Buying an Existing Business
Buying an established business offers a fundamentally different risk profile from starting one from scratch: there is a proven track record, existing customers, trained employees, and established cash flow. The buyer pays for these advantages — and must verify that they are real before signing.
Why Buy Instead of Build?
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The primary advantage of acquisition over startup: time. A business generating $400,000 in annual owner earnings exists today. Building from scratch to reach the same level could take five to ten years and carry high failure risk throughout. Acquisition buyers also have access to SBA financing that pre-revenue startups cannot obtain, and they can underwrite the purchase against proven historical cash flows.
The primary disadvantage: price. You are paying for what has already been built. And if the purchase involves significant goodwill — value tied to the seller's relationships, reputation, or knowledge — that goodwill may not transfer cleanly.
How Businesses Are Found and Priced
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Most small business sales ($250,000–$5 million) are intermediated by business brokers who represent sellers and receive a commission of 10–12% of the sale price. Mid-market deals ($5 million+) are handled by M&A advisors and investment banks. Online platforms (BizBuySell, Acquire.com) list thousands of businesses for direct sale.
Small businesses are typically priced at 2–4× Seller's Discretionary Earnings (SDE). The buyer normally finances with:
- 10–20% equity (personal capital)
- 50–60% SBA loan (government-backed bank loan, covered in the next tile)
- 20–30% seller financing — the seller takes a promissory note from the buyer, payable over 3–7 years
Seller financing is a meaningful signal: a seller willing to take back 20–30% of the purchase price as a note demonstrates confidence that the business will continue performing after the transition. Sellers who refuse any seller financing should prompt scepticism about why.
Due Diligence
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Due diligence is the verification process that confirms everything the seller has represented. Most deals that collapse do so during due diligence — and that is a feature, not a bug. Key areas:
Financial verification: Three years of tax returns matched against the P&L statements. Discrepancies indicate unreported cash income, inflated earnings, or accounting inconsistencies. Filed tax returns are harder to falsify than internally prepared financials.
Customer concentration: Who are the top five customers? What percentage of revenue does each represent? Do any have long-term contracts, or could they leave after the seller departs?
Key-person risk: Is the seller critical to customer relationships, supplier negotiations, or daily operations? What is the transition plan?
Lease and supplier terms: Is the lease transferable at current terms? Are supplier relationships assignable? Material changes in either can alter the economics significantly post-acquisition.
Pending liabilities: Unpaid taxes, pending litigation, undisclosed liens, environmental liabilities. A purchase agreement's representations and warranties section allocates these risks, but prevention through diligence is better than post-closing litigation.