FAQ for Business Buyers: How to Buy a Business Step-by-Step
Answers to the most common questions business buyers ask—from financing with SBA 7(a) loans to due diligence and post-closing transitions.
Buying a small business is one of the most effective paths to entrepreneurship. This FAQ is designed for business buyers who want a clear, practical guide on how to buy a business—from finding deals to closing and beyond.
Where to find businesses for sale?
Top Marketplaces:
What is a business broker?
A business broker is a professional that specializes in selling small and medium sized traditional businesses.
What is an NDA (Non-Disclosure Agreement) and why is it required?
The sale of SMBs are confidential and to legally protect the business owner, business brokers ask buyers to sign NDAs prior to releasing business information.
Steps to buy a business
(1) Define your goals, strengths, and budget
(2) Build an investment thesis
(3) Understand the SMB M&A landscape
(4) Network and source opportunities
(5) Review listings and CIMs
(6) Meet sellers and ask the right questions
(7) Submit a Letter of Intent (LOI) and conduct due diligence
(8) Sign the purchase agreement and transfer ownership
Business Acquisition Loans
A common misconception is that you need 100% of the purchase price in cash to buy a business. In reality, many buyers use SBA 7(a) loans or similar financing to cover most of the cost.
Typically, you need as little as 10% of the purchase price in liquid assets to close.
- For example, if the business is priced at $1,000,000, you may only need about $100,000 in cash (or assets you can quickly convert to cash) to complete the acquisition.
The remaining 90% is usually funded through a combination of an SBA loan and possibly some seller financing. This makes buying a business far more achievable than many first-time buyers realize.
What is seller financing?
A common financing structure business buyers us to buy a business is have the current owner finance a portion of the sale. In laymans terms, the transitioning business owner will personally finance a portion of the sale price. You, as the business buyer, would then directly pay the owner.
SBA 7a loan - Business Acquisition Loan
The Small Business Administration (”SBA”), in conjunction with lenders, most commonly banks, created a program that helps preserve SMBs by helping the transfer of ownership. Essentially banks do the underwriting and deploy the capital but the SBA guarantees a portion of the loan. The SBA 7a loan program allows for business buyers to acquire businesses with little money down and can use the cash flow of the business to pay back the loan.
Do I need industry experience to buy a business?
“Experience” has very broad meaning - if you have management, marketing, business, e.g. experience can all be crafted in a way that checks the box for relevant experience.
That said, business brokers and SBA lenders do look at how relevant your experience is. The more relevant your experience is the higher the likelyhood of you moving to the next steps.
How much money do you need to buy a business?
A general rule of thumb is you need 10% of the purchase price, at a minimum, of liquid assets, that you’re willing to separate with. So if a business is priced at $1,000,000 you’d need a minimum of $100,000 for a downpayment.
Often times this number is closer to 20%, particularly if you’re considering a business’s working capital requirements, legal fees, closing costs, amongst other expenses that pop up during the closing period and when you first take control of the business.
What industries are best for first-time buyers?
The best industry is one where you can add value. Remember: when you buy a business, you’re not just buying cash flow—you’re stepping into the role of the current owner. That owner built the company, knows the customers, and understands the operations.
The real question is: what gives you an edge? Maybe it’s your background, skills, or network. If you can see a way to run the business better, grow sales, or streamline operations, then that’s the right industry for you.
Do I need a license to own a business?
It depends on the industry and location. Some businesses—like HVAC, plumbing, or electrical contractors—require specific licenses to operate legally. For example, in many states an HVAC business must have a licensed mechanical contractor to pull permits and perform work.
If you don’t personally hold the required license, you’ll need to structure the purchase carefully. You’ll most likely need to partner with someone who has the license/
Relying on the seller’s license after closing is risky and often not allowed. And importantly: SBA loans are not available if the buyer doesn’t already hold the required license.
How to value a business?
Most small business valuations use the market approach and are based on Seller’s Discretionary Earnings (SDE).
- SDE = EBITDA + owner’s salary + personal expenses run through the business (that can be verified). It’s meant to show what a new owner could reasonably expect to earn from the business.
- Once SDE is calculated, a multiple is applied. That multiple is based on sales of similar businesses in the same industry, size range, and location.
In short: value = SDE × market multiple.
This gives buyers a benchmark of what the business is worth compared to others that have sold.
What is due diligence?
Due diligence is the process a buyer goes through to confirm that a business is worth acquiring. It happens mostly after a Letter of Intent (LOI) is signed, when the seller grants deeper access to information.
During due diligence, buyers typically:
- Review and validate detailed financial statements and tax returns
- Verify contracts, leases, and customer relationships
- Assess operations, employees, and suppliers
- Confirm that assumptions made during the offer stage are accurate
The goal is simple: make sure there are no surprises, and that the business performs as expected before you commit to closing.
What is an LOI?
A Letter of Intent (LOI) is a document that outlines a buyer’s intent to purchase a business. It’s usually prepared by the buyer (or their advisor) and presented to the seller before drafting a full purchase agreement.
Key points about general LOIs:
- Exclusivity: They typically give the buyer a set period where the business cannot be marketed to other buyers.
- Due diligence: The LOI stage allows the buyer access to financials and other sensitive information to confirm the business’s performance.
- Non-binding: Most LOIs are not legally binding. They signal intent but allow the buyer to back out if due diligence reveals issues.
- Deal structure – Specifies how the purchase will be financed (e.g., 80% SBA loan, 10% buyer down payment, 10% seller financing).
- Working capital – States how much working capital will remain with the business at closing, so there’s clarity on what the buyer is actually receiving.
In short: an LOI secures your “first right” to buy the business while you dig deeper to confirm it’s a good deal.
How long does it take to buy a business?
On average, the process takes 9–18 months, but there’s no fixed timeline. Some buyers find the right fit quickly, while others spend years searching—or never make a purchase at all.
The pace depends on factors like:
- How focused you are on industries and deal size
- How prepared you are financially (e.g., SBA pre-approval)
- Market conditions and available listings
- How quickly you can move through due diligence and financing
The more prepared and decisive you are, the faster the process typically goes.
What is working capital and why it is important?
Working capital measures the cash and short-term assets a business has to cover its short-term obligations.
- GAAP definition: Current Assets – Current Liabilities
- SMB M&A definition: Accounts Receivable + Prepaids – Accounts Payable
In small business acquisitions (under $5 million), more than 70% of deals exclude working capital as defined by SMB M&A.
Why it matters for buyers:
- It’s the lifeblood of operations, ensuring bills, payroll, and supplier payments can be met.
- You need to know what stays with the business at closing (e.g., receivables, cash) and what the seller is taking.
- During your LOI and purchase agreement negotiations, spell out exactly which assets and liabilities will transfer so there are no surprises.
In short: working capital determines whether the business has enough fuel to keep running smoothly the day you take over.
Should you use an attorney or CPA?
It depends on the deal and on you. Four main factors guide the decision:
Risk tolerance – How comfortable are you relying on your own judgment and the seller’s information? If you’re skeptical or cautious, hiring professionals to review financials and contracts adds an extra layer of protection.
Size of the transaction – Larger deals typically involve larger teams on both the buy and sell side.
Complexity – Multi-entity structures, multiple locations, or tricky tax issues call for more professional support.
Your skill set – If you lack experience with financial analysis or legal documents, a CPA or attorney can fill those gaps.
Just because a deal is small doesn’t mean it’s simple—smaller businesses often create more uncertainty because the owner may lack formal systems or clean records.
What is a Quality of Earnings, and why is it important?
A Quality of Earnings (QoE) report is an accounting analysis that helps a buyer verify the financial health of a business beyond what the seller presents. Buyers typically hire an independent CPA firm to perform this review.
A thorough QoE typically covers:
Normalization of earnings – Adjusting for one-time, unusual, or non-recurring items to show the company’s true operating performance.
Sustainability of earnings – Testing whether revenue and profit trends are repeatable and dependable.
Working capital normalization – Confirming that receivables, inventory, and payables are at levels needed to keep the business running and to set a fair working capital target.
Proof of cash – Reconciling reported earnings with actual cash inflows and outflows to ensure profits are backed by real cash.
Liability assessment – Surfacing hidden obligations like pending lawsuits, off-balance-sheet debt, or other liabilities.
GAAP compliance – Spotting gaps, errors, or non-GAAP accounting practices (like improper revenue recognition or expense accruals) that could affect value.
While a QoE is not a formal audit, it is a deeper financial validation than standard due diligence.
When is it used?
QoE reviews are most common in larger transactions—typically deals above $1 million in enterprise value—where the cost of the report is justified. For smaller acquisitions, buyers often rely more heavily on their own due diligence and the financial statements provided by the seller.
Time frame for a QoE: two to four weeks
Cost: $15k–$40k - depending on deal size
What happens after you buy the business (transition period, training, employees)?
The details of the transition are negotiated before closing—how long the seller stays on, what training they provide, and how responsibilities shift to you.
Many new owners shadow or have the previous owner remain on staff for a period of time. We see business buyers leave the existing processes in place for six to twelve months. During that time, they focus on learning operations, meeting key customers and suppliers, and understanding how the business truly works before making major changes. This slow transition helps you see where you can add value once you have the full picture.
One of the biggest challenges is earning the trust of employees. Staff are used to the previous owner’s leadership style and routines. This is a balancing act of implementing your strategic objective while managing what his historically worked well.
First 90-Day Checklist for New Owners
Based on common guidance from small business experts (e.g. SBA and Entrepreneur), here are key priorities for the first three months:
Meet employees individually – Listen and build trust.
Communicate the vision – Reassure staff and customers about continuity and future plans.
Review key financials and cash flow – Confirm liquidity and set up your own financial controls.
Connect with top customers and suppliers – Build direct relationships early.
Evaluate operations and systems – Identify quick wins and areas for efficiency.
Assess contracts and compliance – Double-check leases, permits, and legal obligations.
Even if the deal is small, don’t assume it will be simple. Smaller businesses often create more uncertainty because the previous owner may lack formal systems or clean records. Professional help (CPA, attorney) can be invaluable.
Is Absentee Ownership Real?
Yes—absentee ownership is possible, but it takes time and effort to get there. Don’t expect to buy a business and immediately step away. First, you’ll need to stabilize operations, build a strong management team, and put systems in place so the business can run without you.
Before you buy, ask the current owner how many hours a week they work and what their responsibilities are. This helps you understand the true workload and what gaps you’ll need to fill to make the business self-sustaining.
Types of acquisitions - stock vs. asset
When you buy a business, the transaction is structured as either an asset sale or a stock sale. Most small-business deals are asset sales.
Asset Sale
- What happens: You purchase selected assets—equipment, inventory, customer lists, goodwill—while the legal entity remains with the seller.
- Why buyers like it:
- You can choose which liabilities to assume, limiting exposure to hidden obligations.
- You can “step up” the tax basis of the assets, giving you higher depreciation deductions going forward.
- Potential downsides: Contracts, permits, and leases may need to be reassigned or renegotiated, which can add complexity and delay.
Stock Sale
- What happens: You buy the legal entity itself (all shares or membership interests). All assets and liabilities—known or unknown—remain inside the company.
- Why sellers like it:
- Simpler to execute—most contracts and licenses remain valid.
- Sale proceeds are often taxed at long-term capital-gains rates.
- Potential downsides for buyers: You inherit all liabilities and lose the chance to reset asset depreciation.
In short: Buyers generally prefer asset sales for liability protection and tax benefits, while sellers often favor stock sales for simplicity and personal tax advantages.
What contracts or agreements are involved in buying a business?
Indication of Interest (IOI): An early, non-binding document that expresses preliminary interest, often with a price range and high-level terms. It signals seriousness and starts the negotiation before deeper due diligence.
Non-Disclosure Agreement (NDA): Signed at the outset so the seller can safely share financial statements, customer data, and trade secrets. It limits how information is used and protects confidentiality if the deal doesn’t close.
Letter of Intent (LOI): A more detailed, mostly non-binding roadmap that follows the IOI. It sets out the agreed purchase price, structure (asset or stock), key terms, and timelines while due diligence proceeds.
Purchase Agreement: The definitive contract—either an Asset Purchase Agreement or Stock Purchase Agreement—that finalizes price, terms, representations and warranties, indemnification provisions, and closing conditions.
Disclosure Schedules Exhibits: attached to the purchase agreement listing key details such as assets, liabilities, intellectual property, and any exceptions to representations and warranties.
Non-Compete and Non-Solicitation Agreements: Prevent the seller from starting a competing business or soliciting employees or customers for a defined period and geography.
Employment or Consulting Agreements: Outline roles, responsibilities, and compensation if the seller or key employees remain during a transition.
Escrow Agreement: Governs any purchase price holdbacks or reserves to cover post-closing claims or adjustments.
Assignment and Assumption Agreements: Used in asset deals to transfer leases, customer or supplier contracts, and intellectual property.
Financing and Security Agreements: Include loan agreements, promissory notes, and security documents if the purchase is financed (e.g., SBA 7(a) or bank loan).
Bill of Sale and Other Transfer Instruments: Provide formal legal proof of transferring tangible assets such as equipment, vehicles, or inventory.
Where to source reliable cost-effective documents and templates (eg simply-docs)?
SCORE
SBA
LawDepot
eForms
Rocket Lawyer
Be sure to check local jurisdiction and state laws. Laws vary by state and country, especially with common acquisition documents like: non-compete enforceability, warranties, etc.
How do non-compete agreements work in acquisitions?
A non-compete agreement protects the buyer’s investment by preventing the seller from starting or joining a competing business for a defined period of time and within a specific geographic area.
Why it matters:
- It safeguards the customer relationships, goodwill, and proprietary know-how you’re paying for.
- Buyers and lenders often view it as critical collateral—without it, the value of the acquired customer base and brand can erode quickly.
Typical terms:
- Duration: Commonly 2–5 years, depending on the industry and deal size.
- Geography: Usually limited to the company’s operating territory (for example, a city, metro area, or region).
- Scope: Clearly defines what activities count as competition (starting a similar business, working for a competitor, or soliciting former customers).
Enforceability depends on clear, reasonable terms and compliance with state or local law. Well-drafted agreements specify these details to ensure they stand up if challenged.
How do earn-outs work in small business acquisitions?
An earn-out is a deal structure where the buyer pays part of the purchase price up front and the rest later if the business hits agreed financial targets—typically specific EBITDA or revenue milestones. The goal is to bridge the valuation gap between what the seller wants and what the buyer is willing to pay today.
Why earn-outs are used
They can:
- Address uncertainty or volatility in revenue or profits (common in growth or seasonal industries).
- Align interests by keeping the seller engaged post-closing and incentivized to help hit performance goals—without using rollover equity.
- Lower the buyer’s upfront cash requirement while giving the seller a chance to share in upside if the business performs well.
- Help resolve valuation gaps when comparable sales or reliable projections are limited.
How they work in practice
Payments are contingent on performance (e.g., “If EBITDA reaches $1M next year, seller receives an extra $500k”).
The total purchase price is uncertain at closing—it may rise or fall depending on results.
Terms must spell out how earnings are defined and measured to avoid disputes.
Key financing note
If an earn-out is tied to future earnings as part of the purchase price, it is not eligible for SBA financing. Buyers using SBA loans typically need a different structure, such as a seller note or standby debt.
What role does goodwill play in a business purchase?
Goodwill is the portion of a purchase price that exceeds the fair market value of a company’s tangible assets and identifiable liabilities. In other words, it’s the premium a buyer pays for the business’s intangible value—the things that don’t appear on the balance sheet but drive future earnings.
For small and mid-sized businesses, goodwill often represents factors like the company’s reputation, brand recognition, customer relationships, trained workforce, vendor relationships, and established systems or processes. When a buyer pays more than the net value of physical assets such as equipment, inventory, or real estate, that excess is recorded as goodwill on the balance sheet.
Goodwill matters because it reflects the earning power and competitive advantages that make a business worth more than the sum of its parts. It’s an accounting measure of the trust, loyalty, and operational know-how the buyer is really acquiring.