Business for sale: 5 things to consider before you buy!

Updated: May 6

Buying an already operational business has a number of advantages over setting up a new business. In this article we take a look at the business for sale marketplace and examine the five things to consider before buying an existing business.

Our focus will be on small to medium size businesses. There will also be an emphasis on e-commerce businesses, as these are highly represented in online marketplaces.

Five things to consider before you buy a business for sale online:

  1. The advantages and disadvantages of buying an existing business

  2. Where to find businesses for sale

  3. How to calculate the value of a business for sale

  4. Online business: the advantages of an online-only business

  5. How to buy a business for sale with no money

Let's get started!

The advantages and disadvantages of buying an existing business

Starting your own business comes with a number of inherent risks. In fact it is estimated that 90% of new start-ups fail and only 40% of start-ups actually make a profit.

The primary reason for failure?

No market demand.

It is not surprising then that any new business venture should be entered into with a degree of caution. But how do you mitigate the risks?

One approach is to buy an already existing business that is established and has a track record. There are a number of other benefits.

Advantages of buying a business for sale

  • The business has already started-up: the difficult work of starting the business has already been done for you! If the founders have done their job properly you should inherit an existing business complete with customer base; track-record; procedures in place

  • Track record: given that you are buying an existing entity, the business will have a track record and financial history. This is invaluable information to have when trying to determine the profitability of any business. It is also useful in securing new investors and creditors.

  • Cash flow: depending on the venture, it typically takes time before any business becomes profitable; with some businesses running at a loss for years. The average time to reach profitability for a start-up company is a whopping two to three years! Can you afford to wait that long?

  • Assets: every business has assets, whether they be material or otherwise, a business will typically come with: employees; existing customers; products; intellectual copyright; premises and equipment. These assets can have substantial value and do not have to be acquired, as with a new business venture.

  • Validation: assuming the business that you want to acquire is profitable (generally a good idea unless you see missed opportunities) then it has already validated the business case. With no market demand sighted as the primary reason for start-up failure - you have successfully mitigated one of the biggest risks!

Disadvantages of buying a business for sale

  • There might be a reason: there are a number of legitimate reasons to sell a successful and profitable business; but many more to sell an unsuccessful and unprofitable one. It is vitally important to verify all information and accurately assess the profitability of any existing business before buying it.

  • The business might need substantial investment: many businesses start out on the right track, with the latest in plant and equipment. Over time however this becomes dated and the need arises to invest substantially in order to maintain efficiency.

  • The business might be profitable but not efficient: this can be seen as an opportunity to further increase the profitability of the business, assuming there are no impediments to further increasing efficiency.

  • Costs of doing proper due diligence: it is vitally important to accurately asses any and all claims related to the sale. Budget will be required for the professional services of lawyers and accountants to conduct proper due diligence.

  • The seller could be a major asset: the current owner of the business may be a substantial factor in the success of the business. It is often the case that relationship managers and sales managers take their clients with them. Built on existing relationships, it is important to asses how much of a factor the current owner is in the success of the business.

Where to find businesses for sale

With the global reach of the Internet and the location independence of running an online business, it is no longer a case of finding a business for sale in your local business pages.

Of course that is still possible.

You may wish to find a local physical business to invest in - many business directories have also now moved online making it easier than ever to search.

But the Internet provides a number of ways to search online for businesses for sale. Below are the top five online marketplace websites that we have come across.

Buying a business for sale using an online marketplace:

  1. Flippa: flippa describes itself as the number one marketplace to buy and sell online businesses. Founded in 2009 the site has traded over $140 million in websites, domains, and mobile apps.

  2. Exchange Marketplace: exchangemarketplace is Shopify's marketplace to buy and sell businesses on the Shopify platform. If you are not technical then Shopify is a great place to start, allowing you to focus primarily on the core business function.

  3. Empire Flippers: empireflippers provides a marketplace to buy and sell quality businesses online. They claim to take the friction out of the buying and selling process.

  4. Digital Exits: digitalexits have a team of professionals to assist in the buying and selling of Internet businesses with yearly profits of up to ten million dollars.

  5. Bizbuysell: bizbuysell is a great option for buying an existing physical business. They claim to have facilitated over 100,000 successful business sales and their website has over one million visits per month.

In addition to online marketplaces such as those mentioned above, it is possible to buy businesses for sale using either a broker, or directly from the site/business owner.

Buying a business for sale from a broker

Online brokers facilitate the buying and selling of e-commerce businesses and represent the owner of the business in all negotiations. In some ways this provides a sense of security, as you might assume that the broker, caring about his or her reputation, has already vetted the business to some extent.

Brokers will also likely have a good idea of the value of a business, and, owing to their experience, may be tuff opponents in negotiations. That said, their experience can be an advantage. They know how to properly conduct negations and how to facilitate the transfer of assets and exchange of money - once a deal has been done.

One broker worth checking out is FE International. Their website can be found here.

Buying a business for sale directly from the website owner

Another option is to attempt to buy the business directly from the owner. This perhaps takes some courage and is not always successful as the business may not be for sale.

Most websites have contact pages, or you can use an online business directory tool to find out which company owns the website. Rather than make an offer straight away, try to reach out first and see if the business is for sale. Perhaps mention that you are an existing customer, impressed by the business, and in a position to make a serious offer.

Of course, it is just as important to asses the value of the business before making any offer.

How to calculate the value of a business for sale

Every business, be it online or physical, has value.

There is no perfect way to determine a business' value. The best approach is usually to seek professional advice from a professional appraiser or investment banker; depending upon the size of the business in question.

It is however possible to arrive at a supposed value using some form of valuation criteria.

It is true that a calculated valuation does not mean much if the buyer does not agree with the appraisal, or a buyer cannot be found. Ultimately, as with anything else, a business is worth what someone will pay for it.

Despite this, it is prudent to perform at least a basic valuation calculation.

A valuation calculation should include:

  • Tangible assets: this includes plant; property; inventory; other tangible assets. You should have a clear inventory of tangible assets belonging to the business. The balance sheet provides a starting point for appraising the net assets of the business.

  • Intangible assets: things such as the brand value and recognition; reputation; trademarks and patents; customer loyalty. These things can add significant value to a business. You should have some understanding of the value of intangible assets belonging to the business.

  • Profitability: the current and past profitability of the business is an important consideration. This should include both Net and Gross profit margins; as well as an examination of operational expenses. In its simplest form, Net profit margin can be calculated as: Net Income / Revenue * 100.

  • Earnings Multiples: marketplaces, such as those listed above, often provide multiples relating to net annual profit as a ratio of the acquisition price. This gives you some indication as to how many years of profit it will take to pay back the acquisition cost of the business.

  • Competitor valuations: reach out in the market and try and find valuations for competitors in the same marketplace. Publicly listed companies have public accounts published; taking scale into account you may be able to base your valuation in part on that of your future competitors.

  • Use an online NPV calculator: the net present value calculation is the difference between the current value of cash inflows and the present value of cash outflows over time. This is a great tool for investment planning and helps to project the future profitability of the business.

In the end you may need to go beyond the financial formulas, and not just base your valuation on number crunching.

Consider the strategic value of the business and place emphasis on the intangible assets that you have identified.

Use online marketplaces to gauge the price of similar businesses within the same industry and with similar levels of profitability.

Online business: the advantages of an online-only business

Online-only businesses are akin to a physical business with the exception that they are online-only.

That does not mean they do not deliver physical goods - drop-shipping websites being a great example - but they don't have physical premises where customers can turn up during the working week.

They are essentially a digital version of a physical business.

Just like a physical business they have value, and can grow and prosper over time. This is exactly why online marketplaces exist.

So what are the advantages of an online-only business?

  • Digital asset: you own a valuable digital property that can appreciate in value over time. Digital businesses have value just like physical ones and can be a great investment.

  • Location neutral: the business is usually location neutral and can be run from anywhere with a good internet connection. This means that you are free to reside wherever you like.

  • Source of Passive Income: many online businesses (not all!) can run on auto-pilot. Once they are up and running they require little to no maintenance and provide a great source of passive income. This means that it may be possible to maintain a regular job at the same time, before scaling into your online enterprise.

  • Highly scalable: given that online business generally have global reach, they can be highly scalable. If you have the time and resources it may be possible to scale the business substantially. Ensure that your online business is built upon a scalable online platform.

  • Cost efficiency: the nature of digital businesses is such that they often have significant cost efficiency. This is due to the fact that they do not have expensive office buildings and plant to maintain. In the case of drop-shipping it is also not necessary to hold your own stock - as you effectively act as an intermediary between customer and supplier.

Ultimately, online-only businesses have a number of advantages over physical businesses. But that does not mean that they are the right choice for every business venture.

It may make sense to have an online digital presence as an extension or complimentary to a physical business.

How to buy a business for sale with no money

Lastly, we take a look at how to buy a business for sale with no (or very little) money.

This may seem ridiculous at first, but it is indeed possible!

With many banks tightening their purse strings and limiting commercial lending, it can be difficult to find a way to finance a new business venture. Here are some of the approaches you might take.

Five ways to buy a business for sale with no money:

  1. Look at your existing assets: whilst not always advisable, it may be possible to leverage your existing assets in some way or to use them as collateral for a loan or investment. Always seek professional financial advice before considering this.

  2. Find a passive investor: it could be possible to find an investor who will part-finance your new business venture. Perhaps they are retired, or just consider your venture a good use of their disposable capital. Of course they will expect something in return and will undoubtedly want a share in the business.

  3. Find a business for sale offered with seller finance: some businesses for sale offer seller finance as a part of the deal. Finding such a business can be a challenge, and you will likely still need a down payment, but if you are successful you are well on your way to owning a business without putting any money in up front.

  4. Partner with someone: whilst you may wish to be the sole owner of your new business venture, it may be necessary to partner up. This has a number of benefits - perhaps you have more experience than your business partner - in which case you could offer up your experience in return for his or her cash. Be creative and see how you can balance your experience with your partner's cheque book!

  5. Acquire a starter businesses website: some things in life really are free! Or, there abouts. On marketplaces such as Flippa, mentioned above, it is possible to acquire starter websites. These are template websites that just require hosting and a little love and tender care. The sites are usually very cheap, can be transferred to you, and come ready wired to e/commerce platforms such as Wix or Shopify. Using a drop-shipping partner means you don't have to purchase inventory and can start your new business for almost nothing!

Summing Up

In this post, we looked at the business for sale marketplace with an emphasis on small to medium size e-commerce businesses.

We evaluated the advantages and disadvantages of buying an existing business, and how to find businesses for sale online.

We looked at various approaches for performing valuations of potential businesses and the advantages of buying an online-only business.

Lastly, we looked at how you can effectively buy a business for little or no money, assuming you are prepared to invest your time and effort in making it a success!

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