Buying an Existing Business:
Should You Do It
What to Consider & How to Proceed

When you are ready to become a business owner, one of the first big decisions you will face is whether to start a new business from scratch or buy an existing business.

Buying an established small business can offer many advantages, like existing cash flow and customers. However, it also comes with potential risks and challenges that you need to navigate carefully.

As business attorneys, we have helped many clients successfully purchase businesses in New Jersey. In this article, we will walk you through the key considerations when buying an existing business and the steps to take to protect yourself legally and financially.

Advantages of Buying an Established Business

Why buy an existing business instead of starting from zero? Here are some of the top reasons:

• Proven business model: With an established business, you know the products/services are viable, and there is a market demand. You are not testing out an unproven idea.
• Existing cash flow: The business will likely already be generating revenue that you can use to cover expenses, reinvest, and pay yourself from day one. Banks also tend to be more willing to lend to an established business with a financial track record.
• Turnkey operation: You will inherit the business’s existing assets, inventory, employees, policies, and processes. While you may want to make improvements, you are not having to build everything from the ground up.
• Established customer base and reputation: It can take years for a new business to build brand awareness and a loyal customer base. Buying an existing business gives you a head start and can make sales and marketing easier.

Disadvantages and Risks of Buying an Existing Business

Of course, buying a business is not without its downsides and potential pitfalls:

1. Inheriting problems: No business is perfect. You could be taking on underperforming employees, outdated equipment, financial liabilities, or legal issues. Thorough due diligence is critical to avoid surprises.
2. Higher upfront cost: Buying a business is almost always more expensive upfront than starting a new business, especially if the business is very successful. You will need more capital and may have to take on debt.
3. Less flexibility: Unlike a startup, an existing business already has a brand identity, company culture, and way of doing things. Making significant changes can be difficult and met with resistance from employees and customers.
4. Difficult business valuation: Putting a fair price on all aspects of a business, from “goodwill” to inventory, is complex. The seller will likely value the business higher than you. If the asking price is inflated, getting financing and seeing a strong return on investment is harder.
5. Seller misrepresentation: Sadly, some sellers are not fully transparent about their business’s problems, liabilities, and true financial state. If you do not uncover these issues before closing the deal, you will be stuck with them.

Key Factors to Consider When Buying a Business

Not all businesses for sale are a good purchase. When evaluating potential businesses, ask yourself:

• Is the business in an industry I understand and have experience in?
• Does the business model fit my skills, strengths, and lifestyle?
• Are the business’s financials healthy and well-documented?
• Does the business have a unique competitive advantage and growth potential?
• Will key staff, customers, and vendors likely stay on after the ownership transition?
• What assets (tangible and intangible) are included in the sale price?
• Why is the current owner really selling the business?

Working with a Business Attorney

As you start searching for and analyzing prospective businesses, it is wise to hire an experienced business attorney.

A good business lawyer can help you:

• Conduct due diligence on the business
• Negotiate favorable purchase terms
• Structure the transaction to minimize liability
• Draft and review the purchase agreement
• Advise on necessary licenses, permits, and contracts
• Plan for a smooth ownership transition

In New Jersey, working with an attorney is especially important given our state’s stringent laws around bulk sales, environmental liability, and employee rights when a business is sold. Failure to properly notify creditors, obtain a tax clearance certificate, or comply with the NJ WARN Act if laying off workers can lead to serious penalties. A business attorney can help you avoid these pitfalls.

Valuing and Making an Offer on a Business

Another area where professional guidance is invaluable is in valuing the business and structuring the purchase. A business valuation expert, like a CPA or appraiser, will look at the business’s balance sheet, tax returns, cash flow statements, industry trends and comparable sales to determine an objective value.

They will also help put a fair price on intangible assets like intellectual property, customer lists, and the business’s reputation.

Some key things to look closely at:

• Audited financial statements: Do not rely on the seller’s claims about revenue and profits. Insist on seeing audited financials prepared by a reputable third party.
• Asset values: Carefully evaluate the condition and worth of the inventory, equipment, and real estate included in the purchase price. Consider how soon assets may need to be repaired or replaced.
• Seller financing: Many sellers are willing to finance part of the purchase themselves and get paid the balance over time. This can make coming up with the full purchase price easier. It also shows the owner is confident in the business’s future success.

After gathering all this information, you will be better equipped to make a fair offer and negotiate terms that work for both parties. In addition to the sale price, you will need to agree on things like the payment structure, assets included, training from the seller, non-compete agreements, and recourse if undisclosed issues arise after the sale.

Due Diligence Before Finalizing the Purchase

Before you sign a purchase agreement, you (and your advisors) need to thoroughly vet all aspects of the business in a process called “due diligence.”

This includes:

• Verifying the accuracy of financial statements
• Checking for undisclosed debts or pending lawsuits
• Calling key customers and evaluating the strength of their relationship with the business
• Assessing the condition of physical assets and property
• Reviewing contracts with customers, vendors, and employees
• Ensuring the business has all necessary licenses, permits, zoning approvals, and is not violating any regulations
• Interviewing the owner about challenges and risks facing the business

If due diligence reveals any red flags, you may need to renegotiate the purchase price, insist certain liabilities are resolved before closing, or walk away altogether. An experienced business lawyer and financial advisor can help you evaluate the risks and make an informed decision.

Executing the Business Purchase

Once you have agreed on terms and the due diligence checks out, it is time to make it official with a purchase agreement. This legally binding contract should spell out exactly what is being purchased, the price and payment terms, contingencies that must be met before closing, and the seller’s obligations and liability after the sale. Each party should have the agreement reviewed by their own attorney.

Other key steps to execute the purchase:

• Secure necessary financing from a bank, the seller, or other investors
• Transfer titles/deeds for assets and property
• Assign leases on the business’s physical space and equipment
• Apply for permits and licenses under the new ownership
• Set up new business bank accounts

Transitioning Ownership of the Business

The deal is not done when the ink dries on the purchase agreement. To set your new venture up for success, you need to plan for a smooth transition of ownership with minimal disruption to employees, customers, and operations.

Communication is key. Meet with the staff to introduce yourself, share your vision, and reassure them you value their role. Reaching out to key customers and suppliers to build trust is also critical. The seller’s involvement in these conversations can help put minds at ease about the transition.

Beyond communication, make sure you are getting any necessary training from the seller on how to run the business and getting them to make key introductions. You will also want to prioritize any immediate changes or improvements that are critical to the business’s future success and start implementing them.

Is Buying an Existing Business Right for You?

Buying an established business can be a great way to fulfill your entrepreneurial dreams with less risk and faster ROI than starting from zero. But it is not a decision (or process) to take lightly. Evaluate the return on investment if everything goes well but also your risk tolerance if things get bumpy.

Talk to other entrepreneurs who have bought businesses and get their honest advice. Lean on trusted advisors like our business attorneys to help you vet opportunities and execute the purchase prudently. Ultimately, you need to trust your own judgment that the business is viable and a good personal fit.

If you are considering purchasing a business in New Jersey, our team at The Simone Law Firm would be happy to guide you through the process. We have helped many new business owners successfully navigate the financial and legal aspects of a business acquisition. Contact our office today to discuss your goals and how we can help you achieve them.