, it should be drawn up by a lawyer.

How to Buy a Business In one Word: Carefully

Don't be afraid to buy a business that someone else has started and grown. Buying a business can truly be the opportunity to own and operate the successful business you've been dreaming of - as long as you resist the temptation to get drawn in by a shiny paint job and do more than just kick the tires before you make an offer.

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