How to Find a Business to Buy

An overview of how to determine what business suits you, what you can afford, and how to perform due diligence.

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Amidst all the bad economic news these days, there is a silver lining: It might be the perfect time to buy a business—for the right buyer, that is. The volume of businesses sold is reportedly way down for the year, more than 70 percent according to some business brokers, which is more of a result of the tightening of the credit markets than a dearth of opportunities. In fact, organizations that track the industry like the International Business Brokers Association, which represents the nation's 1,950 business brokers, as well as online markets like BizQuest.com and USABizMart.com, which post business-for-sale opportunities, report that the listing volume is steady or up compared to past years.

In many ways, the market for businesses is running in parallel with the housing market: supply currently exceeds demand. When you add together the dearth of motivated and financially qualified buyers with an ample supply of businesses for sale, you wind up with a buyer's market; the first many brokers say they've seen in decades. That means that those buyers that can go knocking on doors with cash in hand, or at least with a solid credit score, will find they have far more power to negotiate the terms of buying the business of their dreams. At the same time, given the number of companies struggling through the tough economy, buyers have to be more careful than ever about making sure they don't get stuck buying a lemon.

So where do you get started? The first step you need to take if you want to buy a business is to find a business you want to buy. This guide will provide you with an overview of how to determine what business suits you, what you can afford, and how to perform due diligence on the business.

Searching for a Business Opportunity

1. Determine Your Commitment
When it comes to buying a business, the window shoppers seem to outnumber the serious players, says Larry Greene, managing partner of Business Team, a brokerage in Newport Beach, California. "I get calls from the same guy every few months asking me about my new listings," he says. "He's been doing that for six years." While there's nothing wrong with having some fun by shopping around, finding your dream business will require an organized search in which you can narrow your focus on those businesses that both fit your skill set and your financial requirements—both how much you can spend as well as how much income you can expect to bring home.

2. Establish What You Can Afford
Brokers say that most people go about looking for a business backwards by looking at some "magic" income numbers such as the same salary they made from their last corporate job, rather than looking first for an industry where their skills could translate. While few would begrudge the investment banker who dreams of buying a restaurant or a bed and breakfast, the truth is that he or she probably couldn't land the necessary financing to fund such a radical career switch. That's why it's important to you're your finances into account. Here's a quick checklist to help you determine what you can afford:

•       What kind of down payment can you afford to make? With an SBA loan, you will likely be required to foot at least 20 percent of the total purchase price up front.
•       Do you have the kind of good credit, typically a FICO score of more than 700, which would enable you to secure financing from a bank or other lending institution?
•       What kinds of collateral, such as equity in your home, can you bring to the table?
•       Do you have access to any other sources of income?

3. Figure Out What Skills You Have
Before you even begin searching for a potential business, you should narrow your choices by asking yourself some of the tough questions up front that will help get your search off on the right foot, says Larry Martin, head of Benbrook Business Services in Chester, New Jersey. Begin by looking at your own qualifications. Ask yourself the following questions:

•       What skills do you have that would translate best to owning a business? For instance, do you feel comfortable selling?
•       Is there a particular business sector like retail, service or manufacturing that matches up well with your skills?
•       Are there any specific qualifications like a professional license that you would need before acquiring a particular business?
•       Do you want to manage employees or would you rather run the company yourself or with your spouse/partner?

4. Consider Lifestyle Impact
Todd Gilson spent three years looking for a business before he finally bought Accent Purchasing Solutions, a printing shop located in Fort Collins, Colorado, in early 2008. In addition to looking for a business that would benefit from his 12 years working in marketing, Gilson says he and his wife (who has a job outside the business) used three main filters in narrowing down their choice: what they could afford, what the business would earn, and whether it was within 60 miles of their home. It's crucial to consider the impact that buying a certain business would have on your lifestyle, such as what type of hours you are willing to work, whether you're willing to relocate for a business opportunity, and whether your spouse would be willing to be part of the business and/or use your home as collateral in a deal. Using a network of brokers and e-mail alerts he set up on sites like BizBuySell.com, Gilson says he finally found a business that met all his criteria: the shop earns about $2.5 million in annual revenue with good cash flow and is located just a few minutes from home. "So far it's the best thing I've ever done in my life," he says. "But I still lose sleep over the debt."

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