Buying an Existing Business: What Buyers Should Know
Buying an existing business can provide immediate access to customers, revenue, employees, equipment and operating systems—but the buyer also inherits transition risk and any obligations included in the deal.
If you are asking, “How do I buy an existing business?” the process has eight core stages: define your target, find businesses, review the financials, value the company, negotiate preliminary terms, complete due diligence, secure financing and close with a transition plan.
This guide explains how to purchase an existing business, how to compare the advantages and disadvantages, what records to examine and how to get a loan to purchase an existing business.
What Does Buying an Existing Business Mean?
Buying an existing business means acquiring some or all of an operating company’s assets or ownership interests rather than building a company from the ground up. Depending on the transaction, the buyer may acquire equipment, inventory, intellectual property, customer relationships, contracts, employees, receivables, permits, lease rights, goodwill or ownership of the existing legal entity.
The exact assets and liabilities that transfer depend heavily on whether the deal is structured as an asset purchase or an equity purchase. The U.S. Small Business Administration’s planning guidance recommends quantifying the investment, considering the buyer’s skills and reviewing the full infrastructure—including contracts, leases, cash flow and inventory.
Advantages and Disadvantages of Buying an Existing Business
| Potential Advantages | Potential Disadvantages |
|---|---|
| Existing revenue and customers | Higher upfront investment |
| Financial history to evaluate | Hidden liabilities or deferred maintenance |
| Employees, systems and vendors may already be in place | Key customers or employees may leave |
| Established brand recognition | Performance may depend heavily on the seller |
| Faster path to active operations | Acquisition financing requires specialized underwriting |
Advantages of buying an existing business
An established business may already generate sales, have recurring customers and employ people who understand its operations. Historical tax returns, bank statements and financial reports can also help a buyer test whether the asking price and proposed debt are supportable.
The buyer may receive existing equipment, software, vendor relationships, licenses, marketing channels and standard procedures. A recognized brand can shorten the time required to build trust in the market.
Disadvantages of buying an existing business
Buyers frequently pay for goodwill and future earnings in addition to tangible assets. Problems such as tax debt, liens, lawsuits, obsolete equipment, unfavorable contracts or employee disputes may not surface until due diligence.
Revenue can decline when ownership changes, especially when sales depend on the seller’s personal relationships. Conventional lenders may also be cautious because the buyer has not yet demonstrated an ability to operate the acquired company.
How Do I Buy an Existing Business?
For someone wondering how to purchase an existing business, the transaction can be organized into eight major stages.
Define the type of business you want
Set criteria for industry, location, purchase price, revenue, profitability, owner involvement, employees, recurring revenue and real estate needs. Determine how much cash you can contribute before speaking with lenders.
Find businesses for sale
Look through business brokers, marketplaces, accountants, attorneys and industry contacts. Direct outreach can also uncover owners who would consider the right offer even though the company is not publicly listed.
Perform a preliminary financial review
Review revenue, gross profit, net income, seller’s discretionary earnings, EBITDA where appropriate, debt, payroll, rent, customer concentration, owner compensation and capital expenditures. Focus on trends, not just the latest year.
Estimate the company’s value
A seller’s asking price is not necessarily market value. Small owner-operated companies often use an SDE multiple; larger businesses may use EBITDA, while asset-heavy companies may require equipment, inventory or real estate appraisals.
Submit an offer or letter of intent
An LOI can summarize price, structure, seller financing, due-diligence timing, financing contingencies and transition support. It does not automatically create a right of first refusal or exclusivity; any no-shop provision should be explicit and reviewed by counsel.
Complete detailed due diligence
Verify financial, tax, legal and operational claims against source documents. The objective is to understand whether earnings are real, repeatable and likely to continue after the seller leaves.
Secure acquisition financing
Start lender discussions early. Acquisition underwriting evaluates the company’s history, deal structure, buyer qualifications, cash contribution, repayment ability and available collateral.
Finalize the agreement, close and transition
Work with qualified legal and tax professionals to document the transfer, assumed liabilities, representations, indemnities and transition duties. Prepare communications for employees, customers and vendors before closing.
What Financial Records Should You Review?
Compare seller-prepared statements with source documents whenever possible. If a profit-and-loss statement reports $2 million in sales, reconcile it with tax returns, bank deposits, merchant-processing statements and accounts receivable.
Financial and tax
- Three years of business tax returns
- Profit-and-loss statements and balance sheets
- Bank and merchant-processing statements
- Debt schedules, receivables and payables
Revenue quality
- Customer concentration and churn
- Recurring contracts
- Sales by product or location
- Seasonality and declining accounts
Operating costs
- Payroll and owner compensation
- Rent and lease renewals
- Inventory and working capital
- Equipment replacement needs
Understanding SDE and EBITDA
Seller’s discretionary earnings (SDE) is commonly used for smaller owner-operated companies. It generally starts with profit and adds back one working owner’s compensation and certain documented discretionary or nonrecurring expenses.
EBITDA means earnings before interest, taxes, depreciation and amortization. It is more common for larger companies whose operations are less dependent on one owner. Do not accept either figure without reviewing every proposed adjustment.
Asset Purchase vs. Equity Purchase
| Deal Structure | What the Buyer Acquires | Key Consideration |
|---|---|---|
| Asset purchase | Specifically identified assets and any expressly assumed liabilities | Assignments, permits, contracts and purchase-price allocation may require separate work. |
| Equity purchase | Stock, LLC interests or other ownership in the existing entity | The entity continues to hold its assets and liabilities, increasing the importance of comprehensive diligence and protections. |
For qualifying asset acquisitions, the buyer and seller generally use IRS Form 8594 to report the purchase-price allocation when the statutory requirements apply. Deal structure has significant legal and tax consequences, so both sides should consult experienced transaction attorneys and tax professionals.
Buying an Existing Business vs. Buying a Franchise
A franchise may provide established branding, training, operating systems and vendor relationships, but the franchisee may pay initial fees, royalties and marketing contributions while accepting restrictions on products, pricing or operations. An independent acquisition generally gives the buyer more freedom but less centralized support.
If the target is a franchise, review the Franchise Disclosure Document. The Federal Trade Commission’s franchise guide explains that the FDD generally must be provided at least 14 days before the prospective franchisee signs a binding agreement with, or pays, the franchisor or its affiliate.
How to Get a Loan to Purchase an Existing Business
Acquisition financing differs from ordinary working capital. The target may have years of history, but the buyer has not yet operated it. Lenders therefore examine both the company’s historical cash flow and the buyer’s ability to preserve that performance after closing.
Many conventional lenders will not finance every acquisition, especially when cash flow is inconsistent, collateral is limited, the buyer lacks relevant experience or the purchase price depends heavily on goodwill. A combination of sources may be needed.
SBA 7(a) acquisition loans
For qualified buyers, an SBA loan may be one of the first options to evaluate. Current SBA 7(a) guidance allows proceeds for complete or partial changes of ownership and lists a maximum 7(a) loan amount of $5 million.
The buyer applies through a participating lender, not directly to the SBA. Underwriting can consider historical cash flow, purchase price, valuation, equity injection, buyer experience, personal credit, collateral, the business plan and the company’s ability to repay. Eligibility does not guarantee approval.
Seller financing
The seller may accept a promissory note for part of the price. This can reduce the buyer’s cash requirement and align the seller with a successful transition. Terms, priority, collateral and any standby requirements imposed by a senior lender must be documented carefully.
HELOC or other personal funding
A home equity line of credit may provide flexible acquisition capital when the buyer has sufficient equity and qualifies personally. Because the buyer’s home secures the obligation, default can put that personal asset at risk. Personal loans, savings, retirement-based strategies and contributions from partners or investors may also be possible, each with distinct tax, legal and financial consequences.
Conventional acquisition loan
Some banks and nonbank lenders offer conventional acquisition loans to strong borrowers and established targets. Expect substantial documentation, a buyer cash contribution and close review of collateral and debt-service coverage ratio.
Merchant cash advances and post-closing financing
A merchant cash advance is generally based on an operating business’s accounts receivables or sales history and is usually not designed to fund a standalone purchase by a new entity with no operating history. It may only become relevant when an existing owner remains involved and the established operating business qualifies, or after the acquisition has closed and the buyer needs eligible working capital. Cost and repayment structure should be reviewed carefully.
| Funding Source | Potential Fit | Main Trade-Off |
|---|---|---|
| SBA 7(a) | Qualified acquisitions with supportable cash flow and a prepared buyer | Detailed underwriting and longer documentation process |
| Seller financing | Part of the purchase price and transition alignment | Seller approval and negotiated subordination or standby terms |
| HELOC/personal funding | Buyer has personal resources and accepts the risk | Personal assets and credit are exposed |
| Conventional acquisition loan | Strong borrower, cash flow and collateral | Selective credit standards |
| MCA or revenue-based financing | Potential post-closing working capital for an eligible operating business | Generally not a standalone acquisition product; potentially high cost |
Plan for working capital, too. The purchase price is not the buyer’s only cash need. Budget for professional fees, inventory, payroll, rent, insurance, taxes, repairs and a post-closing cash reserve. After closing, eligible businesses may also explore a business line of credit, equipment financing or invoice factoring for appropriate operating needs.
Due-Diligence Red Flags
- Financial statements do not reconcile to tax returns, bank deposits or processing records.
- A small number of customers generate a large percentage of revenue.
- The seller cannot document proposed add-backs to earnings.
- Key contracts, leases, licenses or permits cannot be assigned.
- The business depends on the seller’s relationships, license or personal labor.
- Liens, unpaid taxes, litigation or regulatory issues are unresolved.
- Inventory is obsolete or equipment needs near-term replacement.
- Employees, vendors or customers are likely to leave after closing.
- The seller pressures the buyer to skip professional review or close quickly.
Do not rely on verbal assurances. Material representations should be verified and addressed in the definitive agreement. A qualified attorney, CPA and, when appropriate, valuation professional can help identify risks this guide cannot evaluate for a specific transaction.
Closing the Purchase and Transitioning Ownership
The definitive purchase agreement may address the price, transferred assets or equity, assumed liabilities, representations, indemnification, escrow, seller financing, non-compete restrictions and closing conditions. Requirements vary by transaction and jurisdiction.
A written transition plan should assign responsibility for employee, customer and vendor communications; bank and payment access; leases and utilities; passwords and systems; licenses; inventory counts; insurance; training and the seller’s post-closing support.
Frequently Asked Questions About Buying an Existing Business
How do I buy an existing business?
Define your acquisition criteria, find targets, review the financials, value the company, negotiate an LOI, perform due diligence, arrange financing and close under a definitive agreement with a transition plan.
Is buying an existing business a good idea?
It can be when the price is supportable, earnings are verifiable, risks are understood and the buyer can operate the company. Existing revenue lowers some startup uncertainty but does not eliminate business or transition risk.
How can I finance the purchase of an existing business?
Potential sources include SBA 7(a) financing, conventional acquisition loans, seller financing, a HELOC, personal funds and partner or investor equity. Buyers often combine sources and should also reserve working capital.
Can an SBA loan be used to buy an existing business?
Yes. SBA 7(a) proceeds may be used for eligible complete or partial changes of ownership. The participating lender must still approve the borrower and transaction under applicable eligibility and underwriting requirements.
Can a merchant cash advance pay for a business acquisition?
Usually not as a standalone purchase by a new entity. MCAs generally depend on an operating business’s sales or receivables history and may be more relevant when the established business and a continuing owner qualify, or for eligible working-capital needs after closing.
What documents should I request before buying a business?
Request tax returns, financial statements, bank records, debt schedules, payroll, sales records, receivables, payables, leases, contracts, licenses, corporate records, lien information, litigation records, insurance documents and equipment and inventory lists.
Should I buy the assets or the company itself?
The answer depends on taxes, liabilities, contracts, permits and negotiating leverage. Asset and equity acquisitions have different consequences, so obtain legal and tax advice before choosing the structure.
Explore Funding for Your Business
Acquisition financing is specialized, but funding needs do not end at closing. Excel Capital Management can help business owners review potential financing options for eligible working-capital, equipment and growth needs.
Important: This article is for general educational purposes and is not legal, tax, investment or financial advice. Financing is subject to application, underwriting, approval and product availability. Terms and eligibility vary by lender and applicant. A HELOC or other personally secured financing can put personal assets at risk. Consult qualified legal, tax and financial professionals before purchasing or financing a business.
