The First Steps to Buying a Cash-Flowing Business

Buying a business can be among the most rewarding financial and personal decisions ever. However, taking those first steps can feel overwhelming. Here’s a roadmap to guide you through the process and set you up for success.

Assess Your Readiness

Before diving into the world of business ownership, take a step back to evaluate your personal and financial goals. Ask yourself:

• What skills and experience can I bring to a business?
• Am I looking for an industry I’m passionate about or one that promises high returns?
• How much time am I willing to dedicate to running the business?

A crucial insight that many overlook is understanding your risk tolerance. Are you prepared for unexpected challenges, such as an economic downturn or an underperforming asset? According to a 2022 BizBuySell survey, 35% of buyers cite unforeseen market conditions as their biggest regret. Ensuring that your goals align with your ability to manage risk is foundational.

Understand Your Financial Capacity

Buying a business requires a significant financial commitment. Start by determining your budget and exploring financing options:

• SBA Loans: These government-backed loans often have favorable terms for small business buyers. However, fewer than 50% of SBA applicants are approved, highlighting the need for a strong credit profile.
• Seller Financing: Nearly 60% of small business sales include some form of seller financing, which reduces upfront costs and reflects the seller’s confidence in the business.
• Partnerships: Teaming up with an investor can increase purchasing power, but the partnership agreement should clearly define roles and expectations to prevent conflict.

Another factor to consider is working capital. Many buyers focus on the acquisition price and fail to account for operational expenses, which can lead to liquidity issues after the purchase. Aim to have six months of operational funds set aside.

Build a Deal Team

Successful buyers rarely go it alone. Surround yourself with a team of experts to guide you so that you have more eyes on the deal to keep you from making critical mistakes:

• Business Broker: Helps you find and evaluate opportunities, often uncovering off-market deals.
• Accountant: Assesses the financial health of potential acquisitions and ensures you understand cash flow trends.
• Attorney: Protects your interests by thoroughly reviewing contracts and agreements.

Real-world example: A buyer looking to purchase a small manufacturing firm underestimated environmental compliance costs. Having an attorney familiar with the industry flagged these issues early, saving them from a costly mistake.

Avoid Common Pitfalls

One often overlooked pitfall is failing to assess the seller’s motivations. Sellers exiting due to retirement may have a stable business while selling due to declining profitability requires deeper due diligence. According to SCORE, 20% of buyers regret their purchase due to undisclosed liabilities. Asking pointed questions and observing seller behavior during negotiations can offer valuable clues.