↩ Go Back
Need help?

For those who’re ready to take the entrepreneurial leap, starting a business from scratch might not be the only option. When you build a business from ground up, there’re many challenges in the same including initial set up, finding early customers, hiring key employees, managing cash flow, etc. These issues are negated when you choose to buy a business which has a proven track record of customers, internal processes, revenue and profit. If you’re asking yourself ‘How can I buy a business?’ this article is for you.

Factors to consider when buying a business

Buying a business can be an arduous task, especially if you’re a first time business buyer. The following factors need to be kept in mind before you start the process -

What domain are you comfortable in?

It’s always best if you buy a business in a domain you know and understand. Ex. If you’ve worked with customers in retail analytics, buying a retail shop would work well for you, as you understand the business.

Which geography can you operate in?

Are you willing to travel a long distance (within your city or another city altogether) to run the business? Or are you looking for something within the vicinity of your home? It plays a crucial part in selecting the business you want to buy

What’s the size of the company you can buy?

You might want to buy a big and flourishing business, but these businesses can be expensive to purchase. Plus, you might not have the experience to handle a business of such scale. But if you buy a very small business, it might not give you the required financial benefit you’re looking for. Be clear on the size of the business you want to buy, in terms of number of employees, revenue, floor size, etc.

Meeting of minds between buyers and sellers is a difficult task

How can I buy a business? (Process)

While buying a business, it’s best to stick to the flow explained below -

1) Pick domain and size of business you want to purchase

This has been highlighted in the above section

2) Find potential businesses you can buy
There’re a few ways to find businesses for sale. They include:

a. Online – Platforms like SMERGERS (www.smergers.com) provide information for businesses that are for sale. You can use these services to reach out to seller.

b. Business Brokers – Business brokers help entrepreneurs in buying and selling businesses. If you’re looking to buy a business, they’ll you help in finding potential businesses to purchase, apart from hand holding you through the entire process.

c. Local newspaper ads – You can look for ‘Businesses for sale’ ads on local classifieds. You could also post your own ad and wait for responses from the business community.

3. Meeting potential owners and picking your best fit

It’s important that you spend time with as many business owners as possible and understand how they run their business. Building a rapport with the seller pays off in the long run, especially if you move ahead with the purchase. Also, this helps in getting perspective on how different entrepreneurs run their business.

Once you’ve done your research, pick the business/business that you feel most comfortable with and carry on to the next stage.

4. Due diligence

Performing the due diligence on an existing business requires time, skill and expertise – Put together a small team consisting of an accountant, an auditor and a lawyer to help you with the same. The list of things you need to check prior to the purchase include -

a. Inventory

b. Company registration and regulatory compliances

c. Audit of financial statements including accounts payable/receivables

d. Customer feedback

e. Employee feedback including assessing everyone’s strengths, weaknesses, work contracts and salaries

f. Existing marketing strategy, execution and ROI

g. Gauging the reputation of the business in the market


Agreeing on the price

The sale price can depend on a variety of factors - How badly does the seller want to exit the business? What’re the reasons for the same? What’re the macro economic conditions at the moment? What’s the price a similar business was recently sold for? Having an understanding of all these factors will help you get a better understanding of the price you can pay for the business.

There’re many methods for putting a price on the business

a. Multiplier method

In this method, you take assign a multiple of the revenue/profit after tax, etc. and give a value for the business. Ex. With a 10X multiplier, a business giving a profit after tax of $100,000 can be valued at $1,000,000.
The multiple value depends on the market and recent acquisitions in that market.

b. Discounted Future Cash Flow

In this method, you can make revenue and profit projections for the next 5-10 years, and discount the same to arrive at a present market value for the business. This is a difficult method to calculate value of small businesses.

c. ROI

A simple way to value a business is to see the return on investment provided by the business and arrive at a valuation. Small business typically provide returns of 15-30% on the capital invested, so if you’re buying a business with a post-tax profit of $100,000, you can value it at $500,000 if you’re looking at a 20% ROI per year.


Sale type

You need to consider the sale type you want to pursue i.e. Asset sale vs Stock sale. 

Financing the deal

It’s best if you put 50% of the cash from your pocket and finance the rest through a lender / investor / seller financing. Many sellers are fine to take a deferred payment through the next 2-3 years as it assures them of future income, and there’re insurance companies that insurance against the possible default by buyer. Plus, tax for the seller are reduced through a deferred payment strategy (the same has been explained in another blog (link)).

Other ways to finance the deal include -

a. Take loan against assets owned by seller

b. Partner with someone for buying (Ask seller if there was anyone else interested in buying, but didn’t have enough cash)

c. Lease, with an option to buy – Many sellers will be willing to lease the business to you for a period of 3-5 years, while giving you an option to buy the company at any point during the lease

d. Set up ESOP and raise cash from existing employees – Through this method, you get the cash you want, and the employees will be more motivated to work as they all own a part of the business


Closing the deal and transition

Once you’re through with your due diligence, and you’ve figured out your financing options, it’s time to pull the trigger. Your lawyer will help you with the paperwork and auditor/account with the finances.
Working on the transition phase post-closing of the transaction is very important as customers, suppliers and employees need to adjust to new management. Your seller will help you learn the business and operations in a transition phase which can last anywhere between 3-12 months. You should spend this time making everyone in the eco-system comfortable with your working style and learning how to operate the business as well.

Share this on social media
Industry Watch
The Indian healthcare market is expected to reach ₹ 24 lakh crore by 2022 from ₹ 9 lakh crore in 2016 growing at a CAGR of 17.7% driven by rising incomes, greater awareness, prevalence of lifestyle diseases and increasing penetration of medical
Nutraceuticals (also called health supplements) are specially processed or formulated foods designed to satisfy particular dietary requirements and/or provide medicinal or health benefits. They generally contain extracts from plant & animal sources,
The Apparel industry or the Ready-Made Garments (RMG) Industry is the largest segment of the Indian Textiles and Apparel (T&A) Industry accounting for approximately 50% of the total industry. Given that apparel manufacturing is economically viable
Facility Management (FM) refers to the use of a third-party service providers to maintain a part or entire building facility in a professional manner. It is increasingly gaining popularity amongst commercial as well as residential clients driven by
Fuel additives are fuel-soluble chemicals added in small quantities to enhance the properties of the fuel, improve fuel handling and fuel performance. The rapidly increasing demand for hydrocarbon fuels from transportation and power industries have
Automobile industry facing a tough time as vehicle demand is sluggish. Valuations of companies on the lower end. Autocomponent industry is also expected to witness a flat growth this fiscal because of weak automobile demand. The industry will remain
Fitness industry in India is worth Rs.4,500 crore and is growing at 16-18% annually and is expected to cross Rs.7,000 crore by 2017. The industry is fragmented with majority of the market dominated by unorganized and independent gyms outlets. The
Low utilization rates and weak demand from realty and infrastructure sectors is driving consolidation in the Indian cement industry. More mergers & acquisitions are expected in the medium-to-long-term as valuations are attractive to buyers and
The ecommerce space in India is still evolving and companies have limited history. Many of them function at negative operating cashflows and are dependent on investments from venture capital firms. Using traditional valuation methods like DCF
Demand for electronics hardware in India is projected to grow at 25% compared to only 15% growth in production, expected to create a demand supply gap of Rs.14.8 lakh crores by FY20. This creates a unique opportunity for electronics companies
The Staffing Industry includes companies which list employment vacancies, place applicants in employment, supply temporary workforce and all other employment related services. Market size of the Indian staffing industry was INR 26,650 crore in 2014
The food processing industry in India is getting a shot in the arm with increased focus from the government and policy makers, higher involvement of scientists to help increase food processing productivity, and establishment of mega food parks
Advertising spends in India are expected to grow 12.6% year on year to Rs 48,977 crore for the year 2015. The ad spend in 2014 was Rs. 43,490 crore, which reflected a 12.5% increase over 2013. Firms in the advertising industry prepare advertisements
The worldwide ERP software grew by 6.4% in 2014 to reach $27B market size. The segment is anticipated to garner $41 billion in sales by 2020 with a CAGR of 7.2% during 2014-2020. ERP software is second fastest growing segments within Enterprise
Global acquisitions by Indian IT firms rising with a majority of the transactions happening in Europe and North America. Primary reasons driving these acquisitions are increasing local presence in the US and Europe, acquiring employees with a
It is widely believed that India has not fully leveraged its strength in the Manufacturing sector in the last decade, but the sector is expected to emerge stronger in next decade as companies innovate and adopt new business models. To support this
Pharmaceutical industry seems to be entering a growth phase after a muted growth over the last few quarters. Valuations of pharma companies fairly high as they are expected to perform. Indian Pharmaceuticals industry is the world’s third largest in
The Indian restaurant industry is highly unorganized and fragmented but is getting rapidly organized with Quick Service Restaurant (QSR) segment leading the way. Private Equity and Venture Capital firms have shown increased interest in this sector
The salon industry in India is largely unorganized but is getting organized at a fast pace. The average per person spending on salons in India is a minuscule of spending in other locations such as North America, Europe, and Asia. Even a small growth
India is world’s second largest producer of textile and apparel after China. China is slowly reducing its focus on textiles and this has had a positive impact on the Indian textile and apparel industry. But not everything in the garden is rosy as