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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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 Do Buyers Really Want to Know?

Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same.

  1. Want to do their own thing; to control their own destiny, so to speak.
  2. Do not want to work for anyone else.
  3. Want to make better use of their skills and abilities.
  4. Want to make money.

These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently.

The important item to note is that money is reason number four. Although making money is certainly important and necessary, it is not the primary issue. Once a person decides to go into business for himself or herself, he or she has to explore the options. Starting a business is certainly one option, but it is an option fraught with risk. Buying an existing business is the method most people prefer. Purchasing a known entity reduces the risks substantially.

There are some key questions buyers want, or should want, answers to, once the decision to purchase an existing business has been made. Below are the primary ones; although a prospective buyer may not want answers to all of them, the seller should be prepared to respond to each one.

  • How much is the down payment?  Most buyers are limited in the amount of cash they have for a down payment on a business. After all, if cash were not an issue, they probably wouldn’t be looking to purchase a business in the first place.
  • Will the seller finance the sale of the business?  It can be difficult to finance the sale of a business; therefore, if the seller isn’t willing, he or she must find a buyer who is prepared to pay all cash. This is very difficult to do.
  • Why is the seller selling?  This is a very important question. Buyers want assurance that the reason is legitimate and not because of the business itself.
  • Will the owner stay and train or work with a new owner?  Many people buy a franchise because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
  • How much income can a new owner expect?  This may not be the main criterion, but it is obviously an important issue. A new owner has to be able to pay the bills – both business-wise and personally. And just as important as the income is the seller’s ability to substantiate it with financial statements or tax returns.
  • What makes the business different, unique or special?  Most buyers want to take pride in the business they purchase.
  • How can the business grow?  New owners are full of enthusiasm and want to increase the business. Some buyers are willing to buy a business that is currently only marginal if they feel there is a real opportunity for growth.
  • What doesn’t the buyer know?  Buyers, and sellers too, don’t like surprises. They want to know the good – and the bad – out front. Buyers understand, or should understand, that there is no such thing as a perfect business.

Years ago, it could be said that prospective buyers of businesses had only four questions:

  1. Where is the business?
  2. How much is it?
  3. How much can I make?
  4. Why is it for sale?

In addition to asking basic questions, today’s buyer wants to know much more before investing in his or her own business. Sellers have to able to answer not only the four basic questions, but also be able to address the wider range of questions outlined above.

Despite all of the questions and answers, what most buyers really want is an opportunity to achieve the Great American Dream – owning one’s own business!

Key Factors on the Acquirer’s Side

Photo Credit: Clearly Ambiguous via Compfight cc

Photo Credit: Clearly Ambiguous via Compfight cc

There are several key factors on the acquirer’s side of a sale, most of which are necessary to achieve a successful closing. Just as a seller has to deal with quite a few factors, the acquirer must also. Some of the more important ones on the acquisition side are:

  • Sufficient financial resources to complete the deal as specified.
  • Depth of capable staff to run the existing business and also execute an acquisition at the same time.
  • A rational approach to the type, size and geographic location of target companies.
  • The willingness to “pay-up” for acquisitions such as 6x EBITDA and, if necessary, the willingness to pay 100% cash, whether the sale is one of assets or a stock transaction.
  • Assuming the acquisition search generates satisfactory deal flow, a willingness to stay the course for 6 to 12 months in the search process.
  • A confirmation by the board of directors of their commitment to complete a deal.
  • A “point person” in the search process, preferably the CEO, CFO or Director of Development who is reachable on a daily basis to discuss relevant matters.
  • Complete access to sales manager and others by the business intermediary to discuss suggestions of target companies.

Questions to Consider for the Serious Buyer

Photo Credit: Instant Vantage via Compfight cc

Photo Credit: Instant Vantage via Compfight cc

A serious buyer should have the answers to the following questions:

  • Why are you considering the purchase of a business at this time?
  • What is your time frame to find a suitable business?
  • Are you open-minded about different opportunities, or are you looking for a specific business?
  • Have you set aside an amount of capital that you are willing to invest?
  • Do you really want to be in business for yourself?
  • Are you currently employed or unemployed?
  • Are you the decision maker, or are there others involved?

The real key to being a serious buyer, however, is whether the individual can make that “leap of faith” so necessary to the purchase of a business. No matter how much due diligence a buyer performs, no matter how many advisors there are to advise the buyer, at some point, the buyer has to make a leap of faith to purchase the business. There are no “sure things” and there are no guarantees. If a buyer is not comfortable being in business, he or she should not even contemplate buying one.

Advantages of Buying an Existing Business

Photo Credit: morebyless via Compfight cc

Photo Credit: morebyless via Compfight cc

1. Established.

An existing business is a known entity. It has an established and historical track record. It has a customer or client base, established vendors, and suppliers. It has a physical location and has furniture, fixtures, and equipment all in place.  The term “turnkey operation” is overused, but an existing business is just that, plus everything else. New franchises may offer a so-called turnkey business, but it ends there. Start-ups are starting from scratch.

2. Business Relationships. 

In addition to the existing relationships with customers or clients, vendors, and suppliers, most businesses also have experienced employees who are a valuable asset. Buyers may already have established relationships with banks, insurance companies, printers, advertisers, professional advisors, etc., but if not, the existing owner does have these relationships, and they can readily be transferred.

3. Not “A Pig in a Poke”. 

Starting a new business is just that: “a pig in a poke.” No matter how much research, time, and money are invested, there is still a big risk in starting a business from scratch.  The existing business has a financial track record and established policies and procedures. A prospective buyer can see the financial history of the business — when sales are the highest and lowest, what the real expenses of the business are, how much money an owner can make, etc. Also, in almost all cases, a seller is more than willing to stay to teach and work with the new owner — sometimes free of charge.

4. Price and Terms.  

The seller has everything in place. The business is in operation and a price is established. Opening a new business from scratch can be the proverbial “money pit.”  When purchasing an established business, the buyer knows exactly what he or she is getting for his money. In most cases, the seller is also willing to take a reasonable down payment and then finance the balance of the purchase price.

5. The “Unwritten” Guarantee.

By financing the purchase price, the seller is saying that he or she is confident that the business will be able to pay its bills, support the new owner, plus make any required payments to the seller.

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