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Statistics reveal that out of
about 15 would-be business buyers
only one will actually buy a
business. It is important that
potential sellers be knowledgeable
on what buyers go through to
actually become business owners.
This is especially true for those
who have started their own business
or have forgotten what they went
thorough prior to buying their
business.
If a prospective business buyer
is employed, he or she has to make
the decision to leave that job and
go into business for and by himself.
There is also the financial
commitment necessary to actually
invest in a business and any
subsequent loans that are a result
of the purchase. The new owner will
likely need to execute a lease or
assume an existing one, which is
another financial commitment. These
financial obligations are almost
always guaranteed personally by the
new owner.
The prospective business owner
must also be willing to make that
"leap of faith" that is so necessary
to becoming a business owner. There
is also the matter of family and
personal responsibilities. Business
ownership, aside from being a large
financial consideration, is very
time consuming, especially for the
new business owner.
All of these factors have to be
weighed very carefully by anyone
that is considering business
ownership. Buyers should think
carefully about the risks - and the
rewards. Sellers should also put
themselves in a buyer's position.
The services of a professional
business broker or intermediary can
help determine the relative pros and
cons of the transaction.
Copyright BBP
2003
Buyers Want
Cash Flow
The first
thing to
keep in mind
is that the
vast
majority of
buyers want
to buy cash
flow. Sit
down with
your
accountant
or
bookkeeper
and begin to
get your
financial
statements
in order
with cash
flow the
order of
business.
Cash flow is
not the same
thing as
profit. Most
buyers look
at the
profit and
loss
statement or
tax return,
and look at
owners or
family
compensation.
They will
consider any
excess
compensation
to employees
and family
members.
Buyers will
also look at
large
one-time
expenses
such as a
new computer
system, or
remodeling.
They will
consider
non-cash
items like
depreciation
and
amortization.
Interest
expenses
will be
reviewed, as
will owner
perquisites.
These are
items that a
professional
business
broker
considers
when
advising a
selling
client on a
suggested
selling
price.
Appearances
Do Count
The time
to replace
that old
worn-out
piece of
equipment is
before you
decide to
sell. Don't
assume that
a new owner
will want to
do it or
that the
price will
be slightly
lower
because you
haven't
replaced it.
The time to
"spiff up"
the business
is now, even
if you
aren't
selling. Fix
the sign,
replace the
carpet,
paint the
place - make
it look
good. Even
if you're
not selling,
it's just
plain good
for
business,
and you
never know
when the
time to sell
occurs.
Keep-in-mind
that
anything
that
increases
sales also
increases
profits and
the
all-important
cash flow!
Everything
has Value
There are
other things
that add
value to
your
business.
Don't
discount the
value of
customer
lists,
proprietary
products
and/or
techniques,
well-maintained
equipment,
secret
recipes,
customized
software
programs, or
good
employees.
These are
termed
"off-balance
sheet
items," and
although not
used in most
pricing
models, they
add to
value. Look
at your
business
very
carefully so
you don't
overlook
those items
that make
your
business
more
attractive
to the
buyer.
Eliminate
the
Surprises
Long
before you
put your
business on
the market
-- eliminate
the
surprises!
Review every
facet of the
business and
remedy any
problems
that could
appear
during the
sale
process. No
one likes
surprises --
most of all
potential
buyers.
Whether
legal,
accounting,
environmental,
or anything
else - solve
it now.
We as
professional
business
brokers can
assist you
in the
planning
process. We
know what
buyers are
looking for
and are
familiar
with current
market
conditions.
Copyright
BBP 2003
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The
following is
provided as
a simple
explanation
of common
leasing
arrangements
within small
business
transaction.
it not
intended to
provide
legal
advice.>
The New
Lease
A new
lease is
created
generally
when the
prior lease
has expired
or is about
to and when
there are
going to be
substantial
changes to
the existing
lease. A new
lease would
be executed
between the
purchaser of
the business
and the
landlord. It
is a new
document
either
drafted by
an attorney
or used in a
standard
form that is
available at
stationery
stores and
in many
books. A new
lease
involves
negotiations
between the
owner or
purchaser of
the business
and the
landlord.
The
Sub-Lease
A
sub-lease is
nothing but
a lease
within a
lease. For
example, if
the seller
of a
business is
permitted to
sub-lease
the
premises, he
or she, as
far as a new
owner is
concerned,
is the
landlord. In
this case,
the actual
landlord is
still
dealing with
the seller
and has no
relationship
with the
buyer.
Obviously,
the seller
needs the
permission
of the
landlord or
lessor to
assign or
sub-lease.
The
Assignment
of the
Existing
Lease
This is
the most
common form
of allowing
a buyer the
use of the
premises in
which the
business is
located. In
an
assignment,
the seller
is
"assigning"
all rights
to the
existing
lease to the
new buyer.
Once the
assignment
is executed,
the seller
usually has
no more
rights in
that lease.
However, in
most
assignments,
the landlord
reserves
"all rights"
in the
lease. In
other words,
the seller,
who may be a
tenant or an
assignee, is
still
responsible
to the
landlord if
the buyer
does not
perform.
Copyright
BBP 2003
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Going
into
business for
yourself is
a big step,
one that can
be full of
apprehension
and even
fear. Almost
90 percent
of all those
who purchase
a small
business
have never
owned a
business.
Most of them
bought a
business
that was
different
than what
they had
been looking
for. These
business
buyers had
the
opportunity
to explore
the
marketplace
and
subsequently
found a
business
more to
their
liking. In
most cases,
the seller
financed the
sale of his
or her
business.
As you
begin your
search for a
business,
keep in mind
that running
your own
business is
more than a
job; it is a
lifestyle
change. In
most cases,
it is a very
big
lifestyle
change.
Usually, you
will be
working
longer
hours, you
will be
making all
of the
decisions -
and, as the
expression
says, "you
will be the
chief cook
and bottle
washer." In
other words,
you will be
doing all of
the work
from running
the business
to, in may
cases,
sweeping the
floor and
changing the
light bulbs.
Most buyers
are looking
for many of
the
following in
considering
the purchase
of a
business:
-
Pride in
the
service
or the
product
-
Flexibility
-
Income
-
Control
of your
own
destiny
-
Recognition
-
Security
-
Privacy
-
Status
-
Customer
and
employee
contact
WHAT TO LOOK
FOR
1. How
long the
business has
been in
business.
A
business
with a long
track record
means there
are good
reasons for
that
business to
be
operating.
It will be
well known
in the area,
and people
will be used
to
patronizing
the business
or using its
services.
The longer
it has been
in
operation,
generally,
the better
the
business.
2. How
long the
present
owner has
owned the
business.
The
longer the
present
owner has
been in
business,
the more
likely he or
she has been
successful.
People don't
stay in
business if
they are not
making
money.
3. Why
the present
owner is
selling.
If the
owner of a
business has
been in
business for
six months,
is 37 years
old and
wants to
retire, you
should be
suspicious.
The more
valid the
reason for
sale, the
more
realistic
the seller
will be in
considering
your offer.
However,
keep in mind
that after
five or six
years or
more, people
do get
restless or
"burn-out"
sets in, or
people look
for new
challenges.
Why the
seller is
selling is
an important
question -
get the
answer.
4. Why
Books and
Records are
important.
The
financial
records of
the business
are a good
indication
of how well
the business
has been
doing over
the years.
Keep in mind
that tax
records are
not designed
to show the
business in
the best
light: no
one likes to
pay more
taxes than
they have
to, and
owners of
businesses
are no
different.
Generally,
tax returns
are a worst
case
scenario.
You need to
be able to
look at the
expenses and
discover
which ones
are non-cash
items, such
as
depreciation,
and business
use of home
and
vehicles.
How
important
was the
business
trip to Las
Vegas? A
professional
business
broker can
point these
items out to
you. When in
doubt,
however,
seek outside
assistance.
Keep in
mind that
financial
records are
only
history.
There are no
guarantees
that they
will or can
be
duplicated
or repeated.
All of your
profits are
future. In
the final
analysis,
the
financial
records of
the business
are an
indicator of
what the
business has
done; what
you do with
its future
is up to
you.
5. How
to determine
if the
seller is
reporting
all income.
The
simple
answer is -
that you
can't! Not
reporting
income is
against the
law. You
should
consider
only the
income that
the seller
can show
you. We all
know, of
course,
especially
in cash type
businesses,
there is the
possibility
that the
seller is
not
reporting
all of his
or her
income for
tax
purposes.
This
"underground
economy" has
been
well-documented
and is in
the billions
of dollars.
Many sellers
will tell
you about
how much
they are
"skimming,"
but you
should
ignore their
statements,
since they
have no way
of proving
these
amounts. In
determining
whether a
business is
the right
one for you,
you should
base the
decision on
the figures
actually
supplied to
you by the
seller.
THE BOTTOM
LINE
Being in
business for
yourself can
be a
daunting
prospect.
There are no
guarantees.
At some
point, after
all of your
investigation
is
completed,
you will
still have
to make that
"leap of
faith" that
is necessary
to proceed
with the
purchase of
the
business.
You will
have to work
hard,
perhaps even
"tighten
your belt" a
little and
perform many
different
jobs to be
successful
in your own
business.
But, if
running your
own show,
making your
own
decisions,
not having
to worry
about job
security
(remember,
no one can
fire you
from your
own
business),
and just
being on
your own are
important -
then owning
a business
is for you.
After taking
this leap of
faith,
almost all
business
owners will
tell you
that they
would never
go back to
being an
employee.
Copyright
BBP 2003
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The
strategic
buyer is
one engaged
in a similar
or related
business to
the one
being
purchased.
Generally,
the
strategic
buyer is
willing to
pay the
highest
price since
it provides
a quick
entry to a
related
business.
Buying a
business is
much easier
than trying
to replicate
it.
The
competitive
buyer
offers a lot
of synergies
that can
reduce costs
and perhaps
increase
market share
- which also
obviously
reduces
competition.
However,
this is a
less popular
type of
buyer
because
sellers are
usually
reluctant to
approach the
competition.
The
financial
buyer
brings
little, if
any, synergy
to the deal.
However,
these buyers
do bring
financial
knowledge
and use it
to increase
the profits
of the
business.
They
generally
make changes
and work to
increase the
value in
order to
sell it at a
profit in
five to
seven years.
The
financial
buyer almost
always
insists on
owning 100
percent of
the acquired
business.
The
overseas
buyer
can be
difficult to
find, and
usually
wants to
acquire
larger
companies.
This type
may look at
a smaller
firm if they
feel that it
provides an
entry to the
U.S. market,
and will pay
well for
such a
company.
A
customer,
vendor or
supplier
is also a
possible
acquirer,
but vertical
integration
is not
perceived as
a viable
acquisition
strategy
today.
Copyright
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Anyone who is considering selling - or - buying a business wants to know the advantages of using the services of a business broker. They also want to know what to expect from using their services.
From the Seller's Viewpoint
Let's look at these questions from the seller side first. In most cases, the business broker is listing the business for sale. In most cases the business broker is representing the seller and is duty-bound to represent the seller honestly and fairly. A business broker is also charged with trying to get the highest possible price - and the best deal - for the seller. However, sellers must understand that, no matter how hard the business broker tries, it is the marketplace that ultimately determines the price and terms - not the business broker or the seller.
The business broker will keep the seller informed, on a regular basis, of the status of the listing and will do everything possible to maintain the confidentiality concerning the sale of the business. However, selling a business is a two-way street and requires cooperation on both sides - seller and business broker. The broker needs to be kept aware of current information regarding the business, such as sales trends, major equipment purchases, inventory fluctuations and the like. The broker and the seller must work together; they are on the same side, and they should work as a team.
In some states, business brokers act as transaction brokers. They do not represent anyone; instead, they work for the transaction - their job is to make the sale work and go together. Despite the fact that they may not represent either buyer or seller, they still must treat both sides honestly and fairly.
Although in most states, the business broker does represent the seller, he or she must still deal honestly and fairly with the buyer.
From the Buyers Viewpoint
The advantages of a buyer in working with a business broker are the many opportunities that can be presented to the buyer. Many buyers may think they want a certain kind of business, but, in fairness, they have no idea of the various businesses that may be available.
No one likes to waste their time, and business brokers can show buyers businesses that fit their pocketbook and still can provide the necessary income to provide for their families. Buyers want candor in the presentation of the business. The business broker is an intermediary - he or she can resolve issues and misunderstandings easily and quickly.
Professional business brokers bring value to the process of buying and selling businesses. They understand the issues and the details involved in the business transaction. They have the knowledge and experience to bring the sale to a successful close. If the buyer and seller are honest with the business broker - a win-win situation will result. In return, business brokers need a seller who is really a seller and a buyer who is really a buyer. Buyers and sellers should have high expectations about what the business broker can offer. At the same time, the business broker has the right to have the same expectations from them.
Almost all businesses include all of the following:
- Fixtures and equipment
- Inventory (or stock-in-trade)
- Goodwill (the reasonable expectation of future profits)
- Lease
- Leasehold improvements
In addition, it is possible that a business might include one or more of the following:
- A franchise
- Customer and/or mailing lists
- Patents/copyrights
- Secret recipes
- Proprietary software or other technology
All of these components, and others, may have a positive or negative affect on the asking, and ultimate, selling price of the business.
Copyright BBP 2003
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The following is some basic information for anyone considering purchasing a business. Is may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become.
A Buyer Profile
Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business that he never considered until it was introduced, perhaps by a business broker.
His, or her primary reason for going into business is to get out of his or her present situation, be it unemployment, job disagreement, or dissatisfaction. The potential buyer now wants to do their own thing, be in charge of their own destiny, and they don't want to work for anyone. Money is important but it's not at the top of the list, in fact, it is probably fourth or fifth on their priority list. In order to pursue the dream of owning one's own business, the buyer must be able to make that "leap of faith" necessary to take the plunge. Once that has been made, the buyer should review the following tips.
Importance of Information
Understand that in looking at small businesses, you will have to dig up a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don't overlook a "gem" of a business because you don't or won't take the time it takes to find the information you need to make an informed decision. Try to get a understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.
Negotiating the Deal
Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his "story" may change when it comes time to put his words into action. The seller finances the vast majority of small business transactions. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.
Since you can't expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don't try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure--don't obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.
Furthermore, don't try to push the seller to the wall. You want to have a good relationship with him or her. They will be teaching you the business and acting as a consultant, at least for a while. It's all right to negotiate on areas that are important to you, but don't negotiate over a detail that really isn't key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.
Due Diligence
The responsibility of investigating the business belongs to the buyer. Don't depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn't reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the "leap of faith" necessary to achieve business ownership. Outside professionals normally won't tell you that you should buy the business, nor should you expect them to. They aren't going to go out on a limb and tell you that you should buy a particular business. In fact, if pressed for an answer, they will give you what they consider to be the safest one: no. You will want to get your own answers--an important step for anyone serious about entering the world of independent business ownership.
Copyright BBP 2003
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If you are considering entering the world of franchising, an important consideration is assessing the value of the business. All of the following factors either affect or help determine valuations of typical franchise operations:
1. Franchise Agreements:
Typically, franchise agreements can cover a period of twenty years; sometimes with added options. In most situations where a franchise unit has fewer than ten years remaining on the agreement (and options, if any), the value would diminish proportionately.
2. Territory Exclusivity:
Many franchisors do not, as a matter of course, provide an "exclusive" to franchisees within a given territory. More commonly, however, the franchisor will offer a franchisee limited protection for five years, during which time only he or she will be allowed to expand operation to additional units. Even limited protection can be assigned some value; any current territorial rights may have additional -- and significant -- value.
3. Business Hours:
Potential franchisees should consider operating hours when assessing the value of a business. Business in general, and franchise operations in particular, are staying open for increasingly longer periods -- some operate 24 hours a day, seven days a week. Locations in certain areas -- city centers, bus stations, train depots -- may open for shorter hours and fewer days. Since most business owners/managers would prefer the less demanding hours of operation, a premium value will be placed on these units.
4. Location:
This is the most obvious variable. A franchise operation in a suburban or small-town setting has a higher value than one in an inner-city or high-crime-rate area, regardless of other similarities (rent, sales volume, etc.).
5. Cash Flow:
Surprisingly, profitability may not necessarily be the key factor in valuing a franchise operation. A demonstrated, well-documented cash flow can definitely add value to the unit; however, the smart buyer will also look at other variables, such as unusually low food cost or labor costs, sales history, and potential for growth or improvement under new management in determining the overall value. Extreme situations provide the obvious exceptions to importance of cash flow: where the cash flow is extraordinarily high, capitalization of earnings becomes a truer method of valuation; case where the franchise is actually losing money due to inefficient management, would indicate some reduction in value.
6. Leases:
Taking into consideration market variation, the typical rent will be set at approximately ten percent of retail sales. Modifications in value could result if the lease does not cover a period of at least ten years.
7. Remodeling:
Many franchise agreements will require units to be refurbished within a certain number of years (ten is typical), with the franchisee bearing the cost. Since these costs typically fall within a range from $75,000 to $150,000, potential franchisees should pay particular attention to where the operation stands on this timeline. For example, a unit due for remodeling in a year or less could be reduced in value by a fair percentage of the cost of the improvements. The total cost would not be deducted from the value, since these improvements would also be expected to improve business anywhere from five to twenty-five percent.
Copyright BBP 2003
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Buying your own business can be a complicated procedure. Throughout the buying process, it's important to keep an open mind while searching for a business that will fit your needs, talents, skills and lifestyle. A business broker has many different types of businesses for you to consider; however, you need to remember that there is no such thing as that "perfect" business. Another vital thing to keep in mind is that at some point you must be able to make the "leap of faith" that separates you from being a "looker" to a "doer." This isn't easy, but it must happen if you are ever going to be in business for yourself. The following discussion of other key issues may help in the process:
Importance of Information
Understand that in looking at small businesses, you will have to dig out a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don't overlook a "gem" of a business because you don't or won't take the time it takes to dig out the information you need to make an informed decision. Try to get a understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.
Negotiating the Deal
Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his "story" may change when it comes time to put his words into action. The vast majority of small business transactions are financed by the seller. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.
Since you can't expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don't try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure--don't obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.
Furthermore, don't try to push the seller to the wall. You want to have a good relationship with him or her. They will be teaching you the business and acting as a consultant, at least for a while. It's all right to negotiate on areas that are important to you, but don't negotiate over a detail that really isn't key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.
Due Diligence
The responsibility of investigating the business belongs to the buyer. Don't depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn't reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the leap of faith necessary to achieve business ownership. Outside professionals normally won't tell you that you should buy the business, nor should you expect them to. They aren't going to go out on a limb and tell you that you should buy a particular business; in fact, if pressed for an answer, they will give you what they consider to the safest one: no. You will want to get your own answers--an important step for anyone serious about entering the world of independent business.
Copyright BBP 2003
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How about a quaint bookstore in a small village? Or maybe a lovely country inn nestled in the mountains? Perhaps a travel agency--with all those great trips--might sound appealing. Buying a business, no matter what it is, is also buying a lifestyle. What better time to make a lifestyle change than when one is considering the purchase of a business? If you want to move to the mountains, a small town or even right into the middle of the city--you can do it when you buy a business.
Most buyers of businesses, when asked why they want to buy a business or go into business for themselves, state that they want to control their own destiny or don't want to work for anyone else. Making more money is far down the list. In fact, most buyers who have left the more lucrative corporate world claim that they would never go back to it. Although most buyers would probably not admit it, the decision to buy a business is primarily a lifestyle choice. In this context, the type of business or the geographical place is immaterial--it's the switch from job-holder to business owner that is the dramatic change. Just giving up the "frequent flyer" out-of town trips and the constant meetings may be a lifestyle change for many. One buyer said that he saved 1000 hours a year by adding up the cost of commuting and time spent in meetings. For many new business owners, the lifestyle change becomes more important than money.
Sellers of businesses should keep in mind, however, that a lifestyle business is determined by the buyer--not the seller. It is the buyer's perception that gives a business its "lifestyle" quality. No matter how quaint your bookstore may be, buyers are not going to overlook the basics they expect to find before even thinking about the style of life it might provide. Buyers are still going to look at:
- Is there enough cash flow to cover the debt service?
- Is there also enough to pay a reasonable salary to the owner?
- Is there some left over to provide a fair return on assets and the buyer's investment?
Furthermore, there are other considerations. Some typical lifestyle businesses--the country inn or bed and breakfast, for instance--may be real estate driven. That is, the real estate contains the real value of the business; the real profit lies in the equity in the real estate and its possible appreciation. Therefore, in considering these types of businesses, the buyer may be willing to overlook some of the items listed above. The lifestyle decision may outweigh the normal return a prospective buyer expects of a business. There are those who are willing to make less money or overpay for some lifestyle businesses.
Obviously, it could be said that every business offers a lifestyle opportunity for someone. However, only those businesses where there is sufficient buyer interest can qualify as those lifestyle businesses for which buyers are willing to accept lower returns or even to overpay. Again, sellers would do well to remember that lifestyle is in the "eyes of the beholder."
Copyright BBP 2003
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