Why Buy an Existing Business?
When my clients want to invest in the US economy, I often recommend acquiring an existing business over starting new. An operating business offers immediate cash flow, trained employees, established customers, and proven systems - all things that take years to build from scratch.
The $100K-$500K Sweet Spot
This price range represents the "Main Street" market - established local businesses that are too small for private equity but substantial enough to support an owner-operator. These businesses typically generate $50K-$200K in annual owner benefit (salary plus profit), making them ideal for investors seeking both income and E-2 visa qualification.
Advantages of buying existing over starting new:
- Day-one revenue: Customers are already buying
- Trained workforce: Employees know the operations
- Proven concept: The business model works in this market
- Seller financing: Many sellers will finance 20-40% of the purchase
- Negotiating leverage: Sellers often need to sell for personal reasons
- Better visa documentation: Tax returns prove the business is real
Types of Businesses in This Range
Asset Purchase vs. Stock Purchase
This is one of the most important decisions in any acquisition. As a buyer, I almost always recommend an asset purchase. Here is why:
| Factor | Asset Purchase | Stock Purchase |
|---|---|---|
| Liabilities | You generally do not inherit unknown liabilities | You inherit all liabilities, known and unknown |
| Tax Basis | Step-up in basis; better depreciation | Carry-over basis; less depreciation |
| Contracts | Must be assigned (landlord approval needed) | Generally transfer automatically |
| Employees | You rehire who you want | Employment continues (good and bad) |
| Complexity | More paperwork, transfers, assignments | Simpler transfer of ownership |
| Seller Preference | Sellers usually prefer stock (tax reasons) | Better for sellers in most cases |
When Stock Purchases Make Sense
I recommend stock purchases when the business has valuable contracts that cannot be assigned, professional licenses tied to the entity, or when the seller insists and offers a significant price discount. In these cases, we conduct extensive liability due diligence and negotiate strong indemnification provisions.
The Acquisition Process
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Search and Identification
I recommend using business brokers, BizBuySell, BizQuest, and direct outreach to business owners. In the $100K-$500K range, about 70% of deals come through brokers.
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Initial Screening
Request the Confidential Information Memorandum (CIM) or "blind profile." Sign an NDA to get the business name and address. Review 3 years of tax returns and basic financials.
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Letter of Intent (LOI)
Once you identify a target, submit a non-binding LOI outlining price, terms, due diligence period, and key conditions. I draft these for my clients to protect their interests.
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Due Diligence
This is where most deals die - and where they should if problems exist. I coordinate financial, legal, and operational due diligence lasting 30-60 days.
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Purchase Agreement
The Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA) is the binding contract. I negotiate representations, warranties, indemnification, and closing conditions.
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Closing
Funds transfer through escrow, documents are signed, and you take possession. I coordinate with accountants, lenders, and the seller's counsel to ensure a smooth closing.
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Transition
Most purchase agreements include a transition period where the seller trains you and introduces you to key customers and suppliers.
Due Diligence Checklist
This is the minimum I review for every acquisition in this range:
Financial Due Diligence
- 3 years of federal tax returns
- 3 years of profit and loss statements
- Current year interim financials
- Balance sheet with asset detail
- Accounts receivable aging
- Accounts payable listing
- Bank statements (12 months)
- Cash register or POS reports
Legal Due Diligence
- Corporate formation documents
- All contracts and agreements
- Lease and lease amendments
- Employment agreements
- Intellectual property (trademarks, patents)
- Licenses and permits
- Litigation history and pending claims
- Insurance policies
Operational Due Diligence
- Customer concentration analysis
- Supplier relationships
- Employee roster and compensation
- Equipment condition and age
- Inventory count and valuation
- Technology and systems
- Seller's daily involvement
- Industry trends and competition
Where to Find Businesses for Sale
Online Marketplaces
- BizBuySell.com: Largest listing site with thousands of businesses
- BizQuest.com: Good selection in the small business range
- BusinessBroker.net: Broker-focused listings
- LoopNet: Primarily real estate but includes business sales
Business Brokers
Brokers represent sellers and earn 8-12% commission. While they work for the seller, good brokers want deals to close and can be valuable sources of deal flow. I recommend working with multiple brokers simultaneously.
Direct Outreach
Many business owners would sell if approached correctly. I help clients identify target businesses and craft professional outreach letters. This "off-market" approach often yields better deals.
Red Flags I Watch For
Deal Killers
- Declining revenue: Unless you have a clear turnaround plan
- Customer concentration: If one customer is over 25% of revenue
- Lease problems: Short remaining term or landlord unwilling to assign
- Seller involvement: If the business depends on seller relationships
- Cash business without records: If they claim "real" revenue is higher than reported
- Pending litigation: Especially employment or product liability
- Environmental issues: For manufacturing or gas stations
- Deferred maintenance: Equipment that needs immediate replacement
E-2 Visa Considerations
If you are acquiring a business to support an E-2 visa application, these factors matter:
- Purchase price as investment: The price you pay counts toward the "substantial" investment requirement
- Existing employees: The business should already employ or have capacity to employ US workers
- Your active role: You must direct and develop the business, not be a passive investor
- Documentation: Tax returns and financials prove the business is real and operational
- Marginality: The business should generate more than just your living expenses
Timing Your E-2 Application
I typically recommend applying for the E-2 visa after closing on the acquisition. This allows you to show the investment is committed and at risk. However, some clients prefer to apply during escrow with proof of committed funds. We discuss the best timing strategy based on your situation.
Ready to Acquire a US Business?
I help international investors find, evaluate, and acquire American businesses. From LOI to closing to E-2 application, I guide you through the entire process.
Sergei Tokmakov, Attorney — California Bar #279869