Building Your Business Business Taxes Here Are the Steps To Buy a Business By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 13, 2022 Fact checked by Taylor Tompkins Fact checked by Taylor Tompkins Twitter Website Taylor Tompkins has worked for more than a decade as a journalist covering business, finance, and the economy. She has logged thousands of hours interviewing experts, analyzing data, and writing articles to help readers understand economic forces. She joined The Balance in 2022 as its Economics Editor. learn about our editorial policies In This Article View All In This Article Get Your Team Together Sign a Letter of Intent Do a Preliminary Investigation, Including Due Diligence Negotiate Terms Close the Deal Frequently Asked Questions (FAQs) Photo: Carlina Teteris / Getty Images You have found a business that you want to buy. Now, what do you do? Here are the steps you'll need to take to make that business your own. Key Takeaways In order to successfully buy a business, you need a team of advisors to help you through the process.Make sure you do thorough due diligence on the company you are hoping to buy to get an accurate picture of how much to pay and what your investment could get you. Go into negotiations prepared—understand the seller, have a realistic offer and make sure your advisors have vetted any proposals. 1. Get Your Team Together Before you get into the process of evaluating a potential business for sale and negotiating, you will need some help from business advisors, including: A certified public accountant (CPA) to help you review the books and financials. Your accountant will be your "right-hand" person during this process; seek someone who can work with the lawyer and you as a team. Note Accountants are often conservative by nature, and some are good auditors, but not good advisors—seek one who is assertive but not aggressive. An attorney to help prepare and review documents for the sale. Unless you have the cash for the purchase, you'll need to get a lender for the purchase. You may also begin to talk with insurance advisors, from whom you will purchase business (property and casualty) insurance and malpractice insurance (from separate companies). A business broker for some business purchases. As with the sale of a home, the broker will receive a commission from the seller (up to 10%) for his/her work, payable upon closing. 2. Sign a Letter of Intent Often in a business purchase, the seller will require the buyer to sign a letter of intent. This is a non-binding agreement that prohibits the buyer from discussing information about the business with outsiders. The letter also serves to keep the seller from talking to or negotiating with other potential buyers during this time. The letter then allows the buyer to do a more thorough evaluation of the business and for negotiations to continue. 3. Do a Preliminary Investigation, Including Due Diligence Before you put together an initial offer for a business purchase, there are many questions you need to answer. Due diligence is performed by the buyer and his/her accountant and attorney after the intent to purchase has been signed but before the formal purchase agreement. The purpose of due diligence is to allow you to thoroughly examine the company so you can make an informed decision before purchasing. Note Due diligence also allows you to make your mistakes on paper first. Use your advisors, especially your accountant, to help you examine the books and records. You will want to see financial statements and tax returns for the past four to five years. During this due diligence period, you should: Hang around the business for a few days; talk to staff, workers, and customers. Look at the competition and their positions. How are they advertising themselves? How are they doing financially? Look at potential future repairs/modifications. Look at documents showing liens or judgments that must be paid. Check OSHA and ADA requirements for the facility. Make sure there is enough cash flow to support you personally. Look at all legal contracts entered into by the current business, including lease arrangements and vendor purchase agreements. Analyze the bad debts of the practice, the accounts receivable aging, and the present collection policy. Some areas to focus on during due diligence: Look at monthly gross income for at least three years. Check tax returns for the business for three years or more; cross-check all information against something else. Look at overhead (fixed expenses) against national averages (% of gross sales). Look at employment tax data (941 forms, etc.) and salaries/wages paid out for the past 3 years. Are employment taxes being paid on a timely basis? Verify profitability by subtracting overhead and debt from gross income (before expenses). Check against the owner's income from the business. Prepare a list of questions; if you don't get answers, ask why. 4. Negotiate Terms Your negotiation meeting with the owner may be more important than a job interview. Don't forget that this person is not just selling a business; they are selling a life. Remember, these common mistakes made by sellers: Unrealistic priceMisunderstanding "hidden profit"Assuming that the buyer knows the areaLack of proper counselMisunderstood buyer motiveInadequate documentation Part of this negotiation includes an analysis of the valuation of the business, performed by an appraiser. This valuation is only a starting point, though. The negotiation comes down to an agreement between both parties. 5. Close the Deal The closing of a business deal is the time when both parties and their attorneys get together to sign documents and pass checks around the table. At this point, all the work has been done, and there is no more room for negotiation or changes. At the closing, a number of documents may need to be signed: The bill of sale is evidence of the ownership of assets and is the formal document representing ownership of the business and its assets. A security agreement (lien) is evidence that the assets are encumbered by the seller until the note is paid. The purchase agreement may have already been signed as a letter of intent. The purchase price may be payable in different parts: Earnest funds (already paid) are deductedBalance of down payment is also deductedAssumption of liability or paid by seller portion deductedRemaining balance in a promissory note Portions of the purchase price may also be allocated to certain payments and business assets: non-compete agreement, trade name, trademarks, and a separate consulting agreement (with the seller). Frequently Asked Questions (FAQs) How do you buy a company? You need to fully investigate the business you’re thinking of buying and have a number of professional advisors help you vet your potential purchase. How do I get a loan to buy a business? You have a number of options when looking to finance your purchase of a business. The most common traditional loan avenues are through the Small Business Administration but you should investigate your financing options. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. UpCounsel. "What Is Intent to Purchase Business Agreement?" Small Business Administration. "Buy an Existing Business or Franchise."