How to buy a business, step by step
Short answer
To buy a business: decide what you can run and afford, find businesses for sale, screen them quickly, verify the seller's earnings with tax returns and bank statements, make an offer in a letter of intent, do due diligence, line up financing (often an SBA 7(a) loan with at least 10% down), sign the purchase agreement, close and take over with the seller's help.
The step that decides whether you overpay is verifying the earnings. Price is usually a multiple of profit, so every dollar of profit that isn't real costs you several dollars at closing.
Buying a business is mostly a sequence of filters. You start with hundreds of listings, throw out the ones that don't fit, test the earnings of the few that look good, and negotiate on the one whose numbers survive. Most of the money people lose on acquisitions is lost because a filter got skipped: they fell for a business before they'd checked the profit, or signed a lease they hadn't read.
This guide walks through the whole process from the buyer's side. Each section links to a deeper guide when you get to that stage.
1. Decide what you're actually buying
Before you look at a single listing, write down three things. Brokers call this a "buy box", and having one makes you a buyer they take seriously.
- What you can run. Your skills matter more than your passion for the product. A strong salesperson can usually run a services business that lives on relationships; an operations person may do better with a business that lives on process. Lenders will ask how your experience fits.
- What you can afford. For an SBA 7(a) loan on a first acquisition, you need at least 10% of the total project cost as equity, and under the rules in force since October 1, 2026 that minimum can't be reduced. Add legal, accounting and lender costs, plus a cash cushion. Work backwards from your liquid cash to a purchase price range.
- What you'll pay yourself. Earnings have to cover your salary, the loan payments and reinvestment. A business that only works if you take no pay for two years is a bad fit, however cheap.
If you're still deciding whether to buy at all, read should I buy a business first.
2. Build your team early
You need three advisers before you sign anything binding: a deal attorney who does small business acquisitions (not your cousin who does real estate closings), a CPA who will look at the seller's returns with you, and a lender, usually an SBA 7(a) lender that does change-of-ownership loans regularly. Talk to lenders before you find the business. They'll tell you what they need and roughly what deal size you qualify for.
3. Find businesses for sale
Most buyers start on listing sites and with brokers. That's fine, but it's also where every other buyer is looking. Off-market approaches (writing to owners directly, asking CPAs and attorneys who serve business owners, using your industry network) take longer and produce fewer leads, but you're often the only buyer in the room. See how to find a business to buy for the channels and what each one is good for.
4. Screen listings in an hour, not a week
Most listings should be rejected quickly. Before you sign an NDA and request financials, check:
- The listing math. Asking price divided by the "cash flow" figure (usually SDE). This isn't a valuation; it tells you whether the broker's expectations are in the same universe as similar deals you've seen.
- Owner dependence. If the owner is the main salesperson, the licence holder or the only one who knows the customers, you're buying a job that walks out the door.
- Customer concentration. One customer above a fifth of revenue is a risk you'll need to price or structure around.
- Trend. Three years of revenue and earnings, not just the best one.
- The lease. Years remaining and options. For many retail and restaurant businesses, the lease decides the deal.
5. Verify the earnings before you talk price
Small businesses are usually priced as a multiple of seller's discretionary earnings (SDE): net profit plus one owner's pay, interest, depreciation and the owner's personal or one-time costs. The add-backs are where deals get inflated. A $30,000 add-back that isn't real, at a price of three times SDE, costs you $90,000.
Ask for three years of business tax returns, monthly P&Ls for the same period plus year to date, and 12 to 36 months of bank statements. Then do three checks:
- P&L vs tax return. Do revenue and profit match the filed returns? If not, why? SBA lenders verify returns against IRS transcripts, so the returns are the baseline that matters.
- Revenue vs bank deposits. Does reported revenue actually show up in the bank, month by month? This is a proof of cash, and it's what catches made-up revenue.
- Add-backs vs evidence. Rate every add-back Solid, Shaky or Unsupported by the documents behind it. Start your thinking from the solid-only number. Our SDE calculator does the arithmetic.
6. Make an offer with a letter of intent
Once the numbers hold up, you put your offer in a letter of intent (LOI). It sets the price and structure (cash at closing, seller note, any holdback), what's included (equipment, inventory, working capital), the diligence period, exclusivity, financing contingency and the seller's transition role. Most of an LOI is non-binding, but the exclusivity and confidentiality parts usually are. Base your price on the earnings you verified, and say so. Sellers accept a lower number more easily when they can see where it came from.
7. Do due diligence
After the LOI, you get full access. Diligence covers financials and taxes, legal (entity, liens, litigation, contracts), operations, employees, customers, the lease, licences and permits, and anything specific to the industry. Use our due diligence checklist and keep a running list of issues. Each issue ends up as a price change, a specific clause in the purchase agreement, or a reason to walk away.
8. Line up the financing
Most first-time buyers of Main Street businesses use an SBA 7(a) loan, sometimes with a seller note. The SBA updated its rules for business acquisitions with SOP 50 10 8.1, effective October 1, 2026. The parts that matter most to a buyer:
| Rule (initial acquisition) | What it means for you |
|---|---|
| Minimum equity injection 10%, can't be reduced | Bring real cash. A seller note on full standby, plus any minority investors, can cover at most half of it. |
| Independent business valuation ordered by the lender | Your own appraisal or the broker's opinion doesn't count. If the price is above the valuation, you cover the gap with equity. |
| Total debt capped at the valuation | Includes seller debt that isn't on full standby. |
| Quality of Earnings report if the purchase price is $3 million or more | Ordered for the lender. Its earnings figure drives the debt service test. |
| Debt service coverage of at least 1.25 | Earnings must cover all debt payments with room to spare. Try the DSCR calculator. |
| Maximum 10-year amortization (no real estate) | Higher payments than a 25-year mortgage. Model them honestly. |
| Seller earnouts prohibited; seller may consult up to 24 months | Structure contingent price differently, and plan the handover within that window. |
The full detail is in SBA 7(a) loans for buying a business. Rules change, so confirm the current SOP with your lender.
Illustrative example, not a real business
Say you agree to buy a business for $750,000 and finance $50,000 of closing costs and working capital, a total project of $800,000. Your 10% equity is $80,000 in cash. The SBA loan is $720,000. At an example rate of 10.5% over 10 years, payments come to about $116,600 a year.
Verified SDE is $250,000. You need to pay yourself $80,000 and set aside $10,000 a year for equipment, leaving $160,000 for debt. $160,000 ÷ $116,600 = about 1.37. That clears the 1.25 minimum, with some room if earnings dip.
9. Sign the purchase agreement
Your attorney turns the LOI into a purchase agreement. In an asset purchase agreement, the important parts are what's included and excluded, which liabilities you take on (ideally none you didn't choose), the seller's representations and warranties, indemnification and how it's backed (a holdback or escrow), the non-compete, and the conditions that must be met before closing. Asset buyers and sellers also need to agree how the price is allocated among asset classes, which both report to the IRS on Form 8594.
10. Close and take over
Closing day is mostly paperwork and money moving: the lender funds, the seller's debts are paid off, the lease is assigned, licences and accounts move to you. The real work starts the next morning. Keep the seller close for the agreed transition period, meet every employee and the top customers in the first weeks, and change as little as possible until you understand why things are done the way they are. Our guide to the first 90 days after buying a business covers what to do in what order.
What it costs beyond the price
- Your equity injection (at least 10% for an SBA initial acquisition).
- Deal attorney and CPA fees.
- Lender costs, including the SBA guaranty fee the lender may pass to you, the business valuation and, at $3 million and up, the QoE. Under the SOP, money you spend on those reports can count toward your equity injection.
- Working capital to run the business from day one, since the seller usually keeps the cash and receivables.
- Licences, permits, insurance and any equipment that needs replacing right away.
See closing costs when buying a business for how each is priced.
Where buyers go wrong
The same few mistakes come up again and again: trusting the listing's earnings, ignoring working capital, discovering the lease problem after the LOI, paying for growth that hasn't happened yet, and having no real transition plan. The fix for most of them is to do the cheap checks before the expensive ones. Mistakes when buying a business goes through each.
How to buy a company: buying the shares instead of the assets
To buy a company (rather than just its assets), you purchase its shares or membership interests from the owners. The company continues to exist with you as owner, so its contracts, licences, bank accounts, tax ID and employees usually stay in place, and so do its liabilities, including ones nobody has discovered yet.
That makes diligence heavier, and seller representations, indemnities and a holdback more important, than in an asset purchase.
"Buying a company" in the strict sense means buying the legal entity: the corporation's stock or the LLC's membership interests. It's simpler in some ways and riskier in others than buying a business's assets. Not legal or tax advice.
What comes with the company
Stays in place
Contracts, licences and permits held by the entity, its EIN and bank accounts, employees, payer and vendor accounts, its name.
Also stays in place
Every liability: unpaid taxes, lawsuits, product claims, wage claims, environmental issues, contract disputes, including ones from years ago.
The extra diligence
- Corporate records: formation documents, bylaws or operating agreement, minutes, stock ledger, prior ownership changes.
- Tax: every federal, state, payroll and sales tax filing for the open years; any notices.
- Litigation and claims history; lien and judgment searches.
- Contracts with change-of-control clauses that let the other side terminate.
- Licences that require notice or approval for an ownership change.
- Employee classification, wage-and-hour compliance, benefit plans.
- Environmental, if the business handles fuel, chemicals or waste.
See legal due diligence.
Steps
- Confirm a stock purchase is necessary, or that the price reflects the extra risk. See asset vs stock.
- Check the governing documents for transfer restrictions, consents and other owners' rights.
- Run full diligence, especially tax and legal.
- Negotiate a stock purchase agreement with strong reps, indemnities and a holdback.
- At closing: transfer shares, update corporate records, officers, bank signatories and the IRS responsible party.
For LLCs specifically, see how to buy an LLC.
Frequently asked questions
How long does it take to buy a business?
Searching often takes months. Once you have a signed letter of intent, diligence, financing and legal documents commonly take another two to four months, longer if an SBA lender, a landlord or a licensing agency is slow. Plan for the whole thing to take longer than the broker suggests.
How much money do I need to buy a business?
With an SBA 7(a) loan for an initial acquisition, you need at least 10% of the total project cost in equity, and that can't be waived. On top of that, budget for legal and accounting fees, the lender's costs, and a cash cushion for the first months after closing.
Do I need a broker to buy a business?
No. Most listed businesses already have a broker, and that broker works for the seller. Buyers usually rely on their own deal attorney, CPA and lender instead.
What's the most common mistake first-time buyers make?
Trusting the earnings figure on the listing. Brokers present seller's discretionary earnings with the seller's add-backs included, and many of those don't survive a lender's review. Rebuild the number from the tax returns and bank statements before you agree a price.
Should I buy the assets or the company's stock?
Most small business purchases are asset purchases, because the buyer leaves most of the seller's liabilities behind and usually gets better tax treatment. Stock purchases happen when contracts, licences or permits can't easily be transferred. Your attorney and CPA should weigh in for your deal.
What's the difference between buying a company and buying its assets?
Buying the company (stock purchase) transfers ownership of the entity with all its history. Buying assets transfers specific property into your own entity, leaving most liabilities behind.
Sources
- SBA: Buy an existing business or franchise
- SBA SOP 50 10 8.1 (effective Oct 1, 2026), Appendix 15: 7(a) Changes of Ownership
- SBA Information Notice 5000-880695: Issuance of SOP 50 10 8.1
- IRS: Sale of a business
- IRS Form 8594, Asset Acquisition Statement
- IRS: About Form 8822-B (change of responsible party)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy does not value businesses or give price opinions.