Valuation fundamentals
How to Buy a Small Business
The short answer
Buying a small business follows a fairly consistent path: decide what you are looking for and what you can afford, find businesses for sale through brokers, listings and direct approaches to owners, sign a confidentiality agreement to see the financials, value the business off its normalised earnings, make an offer through a letter of intent, run diligence on the numbers and the operations, arrange financing, and close. From first serious search to owning the business is commonly six to twelve months, and most buyers look at dozens of businesses before they buy one.
Your numbers
The numbers
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Start with what you are actually buying
Before looking at listings, get specific about the kind of business that suits you. Size matters most: a business that supports one working owner is a different life from one with thirty employees and a management team. Be honest about which you want.
Then think about your own skills. Buyers do best when they bring something the business needs — sales ability, operational discipline, industry knowledge — rather than hoping to learn everything after closing. You do not need to have done the trade yourself, but you do need a credible answer to why you can run it.
Finally, decide what you can afford. Your available cash, the borrowing you can support and your income needs together define a realistic price range, and knowing that range keeps you from spending months on businesses you were never going to buy.
Where businesses for sale actually are
Business brokers list the majority of small businesses that change hands, on the main marketplace sites and through their own networks. Register with brokers active in your area and category, and expect to sign a confidentiality agreement before receiving any real information.
A large share of businesses never get listed at all. Owners approaching retirement often sell to someone who approached them, an employee, or a competitor. Direct outreach — a straightforward letter to owners in a category you understand — takes patience but faces far less competition and often produces a better price.
Other routes worth knowing: industry associations and trade groups, accountants and attorneys who serve small businesses, and franchise resale listings where an existing owner is selling an established unit.
Reading the numbers a seller gives you
Small business financials are almost never presented in the form you need. The starting point is normalising earnings: taking reported profit and adding back the owner's compensation, personal expenses run through the business and genuine one-off costs, to arrive at what the business actually produces for one owner. That figure is usually called seller's discretionary earnings.
Then subtract reality. If the owner works fifty hours a week and you intend to hire a manager, that manager's salary comes off. If the equipment is old, the replacement spending is real. If one customer is a third of revenue, the risk is real. Your price should reflect the business as it will be for you, not as it was for the seller.
Verify before you trust. Tax returns, bank statements and merchant processing records should support the profit and loss statement. Where they do not, ask why, and be prepared to walk away if the answer is unsatisfying.
What to pay
Most small businesses are priced as a multiple of normalised earnings. Owner-operated service businesses commonly trade in the region of two to four times, while larger companies with management teams, recurring revenue or contracted customers can go considerably higher. Asset-heavy businesses are also checked against what the assets alone are worth.
Comparable sales in the same industry are the best anchor, and a broker or accountant who works in the sector can usually tell you the range. Be sceptical of a price justified by potential rather than performance — you should not pay today for growth you will have to create.
Remember to plan for working capital. The purchase price is rarely the total cash you need: inventory, payroll before the first collections arrive and a reserve for surprises all sit on top, and running short in month two is one of the most common ways new owners get into trouble.
Diligence: what to check before committing
Financial diligence covers three years of tax returns and financial statements, bank and merchant statements, accounts receivable and payable ageing, and a revenue schedule by customer. Your accountant should do this work, not you alone.
Operational diligence is what buyers most often skimp on and later regret. Talk to key employees where the seller permits it, review the top customer relationships and how they were won, inspect the equipment, read the lease, and understand where the work actually comes from. If the answer is the owner's personal relationships, you are buying something fragile.
Legal diligence covers entity records, contracts, licences and permits, employment agreements, litigation history, and any liens on the assets. An attorney experienced in small business acquisitions is worth the fee, especially on lease assignment and licence transfer, which are where deals most often stall.
How the deal gets structured
Most small business purchases are asset sales rather than share purchases, because the buyer takes the assets and the operations without inheriting the seller's unknown liabilities. Sellers sometimes prefer a share sale for tax reasons, and it is a negotiation.
Seller financing is common and worth pursuing. A seller who carries part of the price on a promissory note has an ongoing interest in your success, and lenders often view it favourably. Earnouts, where part of the price depends on future performance, are also used where the parties disagree about what the business will do.
The letter of intent comes before all of this. It sets out the price, structure, exclusivity period and the main conditions, and although it is mostly non-binding, it frames everything that follows. Get the important terms into it rather than leaving them for later.
The transition after closing
Negotiate a proper transition. Most sellers will stay for anywhere from a few weeks to several months, introducing customers, explaining systems and handing over relationships. This period is far more valuable than most buyers anticipate, and it should be written into the agreement rather than agreed informally.
Plan how employees and customers are told. Uncertainty causes departures, and the first weeks set the tone. Meeting key staff early, keeping the operation stable and resisting the urge to change everything in month one are consistently the advice experienced buyers give.
Then be patient. The improvements you identified during diligence will still be available in six months, once you actually understand how the business works.
A worked example
Imagine a landscaping company asking $650K. Reported profit is $95K, but adding back the owner's $110K salary, a personal vehicle and a one-off legal cost gives seller's discretionary earnings of $230K. You intend to run it yourself, so no manager deduction applies, but two trucks need replacing within a year, which is roughly $90K. Valuing at 2.75 times earnings gives about $630K, less the coming truck spend, so an offer nearer $560K with the seller carrying $100K over four years is a defensible position to open with.
Multiple ranges reviewed September 2026. They are a guide, not a quote or a formal appraisal — see how the process works.
Common questions
How much money do I need to buy a business?
With an acquisition loan, buyers commonly contribute around 10% to 20% of the purchase price in cash, plus working capital and closing costs. Requirements vary by lender and deal.
How long does buying a business take?
Six to twelve months is typical from serious searching to closing. Diligence and financing on a single deal usually take sixty to ninety days once an offer is accepted.
Should I use a broker as a buyer?
Most listed businesses come with a broker who represents the seller. You can also engage your own adviser, but your most important hires are an accountant and an attorney who have done small business deals before.
What is the most common mistake buyers make?
Paying for potential rather than performance, and underestimating how much of the business runs on the departing owner's personal relationships.
Is it better to buy or start a business?
Buying gives you existing revenue, customers and staff from day one, at the cost of a purchase price. Starting is cheaper up front and far riskier in the first years. Neither is universally better.
Can I buy a business with no money down?
It is rare and usually involves heavy seller financing with an owner highly motivated to exit. Treat any offer that requires no capital at all with caution and check why nobody else bought it.
What if the seller will not show me tax returns?
Walk away. Tax returns are the baseline verification of everything else, and a refusal to provide them after a confidentiality agreement is signed tells you what you need to know.