How to Buy a Business: A Step-by-Step Guide for First-Time Buyers

Why Buying a Business Beats Starting One

Starting a business from scratch means building revenue, customers, and systems from zero — while paying yourself nothing. Buying an existing business or franchise means you inherit cash flow from day one.

The failure rate for startups within five years hovers near 50%. For established businesses with verifiable financials, that number is far lower. You're buying a track record, a customer base, a trained team, and (in many cases) a lease that's already negotiated.

For franchises specifically, you also get a franchisor's brand recognition, supply chain, training program, and marketing system. You're not betting on an idea — you're executing a tested playbook in a defined trade area.

The tradeoff: buying costs more upfront than starting. A business with $200,000 in annual seller's discretionary earnings (SDE) typically sells for $400,000–$600,000. But the SBA will finance most of that, and the business pays for itself while you draw a salary.

Step 1: Define What You're Buying

Before you search listings, get clear on three things:

**Industry and lifestyle fit.** Do you want customer-facing retail, B2B services, or a semi-absentee model? A gym requires physical presence. A cleaning franchise can be managed remotely. A restaurant is a lifestyle, not just a business.

**Investment range.** Be realistic about how much you can inject as a down payment. SBA loans typically require 10–20% equity injection. If you have $50,000 liquid, you're shopping in the $250,000–$500,000 range with SBA financing.

**Geography.** Are you buying locally, or willing to relocate? For brick-and-mortar businesses, location determines 40–60% of revenue — which is exactly what a ScoreVet location score quantifies.

Write these three criteria down before you open BizBuySell or contact a broker. Buyers who skip this step waste months touring businesses that will never fit.

Step 2: Find Businesses for Sale

**Online marketplaces.** BizBuySell, BusinessBroker.net, and Flippa list thousands of businesses. Most are broker-represented; a minority are for-sale-by-owner (FSBO).

**Business brokers.** A sell-side broker represents the seller — their fee (typically 10–12% of sale price) is paid by the seller, not you. But brokers control deal flow. Building relationships with local brokers puts you in front of off-market listings before they go public.

**Franchise development reps.** If you're interested in a specific franchise brand, contact their franchise development team directly. They'll present available territories, FDDs (Franchise Disclosure Documents), and connected buyers to resale franchises (existing units being sold by an outgoing franchisee).

**Direct outreach.** For existing businesses, you can approach owners directly — even if they haven't listed. Many owners in their late 50s and 60s are thinking about exit but haven't pulled the trigger. A professional letter expressing interest in acquiring their business sometimes opens doors no listing ever would.

**Franchise resale marketplaces.** Franchise Gator and Franchise.com both carry resale inventory alongside new-territory opportunities.

Step 3: Evaluate the Financials

Every business for sale is sold on a multiple of earnings. The key metric is **Seller's Discretionary Earnings (SDE)** — net income plus owner salary, plus any personal expenses run through the business.

**Typical valuation multiples:** - Service businesses (cleaning, landscaping): 2–3× SDE - Retail or restaurant: 2–3× SDE (often on the lower end due to lease risk) - Franchise resales: 3–4× SDE (brand premium) - Recurring-revenue businesses (SaaS, subscription boxes): 4–6× SDE or higher

When you receive financials, request: 1. Three years of tax returns (the most honest picture of earnings) 2. Three years of P&L statements 3. Current year YTD P&L 4. Aging accounts receivable (for B2B businesses) 5. Lease agreement and remaining term

Compare the tax returns to the P&Ls. Discrepancies — owner running personal expenses through the business — are normal and expected. But they should be explainable and documentable. If an add-back can't be explained to an SBA lender, it won't count toward your loan approval.

Step 4: Conduct Due Diligence

Due diligence is the period after you sign a Letter of Intent (LOI) and before closing — typically 30–60 days. This is when you verify everything the seller told you.

**Financial due diligence.** Verify revenue by cross-referencing bank statements against the P&L. Look for seasonal patterns, one-time windfalls, or declining trends. A business that earned $300K three years ago, $250K two years ago, and $220K last year is trending the wrong direction — price accordingly.

**Customer concentration risk.** If one customer represents more than 25% of revenue, losing them post-acquisition could be catastrophic. Get customer contracts reviewed by an attorney and ask for introductions to key accounts before closing.

**Lease review.** For any brick-and-mortar business, the lease is often worth more than the equipment. Confirm the remaining term, rent escalation clauses, and whether the landlord must consent to assignment. A lease with only 18 months remaining and no renewal option is a red flag.

**Employee retention.** Who knows how to run this business, and will they stay after the sale? Key employees departing post-close is a common deal-killer. Some buyers offer retention bonuses as a closing condition.

**Legal and regulatory.** Any pending litigation, liens, or regulatory violations? Have an attorney run lien searches and review the business's legal history.

For franchises, due diligence includes reviewing the **Franchise Disclosure Document (FDD)** — specifically Item 19 (financial performance representations), Item 20 (outlet growth/closures), and Item 21 (audited franchisor financials). Hire a franchise attorney to review the FDD; it costs $1,500–$3,000 and is worth every dollar.

Step 5: Finance the Purchase

**SBA 7(a) Loan.** The most common financing route for business acquisitions under $5 million. Covers up to 90% of the purchase price including working capital. Rates are Prime + 2.75% for most deals (Prime + 2.25% for loans over $350K). Terms up to 10 years for business-only acquisitions, 25 years if real estate is included.

You'll need: 10–20% equity injection, good personal credit (typically 650+), and a business that shows sufficient cash flow to service the debt (DSCR of at least 1.25×).

**SBA 504 Loan.** Designed for real estate and heavy equipment. If you're buying a building along with the business, 504 is worth exploring — it offers below-market fixed rates on the real estate portion.

**Seller financing.** Many sellers will carry a note for 10–20% of the purchase price, often at 5–7% interest. This reduces the SBA loan amount, which can make approval easier. It also keeps the seller financially invested in a smooth transition.

**ROBS (Rollover for Business Startups).** Allows you to use retirement funds (401k, IRA) as equity injection without early withdrawal penalties. Complex structure requiring a plan administrator — typically costs $5,000–$15,000 to set up. Works well for buyers with retirement savings but limited liquid cash.

**Conventional bank loans.** Some community banks and credit unions offer business acquisition loans without SBA backing, but terms are usually shorter and rates higher. Worth exploring if you have strong collateral or an existing banking relationship.

Step 6: Score the Location Before You Sign

For any brick-and-mortar business — franchise or independent — the physical location is a critical asset. Before you sign a lease assignment or assume an existing lease, run the address through a location scoring tool.

What matters: - **Traffic patterns:** Vehicular and pedestrian counts at the specific address, not just the zip code - **Trade area demographics:** Is your target customer actually living and working near this location? - **Competitive set:** How many direct competitors operate within your trade area, and how do their ratings compare? - **Transit access:** For service businesses targeting commuters, transit proximity drives daytime population density - **Cannibalization risk:** For franchises, are you too close to another unit of the same brand?

ScoreVet scores any commercial address on a 1–10 scale using these signals — in about 60 seconds. A score of 7+ indicates a viable site. A score under 5 means you should address specific risks before signing.

The franchisor's site approval team is not on your side — they want locations open, not necessarily profitable. ScoreVet gives you an independent second opinion before you commit.

Step 7: Negotiate and Close

**Letter of Intent (LOI).** A non-binding document that outlines the agreed-upon price, deal structure, and due diligence timeline. Most LOIs include an exclusivity clause preventing the seller from shopping the deal during due diligence.

**Purchase Agreement.** The binding contract. Includes representations and warranties, indemnification clauses, working capital adjustments, and closing conditions. Never sign without an attorney.

**Closing.** For SBA-financed deals, the lender coordinates closing. You'll sign the SBA note, any collateral agreements, the purchase agreement, and (for franchises) the franchise agreement. Funds are wired, ownership transfers.

**Post-close transition.** Most deals include a seller transition period — typically 30–90 days where the former owner trains you and makes introductions. Get this in writing, with specific deliverables, not just "seller will be available."

Average time from LOI to close: 60–90 days for SBA-financed deals. Franchise closings can take longer due to franchisor approval requirements.

Franchise vs. Existing Independent Business: Which Should You Buy?

This question deserves its own article (see our full comparison: [Existing Business vs. Franchise](#existing-business-vs-franchise)), but the short version:

**Buy a franchise if:** - You want a proven system and brand recognition - You're new to business ownership and want training/support - You're in a category where brand matters to customers (QSR, fitness, childcare) - You're comfortable with ongoing royalties (typically 4–8% of gross revenue)

**Buy an existing independent business if:** - You have industry experience and don't need a playbook - You want lower entry cost for similar revenue - You're comfortable with more operational variability - You want freedom to pivot the business model

The math often favors existing businesses on pure valuation — you're buying real earnings at a market multiple. Franchises carry a brand premium and ongoing royalty burden. But the system, support, and franchisor relationships have real value, especially for first-time buyers.

Frequently Asked Questions