What does it take to buy a business?
How to buy a business comes down to eight steps, from setting a budget to taking over from the seller. Each step ends with a decision and a document, and the cash you need at closing is larger than the down payment.
Buying a business is a transaction in which a buyer takes over the assets or the ownership of an operating company, usually paying with cash, a loan and sometimes a note to the seller. Buying an existing business gives you customers, staff and a track record on day one. It also gives you the seller's history, good and bad.
Deal volume is holding steady. According to the BizBuySell Q3 2026 Insight Report, 2,132 businesses changed hands in the quarter, at a median sale price of $350,000. This guide uses that median as a size reference for its two worked examples.
Commera is a broker, not a lender. We compare offers from our lender partners. The loan side of a purchase has its own guide on the business acquisition loan. Here the focus is the route.
| Step | What you decide | Document you sign or receive | Who usually helps |
|---|---|---|---|
| 1. Budget and fit | Price range and the role you will play | Personal budget and a list of cash you can commit | Accountant |
| 2. Search and NDA | Which listings deserve a closer look | NDA, then the seller's summary financials | Seller's broker, seller |
| 3. Price test and LOI | Offer price and deal outline | Letter of intent (LOI) | Accountant, attorney |
| 4. Due diligence | Whether the facts match the story | Tax returns, bank statements, leases, contracts | Accountant, attorney |
| 5. Financing | Mix of your cash, a loan and a seller note | Loan offer, seller note terms | Lender, financing broker |
| 6. Purchase agreement | Final terms and protections | Asset or stock purchase agreement | Attorney |
| 7. Closing | Transfer of money and ownership | Closing documents, loan documents | Attorney, lender |
| 8. Transition | How the seller hands over | Transition plan, new accounts | Seller, accountant |
Step 1: Set your budget and the kind of business you can run
Start with the job, not the listing. A small business usually needs its owner every day. Pick a trade where your skills match the daily work, or plan who will run it for you.
Then set the budget. Price is not the cash at closing. Legal work, the financial review, lender fees and a cash reserve sit on top of the down payment. The second worked example shows how wide that gap gets.
Keep a reserve for the first months. Sales can dip while customers get used to a new owner. A buyer with no cushion has to borrow at the worst moment.
Step 2: Find and screen listings
Screening a listing means asking for proof early and walking away fast. The full set of channels is in our guide on how to find a business to buy. This section covers what to do once a listing looks promising.
Sign the NDA before you ask for numbers. Expect the seller to ask for a nondisclosure agreement before sharing financials. It protects you too.
Ask why the owner is selling. Retirement is one kind of answer. A falling market or a lost key customer is a different story.
Request tax returns and bank statements at this stage. Compare them with the summary in the listing. Gaps between them are your first screening test.
Step 3: Test the price against cash flow, then sign an LOI
The price test asks one question: does the cash the business throws off pay the owner and the debt? Seller's discretionary earnings (SDE) is the cash flow one full-time owner takes out of the business before debt service. Start from SDE, not from revenue.
Revenue is not owner income. Subtract a fair salary for yourself, a reserve for replacing equipment and the debt payments. What is left is your margin for a bad year. The worked example below runs this test on real numbers.
Once the numbers hold, sign a letter of intent. The LOI sets out the price, whether you buy the assets or the stock, a condition that you secure financing and a period of exclusivity. Some LOI terms are usually non-binding and others are not, so have an attorney review it before you sign.
Worked example: can a median-priced business carry the debt?
A business carries its debt when the cash left after the owner's salary covers every loan payment with room to spare. In this Commera illustrative calculation, the base case clears the payments with an 18% cushion. A 15% drop in SDE leaves the payments larger than the cash.
Methodology: Commera illustrative calculation, not an offer and not a real deal. The price is the BizBuySell Q3 2026 median from the first section, used only as a size reference. The business, its SDE, the rates, terms and costs are assumptions.
In this illustrative calculation, financing is a term loan for 75% of the price and a seller note for 10%, with level monthly payments. The term loan carries a 2% fee paid at closing, and its estimated APR is the internal rate of return of 120 payments against the loan amount net of that fee. The seller note has no fees. The owner-manager salary is $55,000 a year and the replacement reserve is $5,000 a year.
| Item | Term loan | Seller note |
|---|---|---|
| Amount, $ | 262,500 | 35,000 |
| Rate, % | 10.50 | 7.00 |
| Term, months | 120 | 60 |
| Monthly payment, $ | 3,542.04 | 693.04 |
| Total repayment, $ | 425,045.24 | 41,582.52 |
| Fee at closing, $ | 5,250 | 0 |
| Est. APR, % | 10.99 | 7.00 |
The rate is not the APR. In this illustrative calculation, the closing fee lifts the term loan's est. APR above its stated rate.
The test uses the debt service coverage ratio. DSCR = cash available for debt service / annual debt service.
| Cash flow test | Base case | SDE down 15% |
|---|---|---|
| SDE, $ | 120,000 | 102,000 |
| Less owner-manager salary, $ | 55,000 | 55,000 |
| Less replacement reserve, $ | 5,000 | 5,000 |
| Available for debt service, $ | 60,000 | 42,000 |
| Annual debt service, $ | 50,821.03 | 50,821.03 |
| DSCR | 1.18 | 0.83 |
In the base case, the business covers its payments with little room. In the weaker case, the payments exceed the cash, and the owner covers the gap or cuts their own pay.
The pressure eases later. Once the seller note is paid off, from month 61, the base case DSCR rises to 1.41 in this illustrative calculation.
Lenders set their own coverage tests, and every term here is subject to underwriting. Run this test on the seller's verified SDE before you sign the LOI.
Step 4: Run due diligence and settle the deal structure
Due diligence checks that the business is what the seller says it is. At the same stage, you fix the structure. In an asset purchase, you buy selected assets and take on only the liabilities you agree to. In a stock purchase, you buy the company itself, with its past.
The full list of what to check is in our due diligence checklist. This section covers the structure and its tax side.
Asset deals carry a federal filing. Per the IRS instructions for Form 8594, both buyer and seller file Form 8594 when they transfer a group of assets that makes up a business and goodwill could attach. The same IRS instructions require the residual method to allocate the price, and goodwill and going concern value are Class VII assets.
State tax can follow the business. Take California as one example.
Under CDTFA Regulation 1702, a buyer withholds enough of the price to cover the seller's sales tax until CDTFA issues a certificate that nothing is due. A buyer who skips this can be liable for the seller's unpaid tax. Rules differ by state, so consult a tax advisor and an attorney.
Example: asset or stock purchase
- What transfers. An asset deal moves the items listed in the agreement. A stock deal moves the whole company, including everything you did not list.
- Seller's past liabilities. In a stock deal, old debts, claims and tax bills stay with the company you now own. In an asset deal, you generally take only the liabilities you agree to, though some state taxes can follow the business.
- Contracts that need consent. Leases, supplier contracts and licenses may need the other party's consent to move to you. Read each one before you set a closing date.
- Tax allocation and Form 8594. In an asset deal, buyer and seller allocate the price across asset classes and report it on Form 8594, per the IRS instructions. Agree on the allocation with your tax advisor before you sign.
Step 5: Line up the financing
Most purchases mix three sources: the buyer's own cash, a term loan from a bank or a non-bank lender, and a note to the seller. A seller note is a loan from the seller, repaid out of the business after closing.
The SBA 7(a) program is a public program offered through participating lenders. Commera does not offer, arrange, broker, or refer SBA financing. Its rules are covered in the business acquisition loan guide linked above.
How to build the financial plan and the lender package is a separate topic. Our guide on how to finance buying a business walks through it. To see what a term loan costs per month, you can estimate a loan payment before you talk to lenders.
Worked example: the cash you need at closing
The cash you need at closing is the full cost of the deal minus what lenders and the seller put in. In this Commera illustrative calculation, a "15% down" deal needs $102,750 of the buyer's cash, or 29.4% of the price.
Methodology: Commera illustrative calculation, not an offer and not a real deal. It uses the same purchase and financing as the first worked example. Legal fees, the accounting review and the working capital reserve are assumptions. The lender fee is the closing fee from the first example.
All terms are subject to underwriting.
| Uses | Amount, $ | Sources | Amount, $ |
|---|---|---|---|
| Purchase price | 350,000 | Term loan | 262,500 |
| Legal fees (assumption) | 12,000 | Seller note | 35,000 |
| Accounting and financial review (assumption) | 8,000 | Buyer cash | 102,750 |
| Lender fee, 2% | 5,250 | ||
| Working capital reserve (assumption) | 25,000 | ||
| Total | 400,250 | Total | 400,250 |
The down payment is not the cash you need. In this illustrative calculation, the 15% down payment is $52,500. Fees and the reserve nearly double what you bring to the table.
Cut the reserve and the number shrinks. Then the first slow month lands on your personal savings instead. Plan for the full figure.
Steps 6 to 8: Sign, close and take over
The last three steps turn the LOI into ownership: the purchase agreement, the closing and the handover. Buying an existing business does not end at the closing table. The first months with the seller decide how much of the value you keep.
Step 6: Sign the purchase agreement. The purchase agreement replaces the LOI with binding terms. It covers the price, the structure, what the seller promises about the business and what happens if a promise proves false. Have your attorney draft or review it.
Step 7: Close. At closing, money moves and ownership changes. Before that day, line up the lease assignment or a new lease, the licenses and permits, and the bank and merchant accounts in your name. The IRS says you need a new EIN, in general, when you change your entity's ownership or structure, per its guide on when to get a new EIN.
Step 8: Take over. Agree in writing how long the seller stays and what they do. Introduce yourself to key customers, staff and suppliers together with the seller. Keep the old routines until you know why they exist.
Before you talk to lenders, check your funding options against the cash test above.
Broker disclosure: Commera Finance is a broker, not a direct lender. Financing providers make their own eligibility, underwriting, approval, pricing, and term decisions.
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