How to Buy an Existing Business: 7 Key Steps

[00:00:00]Starting a business from scratch is overrated. The real freedom, real cash flow, and real wealth that actually comes from buying a business that's already proven. You don't need a million bucks. You don't need to have a degree.

[00:00:10]You just need to know the right steps.

[00:00:12]And today, I'm giving you the seven seven smart steps to buy a business, skip the startup phase, pain, and buy a profitable business. Now, if you miss these steps, you'll probably end up doing the same thing in 5 years or maybe buying a limit. Hi, I'm Jerry Krauss.

[00:00:26]from buyingonlinebuses.com and we help people buy back their time, their freedom by acquiring great online businesses safely and the smart way. And if you appreciate the time and effort that I put into this video, please, you know what to do. Give the like button a little bit of love. Now, most people have no clue why they're buying a business. Passive income, freedom, quitting my job, all the cool reasons, but it's just it's just too vague. If you don't know why you're buying, how do you know what business to buy? So, there's a few key points. Is it cash flow? Is it a growth opportunity? Is it a long-term exit? Maybe it's a semi-passive income stream and a side gig. Or is it to make your life less stressful by what the business provides you? An income stream where you can be anywhere and do it at any time whilst you live your current life with maybe your partner, kids, traveling, whatever it is. Typically, I find most people want a business and they want the cash and they want all this sort of stuff, but typically it's a it's a less stressful life. So, write down your why.

[00:01:23]It'll filter out 90% of your bad deals and save you months or even years of frustration. Think about things like what's the workload that you want to take on? What sort of work do you want to do or not want to do within a business? Do you want to be running ad campaigns? Maybe, maybe not. Do you want to be creating content? Maybe, maybe not. Do you want to be the manager of a team? Maybe, maybe not. Think about these sorts of things. And how many hours is too many? How many hours is not enough? Next thing, we need to really understand your budget. That's step number two. Let's be real. If you're looking at a million-doll business, but you only have $50,000 saved, it's going to be tough for you to buy a million dollar business, you're not going to have enough for the deposit to be able to get the loan. So, there's some key points with this step number two on on knowing what your budget is. Firstly, what can you comfortably invest without losing your house, risking your house or your sanity? Also, factor in 6 to 12 months of operating capital. You know, postacquisition. It's really good to have a bit of a war chest there unless you're using SBA where the SBA finance might be able to help you sometimes with some working capital. Another thing you need to consider is don't spend everything you have on the purchase. I typically, this is not financial advice.

[00:02:30]I'm not a financial practicing advisor, but typically I suggest most people, this is what I do for myself, is to not spend more than 80% of my cash on one investment because you need to have some contingency money and then you also you want to have some money for improvements to grow the business and there may be some surprises that pop up along the way, some resources that you need to put into something to resolve a certain issue. Pro tip here is stretching your budget too thin is the fastest way to crash and burn after buying a business.

[00:02:56]And our typical goal isn't just more money. Like I said before, that's the byproduct. Usually, our main goal is less stress. So, why stress yourself out by throwing every single penny in? Step number three is pick the right type of business for you. You don't need the hottest trend. You know, in fact, the hottest trend and the fad businesses are a bad investment decision. Typically, they only have a small life cycle. What you're most likely going to want to buy is a business you actually understand how it works, right? Or you can learn to understand how it works. and that maybe suits your lifestyle. Maybe you got some skills for it. Maybe you know how to hire for those skills, but you want a business that suits your lifestyle and your financial goals. Think about the skill sets you do or don't have. And do you need to use them in the business?

[00:03:41]Are you good at marketing or can you find a digital marketer? Do you know how to create content or do you want to create content on the site or do you know how to run an ecom store? Do you know how to do inventory management or can you hire a consultant to help you understand in inventory management to be able to do it yourself? Do you love systems? Do you love operations? you know software by buying something typically your skill set is a leverage and if you do want to buy something with a skill set that you have you can leverage from it remember you will be tying your time to that business by using leveraging your skills versus leveraging somebody else's skills so it's always a pro there's always pros and cons there think about the lifestyle 90% of people who buy a business they want to increase their wealth sure but the main goal again like I said is is have a better lifestyle right and choose something that fits within those lifestyle goals. Do you need to be working 5 hours a day on the business, 25 hours a day or 25 hours a week in the business, or can you buy something that's, you know, going to take you 5 to 10 hours and you can run that at certain hours where you're not doing anything and then the rest of your time you can be, you know, working your regular job or traveling or whatever it is. Pro tip here is that if you wouldn't enjoy working in the business and on the business for at least 6 months, don't buy. Step number four is sourcing deals.

[00:04:52]Here's the brutal truth. The best businesses are just not listed on public marketplaces. Sure, you can find them.

[00:05:00]There's a caveat to that. And yes, you can use brokers, right? You can go to brokerage sites, but also it's worth doing direct outreach if you know exactly what you want to buy and you feel that you can get it. There's other things you can do like networking. You can post on LinkedIn, join mastermind groups, Facebook groups, all that sort of stuff. You can also ask owners in forums if they're considering selling.

[00:05:19]So for example, you want to buy a specific e-commerce business, you can join e-commerce groups, e-commerce networks, stuff like that. Now many of my clients decide to use me as a buy side advisor to tap into my network.

[00:05:31]Obviously having 10 years, more than 10 years in the industry, get access to offmarket deals all the time. Also access to finance brokers, lawyers, all that sort of stuff stuff. If you're interested, let me know. Hit me up on LinkedIn or email me. I'm here for you.

[00:05:42]There's other people out there that you can tap into as well, you know, that can find offmarket deals for you or you can pay for somebody to do offmarket research for you and do, you know, do that sort of search yourself. But the pro tip here is that offmarket deals are less competitive. Typically, you can get better prices and better terms and buy better business, right? There's because there's less less competitors, less people know about it. Step number five is mastering due diligence. This is the battlefield. This is where amateurs just absolutely get slaughtered if they don't know what they're doing. You need to understand how to do due things like check the financials. Look at the profit and loss statement and is the income coming in that they have on the profit and loss statement shown on maybe the Shopify Shopify account or does it match the or reconcile with the uh Amazon revenue? Does it reconcile with the ad revenue that they're getting? Look at the profit margins. Analyze recurring income. Understand the retention rate in the financials alone. Uh for larger businesses, typically you're going to have somebody that will do financial DD and DD for you. If you're smaller businesses, then obviously you you you need to be across this. I've done this myself. I'm not a CPA, but I've done a lot of financial dood myself and there's a lot of reconciling and it is work, but it's so so critical. Very very critical.

[00:06:57]The next thing you need to do is analyze the traffic sources. Is it SEO content and SEO traffic right from Google or a different platform? Is it paid ads? Are they social ads? They're Google ads.

[00:07:08]What is it? And how valuable are they?

[00:07:10]You need to analyze that. Look at the customer lifetime value. Look at the CPA, all those sorts of things. Then you need to be looking at like customer retention. Is there one client or is there just multi multitude of smaller acquisitions or smaller purchases and recurring revenue from a lot of people?

[00:07:26]If it's single source dependency in traffic or revenue, that's risk too. One thing I noticed that when people buy a business is they ask the seller for the answers and then they trust the seller that the answers are true and correct.

[00:07:37]You need to get the answers from the seller and then you need to trust what they say but also verify it by going away and getting access to all these accounts and understanding how to do due diligence. I'll give you the pro tip to step number five is build a due diligence checklist and follow it rigorously. I give away my due diligence framework. It's a set list of questions that you should be asking the seller about the business to get the correct data to go away and then verify. And it takes the guess work out of buying a business. And I it's saved people millions of dollars and made people millions of dollars. If you want it for free, there's a link in description for you. Get it. Step number six, structure the deal in a very very wise way. Buying a business is not just about price, it's about the terms. You can get a crazy good deal just by being creative with how you pay. I've said this before in other videos. It's not about what you pay for the business, it's about how you pay. So, let me break down some key points. Cash is a great way to get the deal done cheaper. So, for example, a lot of people don't want to pay all cash, but in the marketplace and you've got other biders for a business, and say, say you're looking at buying a $200,000 business, and you've got somebody that wants to do 20% seller financing or 30% seller financing and 70% cash. If you come in and say, "Look, I'll pay 100% cash at a lesser price than the person is looking, the other person is bidding for," you can get the business cheaper by paying for cash.

[00:08:57]Pros and cons of this. The pros, you can get it cheaper. It's not the worst idea, and cash can sometimes be a good way to go. I do prefer finance, though. The the downside is that you're tying your a lot more of your cash into the deal, which means less resources to reinvest in other investments, reinvest in the business or for contingency money for life and a war chest for the business.

[00:09:19]So, it is helpful to do finance, but if you put more cash in, that can be a good way to win the deal if there's a high level of competition. Another way to structure is seller financing, where you pay a portion up front. I mentioned this before. Maybe you pay 70% or 80% for the business and then 20% seller financing and that might be paid out over a time of between 6 months to up to six years depending on what you decide. Typically, you want to do a longer time frame if you want less risk within the business, but then you'll be paying a little bit more. Same with earnouts. Earnouts can be the same structure. It could be 80% down for the business, could be 90% down for the business, and then the rest is earn earned out. It's the same basically the same as seller financing, but an earnout is where you don't pay interest on the repayments and it'll be a shorter payback period. Typically 6 months, maybe maximum 12 months earnout depending on the business. Then you have financing through SBA loans for US buyers. You can leverage the bank's money. You know, there's other ways that you can finance it as well. If you guys want links to or introductions to finance brokers, let me know. Just reach out. Email or LinkedIn. I'm here for you. There's many places you can go get finance for buying a business. Now, the pro tip here when thinking about the price and what price to pay is focus on minimizing risk, right? And maximizing flexibility with your payment terms. The key one is risk. Very, very, very important to decrease your risk and not spend too much in the business if you can, depending on how strict and heavy the competition is. That will allow you to have more resources and more fluidity when you buy the business. Now, the last step, step number seven, is transition like a pro, right? Congratulations, you bought the business. But here's where most people screw it up. It's taking over the business too aggressively and just just getting fire hosed with information and accounts and data and all that sort of stuff. What does make it more beneficial is if you do this and drag it out over time if you can with the with the previous owner. Now the transition slowing slowly allows you to between calls and between taking over accounts is digest and process what's just happened what you've just got how much value is in what you've just received and what you can do with it differently and how to also use it the way the previous owner was using it if that's beneficial too so transition slowly if you can next is keeping existing systems running don't just rush into changing the business straight away is typically I tell people to learn the business for a good few months and Keep the systems and the team the same and understand how the business is running.

[00:11:51]Learn to tune into the business. Listen to the business. What is it telling you?

[00:11:55]What does it like? What does it not like? And that's where you can start to use leverage and and flex your resources within the business to fix things that aren't working so well. And then, you know, put those resources into things that are working so well. So, lean in the business. Don't rush into it to make major changes. You want to keep the business stable and then build and scale the business on something that's stable.

[00:12:16]Not when you're just overload with information. You just want to make quick changes because you're so sporadic and you're excited. Very, very critical.

[00:12:22]Also, once you've bought the business is yes, you can have a growth strategy.

[00:12:26]Don't execute it straight away, but have a growth strategy ready to execute after you've learned the business, after you've settled into the business. And then make sure like sometimes you build a growth strategy for a business, you acquire it and when you buy the business and you've learned it over a couple of months, maybe 6 months, you realize some of those growth strategies aren't going to work or they're not the right thing for the business, but some of them are.

[00:12:46]So learn the business and then hold up those growth strategies against the business to see if they're worth pursuing still. The pro tip here is negotiate a transition support period with the seller that's at least 30 to 90 days if you can. And sometimes you want to have one or two full days of just, you know, understanding and learning the business and spread that out. Maybe you want a call a week, a 2-hour call a week or two 1-hour calls a week and you get to digest and process things in between.

[00:13:14]Very, very, very critical. Now, I've helped thousands of people to buy online businesses, and it's very, very helpful.

[00:13:21]It does change people's lives. I've seen many, many lives change, but only if you play it smart. Forget the startup grind.

[00:13:28]Forget the gamble of that. Play it safe like a smart investor. This is what real wealthy people do is they buy assets that are already stable and solid that are paying good cash flow, right? And then they build on top of them and they acquire more. The largest businesses in the world, Facebook, Google, Amazon, they've spent billions of dollars on acquisitions and they just acquire market cap and they just build their business by through acquisitions, right?

[00:13:53]That's how they build their wealth.

[00:13:54]That's how the wealthy get rich is buying great assets. Sometimes you can get startups, but most people that are in startups typically, you know, 90% of startups fail. So you got to start 10 of the things for one to work. That can really decrease your time depending on your age and how fast you want your less stressful life. So play it like a business owner and step into real freedom a lot sooner than you think by going away and just looking at marketplaces, looking at business for sales, seeing how much they actually cost, what they're making per month, and see if you can finance them. If you need help, reach out. I'm here for you. If you did appreciate appreciate the video, please hit the like button if you found it valuable. Also consider subscribing because there's a lot more to come.