Buying a Business in the U.S., Part 1: How to Find Them

Welcome to the first installment in a series on buying a business in the U.S. This post explains how to find business purchase opportunities, for anyone interested in owning a small or closely-held business.

In future posts, I’ll cover how small businesses are valued, how the purchase and sale process works, key considerations for purchasers, and more.

What is a small business?

A small business is an independently owned and operated, for-profit enterprise. These businesses are typically characterized as “non-dominant in their field,” and they constitute 99.9% of all U.S. businesses. A small business may take the corporate form of an LLC or corporation (including an s-corporation), or sometimes, just a sole proprietorship.

The Small Business Administration (SBA) categorizes small businesses using industry-specific, NAICS codes. For most non-manufacturing businesses (e.g. retail, construction, services), the “small business” tag is based on annual gross revenue, often capped between $1 million and $40 million—depending on the specific trade. The number of employees a business has may also be dispositive.

Why do the SBA’s “small business” standards matter for buyers?

These standards are important for buyers to understand because they can determine whether a business can participate in government contracting programs, and whether the business is eligible for special, government-backed loans (like 7(a) or 504 loans). Many small business purchases are also financed via SBA loans, which is something I’ll touch on in a later post.

How is a small business different than a closely held business?

Big picture, most small businesses are closely-held, but not all closely-held businesses are small businesses. That said, people often use the terms interchangeably.

The IRS defines a closely held corporation as “a non-personal service company where 50% or more of the stock is owned by five or fewer individuals during the last half of the tax year.” As such, a closely held business is defined by who owns it, whereas a “small business” is defined by its size. Unlike small businesses, closely-held businesses can be quite large.

Closely-held businesses, like small businesses, are not traded on a public stock market. This means ownership and financial information isn’t broadly disclosed—which is important to understand as a buyer. This also means that most “material” information a potential buyer receives while weighing a purchase—and virtually all financial information—will come from the target business itself.

Where do buyers find business purchase opportunities?

There are various ways. Here are the two we most often see, as attorneys working on these deals.

1. Familiar buyer

Many small businesses are purchased by individuals with a preexisting relationship to the business’s selling owners. These buyers may include key employees, vendors, or minority owners of the business itself.

We have also handled many sales from businesses to their competitors, which may have gained familiarity with the selling owners and wish to expand. The status of the buyer will often drive a seller’s requirements related to confidentiality, deposits, purchase price allocations and more, which I’ll cover in a later post.

2. Through a listing or a broker

Many small businesses are represented by brokers or listed on platform websites. For a comprehensive list of online platforms, go here. If you want just two to start:

• BizBuySell generally has the largest database of companies for main street businesses, like stores and service companies.
• Acquire specializes in online businesses, including SaaS and ecommerce.

If you prefer to begin with a business broker directly, many are listed on directory sites like BizBuySell, while others are easily found through a local web-based search. Some brokers are better than others: in general, they are licensed at the state level and they act like real estate agents, marketing companies to potential buyers. Also like real estate brokers, business brokers typically work on a “commission” or “success fee” basis.

Look for a full-time professional who specializes in your specific industry (assuming you know what you want to buy). Also, a word of caution: never sign legal documents generated by brokers, aside from the broker’s retainer agreement, and it’s a good idea to have a lawyer look at that prior to signing, too. I’ve explained why this is important in the context of specific industries, but it holds true across the board.

Finally, larger deals are often handled through investment banks. We handle these frequently for corporate sales above the $5 million mark. The brokers here hold strict federal licenses, and market companies to larger (often institutional) investors. If you are one of these potential buyers, chances are the brokers will be finding you—not the reverse.

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Finding a business to buy is not that difficult. Thousands of them are for sale at any given time, all across the U.S. Finding a business that you would actually like to own, though, may be another story.

For selective buyers, many things must fall into place to close on an attractive business, starting with price. Stay tuned for part 2 in this series, where I’ll cover how small businesses are valued.