The 5 Must-Do’s When Considering Buying Any Business

There is no doubt that buying a business can be a very exciting idea; however, it is critical that prospective buyers don’t lose track of what is truly important. Let’s explore the five most important steps that any buyer needs to take when evaluating a business. The simple fact is that as a buyer, you have no choice but to look beyond the sizzle and work to find the steak. In other words, it’s essential to determine the true worth of a given business.

#1 – Evaluate What is Actually Being Sold

No buyer should assume that he or she understands everything that is, or is not, being sold when buying a business. One of the most important tasks for any buyer is to carefully evaluate the business under consideration and invest the time to understand what the business does and what is included in the sale. This is a task that your Business Broker or M&A Advisor will perform as well. 

#2 – Understand Business Performance

Understanding the performance of a business can be more complex than it initially appears. On one hand, the numbers don’t lie, and it is possible to quickly evaluate the bottom line. 

However, in the process of evaluating the business, you and your Business Broker or M&A Advisor might discover that there are many flexible factors that could quickly alter how well the business performs. For example, you’ll want to take into account the number of hours the current business owner is working and if key employees are contributing enough to the business. These are just two of a wide variety of factors that could influence overall performance.

#3 – Look at the Financials

Ultimately, there is no replacement for understanding the current financials of a business. Perhaps a business has all the potential in the world, and you can easily see that potential. However, remember that almost all buyers must obtain financing; this means that it is usually critical that the business has strong financials in its current state. Before considering any business, you and your team of professionals will want to carefully evaluate profit and loss statements, tax returns, balance sheets, and other important financial documents.

#4 – Evaluate the Business Plan

Understanding the current owner’s goals and what steps they’ve outlined to achieve those goals is a key step. As a new owner, you’ll want to know that there is a path forward for growing your business, and a business plan is essential for achieving that goal.

#5 – Look at the Demographics

One of the single best ways to grow your business is to understand your customers. For this reason, it is important that you have a clear understanding of the demographics of the business and why customers should remain loyal. If there are challenges on the horizon, such as an expanding competitor or new competitor entering the arena, then you’ll want to know this information as well.

Evaluating a business is not a simple process. Working closely with a brokerage professional who has years of experience in evaluating all types of businesses is essential. This is an excellent first step towards buying the right business for your needs.

Copyright: Business Brokerage Press, Inc.

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The Often-Overlooked Importance of Leases

When buying or selling a business, it is critically important that you evaluate the lease. It is a strange phenomenon that otherwise savvy business people will treat leases as a secondary concern. However, problematic terms in a lease can literally force you to pack up a business and move. This would not only be a jarring experience, but a very costly one as well. 

Finding a good location is of paramount importance to both the profile and profitability of your business. You may feel that there are more important issues when buying or selling a business. But by the end of this article, you’ll see the wisdom in placing a lease near the top of your “to evaluate” list.

There are three different kinds and types of leases: a new lease, an assignment lease and the sublease. All three of these options are most definitely different from one another and can potentially impact your business in different ways.

The New Lease

A new lease, as the name indicates, is the result of a lease that has expired. That means that the buyer must work with the landlord to establish a new lease. Buying a business only to discover that you don’t have a lease and the landlord isn’t interested in keeping your business at its current location is most definitely a shock that no business owners want to encounter. Buyers should be one-hundred percent certain that they have a lease in place before they buy a business.

Assignment of Lease 

The second type of lease is the assignment of lease; this form of lease is quite common. It involves the buyer of a business being granted the use of the location where the business is currently located and operating. Through the assignment of the lease, the seller is able to assign the buyer the rights associated with the lease. Of course, it is important to keep in mind that the seller is not acting as the landlord, but instead, simply has the ability to assign the lease. 

The Sublease 

The third option for lease is the sublease. The sublease is basically a lease within a lease, and it comes with some important distinctions that must be understood. A sublease generally requires the permission of the landlord and that permission should not be viewed as a “foregone conclusion” or “automatic.”

The bottom line is that no new business owner wants to discover that their new business doesn’t have a home. There are an array of very important issues to work out when buying a business, and it is critically important that buyers never overlook what kind of lease is involved. A savvy seller will highlight what kind of lease they have, especially if the terms are favorable. But buyers should always be proactive and ask questions about the status of the lease and make certain that lease terms are clearly defined.

Copyright: Business Brokerage Press, Inc.

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Buying/Selling a Business: The External View

There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history.

The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times?

The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.”

Both owners and potential buyers can learn about the customer service, etc., by having a family member or close friend patronize the business.

Interestingly, these methods are now being used by business owners, franchisors and others. When used by these people, they are called mystery shoppers. They are increasingly being used by franchisors to check their franchisees on customer service and other operations of the business. Potential sellers might also want to have this service performed prior to putting their business up for sale.

Copyright: Business Brokerage Press, Inc.

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A Closer Look at 3 Major Factors to Consider When You Buy a Business

The simple but undeniable fact is buying a business is one of the single greatest financial decisions a person can make.  Buying a business can lead to great financial success or great financial failure.  This fact helps to underscore why it is so important to work with an experienced broker who can help guide you through the often labyrinthian process of buying a business.

In a July 2019 article from Smallbusiness.co.uk, author Kyle Carins explores three key factors that everyone should consider before they buy a business.  The first factor covered in Carins’ article, “3 Things to Consider When Buying a Business,” is appeal vs. viability. 

Appeal Vs. Viability

Not surprising, the most important variable for most prospective owners is that the business is indeed viable.  Not being able to differentiate between an appealing business and one that is viable can lead to financial disaster. 

As Carins points out, “Do you want to make money or do you want to fulfill a dream?”  Sometimes those two variables can intersect, but not always and not often.  In the end, it is vital to know whether a given business is, in fact, potentially lucrative. 

However, as Carins points out, it is also important that you choose a business that you will enjoy.  Nothing can be more spirit crushing than running a business that you truly hate, even if it is lucrative.  Selecting the right business for you is something of a balancing act that must take in a variety of often competing variables.

Considering Hidden Costs

The second factor that Carins looks at is the issue of “hidden costs.”  One of the key reasons that it is so important to work with a business broker is that a business broker understands these kinds of factors that you might otherwise overlook.  Due diligence is amazingly important.  For those who have never bought a business before, working with a business broker offers substantial protection against making a potentially serious mistake.

Second Opinions

The third factor examined in Carins article is “Getting a second opinion.”  For Carins, getting a second opinion is actually linked to due diligence.  He feels that additional opinions regarding a given business should go beyond working with professionals and should also include talking to friends and family who know you well.  Additional opinions can help one see angles that might otherwise be missed. 

Again, buying a business is complicated and will take up a good deal of one’s time and mental energy.  Your friends and relatives, understand your personality and your wants and desires.  Their input can be particularly beneficial.

Finding an experienced business broker can help you do more than simply establish whether or not a given business is a “good deal.”  Brokers with years of proven experience can also help you determine whether or not a specific business is a good fit for you and your lifestyle.

Copyright: Business Brokerage Press, Inc.

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Do You Know What Kind of Business Owner You Really Are?

Does your business have real, long-lasting longevity or is your business a temporary entity that will vanish the second you stop working on it?  In his insightful article in The Business Journals entitled, “Are You Living for Today as a Business Owner or Building Value?” author Kent Bernhard asks a very important question of readers, “Are you a lifestyle business owner or a value accelerator?” 

Many business owners have never stopped to ask this very important, yet basic, question regarding their businesses.  So, let’s turn our attention to this key question that all business owners must stop and ask at some point.

As Bernhard points out the core issue here is how a given business owner defines the idea of success for him or herself.  As Chuck Richards, the CEO of CoreValue Software notes, “At the end of the day, a lifestyle business is just a job.” 

Richards goes on to note that this is fine for many people.  But if this is the case, it is a choice that one is making.  Therefore, lifestyle business owners should be aware that they are, in fact, clearly making a choice.

Business owners who are lawyers, consultants and accountants often fall into the category of those with a “business as a job.”  They fail to accumulate enough assets for their business to really be more than a job.  Summed up in another fashion, the business generates enough revenue to provide a comfortable lifestyle.  However, it does not have the infrastructure or equity to remain profitable, or even in existence, once they walk away.  As the owner and operator of the business, they are vital to its very existence.  This means that the business only has value so long as the owner is working in the business on a regular basis.  As a result, the owner may never really be able to exit the business.

As Bernhard points out, “To build a business as an asset, you have to become a value accelerator who looks beyond whether the business’ profits are sufficient to maintain your lifestyle.  It means looking at the business as an entity outside yourself.”  Those who fall into the value accelerator category, focus on figuring out creating value for the business as a financial asset that can operate independently. 

Making sure that your business can continue on without you means that you have to build it, and that involves having a coherent and focused plan.  Plan in advance and know how you will exit your business.  To ultimately create value for the business entity itself, a plan must be in place that allows for your successful exit.

Copyright: Business Brokerage Press, Inc.

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Business Buyers Can Leverage SBA Lending

Finding the money to start your own small business can be a challenge.  Over the decades, countless people have turned to the Small Business Administration (SBA) for help.  A recent Inc. Magazine article, “Kickstart Your Business Dreams with SBA Lending,” by BizBuySell President, Bob House, explored how SBA lending can be used to the buyer’s advantage.

The article covers the basics of an SBA loan and who should try to get one.  House notes that the SBA doesn’t provide loans itself, but instead facilitates lending and even micro-lending with a range of partners.  The loans are backed by the government, which means that lenders are more willing to offer a loan to an entrepreneur who might not typically qualify for one.  The fact is that the SBA will cover 75% of a lender’s loss if the loan goes into default. 

Entrepreneurs can benefit tremendously from this program.  In some cases, an SBA loan even means skipping the need for collateral.  SBA loans can be used for those looking to open a business, expand their existing business or open a franchise.

House points out that getting an SBA loan has much in common with receiving other types of loans.  For example, it is necessary to be “bank ready.”  By “bank ready,” House means that all of your financial documentation should be organized, clear to understand and ready to go. 

Next, a buyer would need to check that he or she qualifies, find a lender and fill out the necessary SBA forms.  In order to be eligible for an SBA loan, it is necessary that the business is a for-profit venture and that it will do business in the United States.  Once the necessary forms have been submitted, it can take between 2 to 3 months for an application to be processed and potentially approved.  

The simple fact is that the SBA helps thousands of people every year.  If you are looking to buy a business or expand your current business, then working with the SBA could be exactly what you need.  Of course, business brokers are experts on what it takes to buy.  Working with a broker stands as one of the single best ways to turn the dream of owning a business into a reality.

Copyright: Business Brokerage Press, Inc.

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How Employees Factor into the Success of Your Business

Quality employees are essential for the long-term success and growth of any business.  Many entrepreneurs learn this simple fact far too late.  Regardless of what kind of business you own, a handful of key employees can either make or break you.  Sadly, businesses have been destroyed by employees that don’t care, or even worse, are actually working to undermine the business that employs them.  In short, the more you evaluate your employees, the better off you and your business will be.

Forbes’ article “Identifying Key Employees When Buying a Business”, from Richard Parker does a fine job in encouraging entrepreneurs to think more about how their employees impact their businesses and the importance of factoring in employees when considering the purchase of a business. 

As Parker states, “One of the most important components when evaluating a business for sale is investigating its employees.”  This statement does not only apply to buyers.  Of course, with this fact in mind, sellers should take every step possible to build a great team long before a business is placed on the market.

There are many variables to consider when evaluating employees.  It is critical, as Parker points out, to determine exactly how much of the work burden the owner of the business is shouldering.  If an owner is trying to “do it all, all the time” then buyers must determine who can help shoulder some of the responsibility, as this is key for growth.

In Parker’s view, one of the first steps in the buyer’s due diligence process is to identify key employees.  Parker strongly encourages buyers to determine how the business will fair if these employees were to leave or cross over to a competitor.  Assessing if an employee is valuable involves more than simply evaluating an employee’s current benefit.  Their future value and potential damage they could cause upon leaving are all factors that must be weighed.  Wisely, Parker recommends having a test period where you can evaluate employees and the business before entering into a formal agreement.

It is key to never forget that your employees help you build your business.  The importance of specific employees to any given business varies widely.  But sellers should understand what employees are key and why.  Additionally, sellers should be able to articulate how key employees can be replaced and even have a plan for doing so.  Since, savvy buyers will understand the importance of key employees and evaluate them, it is essential that sellers are prepared to have their employees placed under the microscope along with the rest of their business.

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recent article from Divestopedia entitled “When is the Best Time to Sell My Business” explains that a business owner who is looking to sell should begin preparing for the sale three years before they plan to list their business on the market.

The state of the market matters when listing your business, but what you can’t control this as a business owner. What you can control, however, is the state of your financial records, whether the business has any litigation outstanding, and the overall appearance and wellbeing of the business. In order to sell your business at the highest value possible, there are certain things that need to be taken care of before listing. By giving yourself about three years (the number of years of clean, verifiable financial statements you should have) to prepare your business for sale, you are giving yourself and your business the best chance on the market.

Click here to read the full article.

A recent article from Inc.com entitled “Small-Business Financing 102: The Latest Updates and Options Available for Funding a Business Venture” explains what each type of startup funding entails and how it’s affecting both buyers and sellers. Currently the ways to fund a new business or to purchase an existing one include:

  • SBA Acquisition loans
  • Peer-to-Peer lenders
  • 401(k) business financing
  • Crowdfunding and angel investors

Each option presents its own set of obstacles and requirements that need to be met by the buyer, just as they each provide their own benefits. The increasing number of ways in which an aspiring entrepreneur can acquire the capital to start or buy a business is great news for sellers because it means more buyers on the market.

Click here to read the full article.

A recent article from Exit Promise entitled “Top Seven Important Deal Terms When Selling a Business” highlights the main factors, other than price, that influence a seller’s decision when considering an offer on their business. While price matters, business owners care about their businesses and generally want the best for both themselves and their business, therefore they consider these factors in the sale as well as price:

  • Speed of the sale
  • An all cash offer vs. a financed one
  • The compatibility of the potential new owner with their vision for their business
  • % of the business the new owner wishes to purchase (most prefer to sell 100%)
  • Whether or not there’s an earnout clause written into the deal
  • The tax consequences associated with the deal
  • Confidentiality of the sale

In the end, sale price is generally the primary focus of negotiations between a seller and a buyer. However, it is not uncommon for a buyer to choose to accept a lower offer, for example, if it’s a complete cash sale to a buyer whose business plan aligns well with the current owner’s dream for the company’s future.

Click here to read the full article.

A recent article from FinSMEs entitled “Raising funds to Buy a Business; What Are The Different Options?” explains the different ways to fund a business acquisition, how to approach each way and who it’s best for. The options explained include:

  • Savings
  • Traditional lenders
  • Borrowing from family and friends
  • Crowdfunding
  • Investors

Each of these options comes with its own obstacles and upsides, and some may be better options than others. Whichever option you choose to go with, be sure to do your research and prepare yourself for meeting the demands of each source of funding.

Click here to read the full article.

A recent article from Exit Promise entitled “Business Broker Fees and Other Selling a Business Expenses” explains the typical fees and expenses that a business owner can expect to come across during the process of selling their business.

Business Broker Fees:

  • Small Business:  Typical fees include a 10% commission of final sale price and upfront $1000- $2500 to market, value and sell the business.
  • Large business: Typical fees include 3-10% commission of the final sale price and upfront fees ranging from $2,500 to $25,000+.

These fees can vary from broker to broker depending on their expertise and services offered. They can also vary depending on the size of the business and specific services and time needed from your broker. It is always recommended to get multiple quotes from qualified brokers who specialize in your industry and the services you need.

Legal costs:

  • Small Businesses ( $1MM or less) : total legal fees are typically between $5,000 and $12,500
  • Large Businesses ($1MM and up): total legal fees can range from $10,000 to $50,000+.

Your broker can recommend attorneys that are experts in business sales and negotiating with your buyer’s lawyer, protecting your interests and keeping legal fees from becoming excessive.

Other hidden fees can include severance payments to employees not retained by the buyer, prepayment penalties associated with paying off indebtedness of the seller, taxes, appraisals if necessary and a CPA.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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What Should Be in Your Partnership Agreement

Partnership agreements are essential business documents, the importance of which is difficult to overstate. No matter whether your business partner is essentially a stranger or a lifelong friend, it is prudent to have a written partnership agreement.

A good partnership agreement clearly outlines all rights and responsibilities and serves as an essential tool for dealing with fights, disagreements and unforeseen problems. With the right documentation, you can identify and eliminate a wide range of potential headaches and problems before your business even starts.

Determining the Share of Profits, Regular Draw, Contributing Cash and More

Partnership agreements will also outline the share of profits that each partner takes. Other important issues that a partnership agreement should address is determining whether or not each partner gets a regular draw. Invest considerable time to the part of the partnership agreement that outlines how money is to be distributed, as this is an area where a lot of conflict occurs.

The issue of who is contributing cash and services in order to get the business operational should also be addressed in the partnership agreement. Likewise, the percentage that each partner receives should be clearly indicated.

Partnership Agreements Outline and Prevent Potential Problem Areas

Another area of frequent problems is in the realm of who makes business decisions. Here are just a few of the types of questions that must be answered:

  • Are business decisions made by a unanimous vote or a majority vote?
  • What must take place in order to consider new partners?
  • Who will be handling managerial work?
  • How will the business continue and what changes will occur in the event of a death?
  • At what stage would you have to go to court if a conflict cannot be resolved within the framework of your partnership agreement?

You might just want to get your business running as soon as possible, but not addressing these issues in the beginning could spell disaster down the road.

The Uniform Partnership Act

One option to consider, which is offered in all states except Louisiana, is the Uniform Partnership Act or UPA. The UPA covers all the legal regulations that specifically apply to partnerships.

Reduce Conflict Via a Partnership Agreement

Forming a partnership can be great way to launch a new business, but it is also important to keep in mind that no matter how exciting the process may be it is still a business. New businesses face an array of challenges, and the last thing any new business needs is internal disruption. Mapping out via a partnership agreement the duties and expectations of all partners is an easy and logical way to reduce internal conflict within the business so that you can stay focused on building the business and making money!

Copyright: Business Brokerage Press, Inc.

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Can I Buy a Business With No Collateral

At first glance the idea of buying a business with no collateral may seem impossible, but in reality it can be done. Let’s examine your options. When it comes to achieving this goal, your greatest assets are an open mind and a commitment to hanging in there despite the odds.

The Small Business Association’s 7 (a) Program is Your Friend

One possible avenue for buying a business with zero collateral is to opt for the SBA’s 7 (a) program, which works to incentivize the bank to make a loan to a prospective buyer. Under this program, the SBA guarantees 75%. The buyer still has to put in 25%; however, this money doesn’t necessarily have to be his or her money. This is where things really get interesting. The cash that the buyer uses can come from investors or even be a gift from parents in the case of young buyers. These possibilities all fall within the SBA’s guidelines.

Look into Seller Financing, You Might Be Surprised

There is a second way to buy a business with no collateral, and that comes in the form of finding a seller who is willing to finance. Again, this might seem counter intuitive at first glance. But the facts are that a large percentage of sellers do agree to offer some level of financing. So in other words, seller financing is not unheard of and stands as a viable way for a prospective buyer to buy without collateral.

Combining Seller Financing and the SBA’s 7 (a) Program

Combining the SBA’s 7 (a) program with seller financing can prove to be a powerful combination. It is important to note, however, that if you do use the SBA’s 7 (a) program the seller cannot receive his or her repayment for two years.

Persistence Pays

Ultimately, you will likely need to be rather persistent when trying to find a bank. Rejection is likely. But if you are persistent, it is possible to make the SBA’s 7 (a) program work for you.

One key way to keep yourself motivated is to constantly remember that jumping through some hurdles is all part of the process since you’re trying to circumvent the traditional route of using collateral. But working relentlessly may be worth it because if you are successful, you have acquired a tangible asset without any collateral of your own. That is no small accomplishment.

Don’t be afraid to ask for advice from S.C.O.R.E., the Small Business Administration (SBA), or an experienced business broker. While it might sound very unlikely that you’ll be able to buy a business without collateral, plenty of people have successfully done so.

Copyright: Business Brokerage Press, Inc.

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