Buying & Selling
QUESTIONS ABOUT BUYING
Buying a business is a major decision. It will not only affect you financially, but it is also, and perhaps more importantly, a lifestyle decision. How you live your life is shaped and influenced by how your earn your living. Many people really enjoy working for themselves. Being self-employed and in charge of your own destiny is a great feeling! If you have decided that now may be a good time to consider going into business for yourself, working with a knowledgeable business broker can provide you with the professional assistance necessary for a smooth and successful transition. The following list of questions are those typically asked along with our responses to those questions. If you have other questions, we would be happy to meet with you and discuss your situation with no obligation on your part.
QUESTIONS ABOUT SELLING
Considering selling your business? Selling is a big decision. Often, you have spent much of your life building the business and it may be your largest asset. If now is the time to sell, you need excellent professional assistance to sell. You need to consult with an accountant or other tax professional that is well acquainted with the tax implications of selling a business. Selling a business usually has very different tax consequences than selling many other investments. This is so because most businesses are sold as a collection of assets rather than selling stock in a small corporation. If the deal is structured incorrectly, you could end up paying a lot more in income taxes than you should. You will need an attorney that handles business sales regularly and a well qualified business broker is a good idea. A well qualified business broker can help you determine price and terms that will be acceptable to business buyers. They also find buyers, screen buyers, assist with financing, and coordinate the closing process.
The following are some of the most common questions sellers ask along with our responses. If you have other questions, we would be happy to meet with you and discuss your situation with no obligation on your part.
A professional business broker can be helpful in many ways. They provide you with a selection of different and, in many cases, unique businesses, including many that you would not be able to find on your own. Approximately ninety percent of those who buy businesses end up with something completely different from the business that they first inquired about. Business brokers offer a wide variety of businesses to look at and consider.
Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise you about trends, pricing, and what is happening locally. Your business broker will handle all of the details of the business sale and will do everything possible to guide you in the right direction, including consulting with other professionals who may be needed to assist you.
Professional business brokers sell only businesses. This is their area of expertise. They don't sell houses, apartment buildings, or other types of real estate. They have the experience and the knowledge necessary to help you through what can otherwise be a difficult and complicated process.
Getting a brand new business to the point where it consistently generates profits can be a long and expensive process. An existing business has a track record. It has made it through the high mortality start-up phase. The failure rate in business is largely at the start-up phase. An existing business has demonstrated that there is a need for that product or service in a particular area. Financial records are typically available along with other information on the business. Most sellers stay on for a period to train you, the buyer, and most will also finance part of the purchase price. Training and financing are both critical parts of acquiring a business.
Many surveys have been taken to attempt to answer this question. Some surveys change the order of the responses somewhat, but most surveys list the following reasons:
1. To control my own destiny.
Making money, while important, is generally not the major reason for going into business for yourself.
Generally, at the outset, a prospective seller will ask the business broker what he or she thinks the business will sell for. The business broker usually explains that a review of the financial information will be necessary before a price or range of prices may be suggested. Most sellers have some idea of what their business should sell for and this is taken into consideration. However, the business broker is familiar with the market and by reviewing the financial information, can make a recommendation of what the market will likely dictate. A range is normally set with a high and low price. The more cash demanded by the seller, the lower the price; the smaller the cash requirements of the seller, the higher the price.
Since most business sales are seller-financed, the down payment and terms of the sale are very important. In many cases, how the sale of the business is structured is more important than the actual selling price. Too many buyers make the mistake of being overly concerned about the full price when the terms of the sale can make the difference between success and failure. If you could purchase a business that would provide you with more net profit than you thought possible even after subtracting the debt service to the seller, and you could purchase the business with a small down payment, would you really care what the full price of the business was?
Obviously, you want to consider only those businesses that you would feel comfortable owning and operating. "Pride of Ownership" is an important ingredient for success. You also want to consider only those businesses that you can afford with the cash available. In addition, the business you buy must be able to supply you with enough income to pay your bills and support your required lifestyle. However, you should look at a business with an eye toward what you can do with it--how you can improve it and make it more profitable. You should not buy a business unless you believe that you can eventually do better than the present owner.
You need to have enough capital to buy the business, to make the improvements you want along with maintaining some reserves. You will need to be willing to work hard and, in many cases, put in long hours. Too many people believe that they can buy a business and sit home listening to the cash register ring over the phone. Business owners must be involved in the business--they must be "doers."
When you find a business you want to buy, the business broker will be able to answer many of your questions. Other questions will need to be answered by the seller. The business broker will arrange for you to visit the business and meet with the owner. Once you get your preliminary questions answered, the typical next step is for the broker to help you prepare an offer based on the price and terms you feel are appropriate. Some questions will only be able to be answered by a thorough review of all the business's books and records. The offer will be subject to your approval of the actual books and records supporting the figures that have been supplied to you. The main purpose of the offer is to see if the owner is willing to accept the price and terms you offered. There isn't much point in continuing if you and the seller can't agree on price and terms. The offer is presented to the seller by the broker. The seller can approve it, reject it, or offer a counter proposal. You have the choice of accepting the counter offer or continuing your search for a suitable business.
If you and the seller agree on price and terms, the next step is for you to do your "due diligence." The burden is on you--the buyer--and no one else. You may choose to bring in outside advisors or to do it on your own. Once you have checked the business and approved those areas of concern, closing documents can be prepared and your purchase can be completed. Closing documents are typically prepared by an attorney representing the seller. The buyer usually has their own attorney review them on their behalf to ensure that they correctly outline the original accepted offer agreement. The closing then takes place typically in the office of an escrow company.
Business brokers are the professionals who will facilitate the successful sale of your business. As you business broker, we can help you decide how to price your business and how to structure the sale so it makes sense to both they buyer and to you. Our job is to find the right buyer, work with you and the buyer in negotiating the price and terms, and to coordinate each step of the process to lead to a successful closing. We also help the buyer in each step of the process including assisting in obtaining any needed financing.
Business brokers do not, however, set the price of your business. Only the marketplace can do that. Most businesses will sell if priced and structured properly. The down payment you require as well as the other terms of the sale can have a significant impact on the price and ultimate success of the transaction.
It is usually very important to keep the fact that the business is for sale confidential. Customers and suppliers, employees, and others can become nervous and it may hurt the business for it to become widely known that it is for sale. A good business broker requires potential buyers to sign a non-disclosure agreement before they learn anything about a business including its name and location. This protects you from many of these problems.
No one can predict how long it will take to sell your business. Some businesses have sold in a week or two. Many sell between three and six months. Others take a year or more to sell. Some never sell at all. The sooner we have a complete package of information about the business, the sooner we can get to work. Buyers want facts. We cannot professionally present the business without this information. It is equally important that the business be priced correctly from the beginning. Some sellers want to overprice the business in the belief that they can always come down. The fact is, many qualified buyers will refuse to look at a business that is overpriced. They simply do not want to enter into negotiations with a person that they believe has unreasonable expectations.
Often, the down payment required may be the key ingredient to a quick sale. Generally, the lower the down payment, the quicker the sale. Many businesses sell with down payments equal to one fourth or one third of the total price. A reasonable down payment also tells the buyer that the seller has confidence in the business's ability to make the payments. Of course, if the business has a large amount of inventory, the down payment must be enough to cover the inventory or other collateral may be necessary to prevent a buyer from selling the inventory and not making payment to you, the seller.
Many people really do not know what their business is worth or what someone will likely pay for it. First, Sellers often ask their accountant however, most accountants are not trained in valuing businesses and simply do not know the answer or will guess incorrectly. Some Sellers ask if they need to have their business appraised. This is an expensive process and is usually not necessary to sell a business. A well qualified business broker sells businesses of all kinds regularly and can help you determine what your business will likely sell for. A broker will usually help you determine a range of likely prices. The more cash demanded by the seller, the lower the price; the smaller the cash requirements of the seller, the higher the price. No one can really predict the price a business will sell for--only the market can do that after proper exposure for a reasonable period of time.
There are no magic formulas for pricing a business. Our firm of business brokers and a certified business appraiser will meet with you, review your financial information, check market sales of businesses in the same or similar lines of business and help you determine a reasonable asking price. After exposure to the market for a period of time, it will become apparent if the business is priced appropriately. We stay in regular contact with you and keep you informed of our progress and business buyer prospect's comments and thoughts. This way, you can decide what to do about your asking price and adjust it as needed.
Since most business sales are seller-financed, the down payment and terms of the sale are very important. The terms must be such that a buyer can make the payments and still pay themselves a wage large enough to live on. If this is not possible, the price is too high. Some business owners demand all cash. In this case, a Small Business Administration (SBA) guaranteed loan is typically necessary. You need to understand that the price you receive in an all cash transaction is typically much lower than if you carry financing. Also, many businesses simply will not qualify for an SBA loan for a variety of reasons. Some of those reasons are: poor financial information, sales not fully reported, lack of sufficient collateral for the loan, length of time in business, and many others.
Surveys have shown that a seller who asks for all cash receives on average only 70% of their asking price. Sellers who accept terms receive over 85% on average. In many cases, businesses listed for all cash simply do not sell. With reasonable terms, the chances of a sale increase dramatically. Unfortunately, most banks and lending institutions (including Small Business Administration 'SBA' lenders) do not make loans for the purchase of most small businesses. Seller financing may be the only way to sell the business. You will also receive interest from the note which can greatly increase the total amount received. Seller financing tells the buyer emphatically that the seller believes the business can make the payments.
Very few seller carried financing transactions are supported by collateral other than the business being sold. Asking for financing to be secured by the buyer's home or other real estate usually is interpreted by the buyer as the seller has no confidence in the business. Getting a large enough down payment to cover easily disposed of assets with the right to quickly take back the business in case of non-payment along with good training of the buyer usually takes care of the potential problem.
When a buyer is sufficiently interested, we will assist in the preparation of an offer. Our standard Business Opportunity Purchase Agreement will spell out the buyer's offer in detail. The offer may contain several contingencies and will spell out the type of due diligence the buyer will perform. You may be asked to provide bank statements, sales tax reports or other such items in addition to financial statements and tax returns that we requested when we listed your business for sale. Additionally, the buyer will want to review the lease, franchise agreement or other contracts that may be applicable to the business.
We must present all offers to you for your consideration. Even those that you might view as ridiculous. You always have the right to accept an offer, issue a counter proposal or reject the offer. It is important to know if you don't accept the offer, a buyer can withdraw at any time. Be prepared to do some work at this point in the process. People from all over are seeking business opportunities in our area. Different nationalities and cultures approach negotiations in far different ways. You should take the time to consider all offers carefully and seriously. There may be some definite positives in the offer and the negatives may be offset with careful negotiations. Often, the first buyer turns out to be the best.
First and most importantly, a seller should continue to run the business as if they intend to keep it forever. Do not put off needed maintenance or defer advertising thinking you can save a few dollars. This type of move will only hurt the business and reduce the amount you will get for it. Make decisions about the company in ways that are in the best interest of the long-term objectives for the company.
Make sure that you have good records. A buyer will want to see the last three to five years tax returns and a current interim financial statement. Work with your accountant to make sure that your financial information is accurate and complete. If you have not reported all of your income in the past, do so now. Sales that are not reported will not be recognized by a buyer or a lender.
Understand the tax implications before setting the selling price and terms. This may very well require the assistance of a specialist in this field. Your company accountant or bookkeeper is an expert at keeping records of the company but may not be completely up to date on some of the latest structures that can be employed t reduce your tax burden. An effective tax plan can allow you to price the business much more attractively without sacrificing your total return. This is a critical step in developing a win-win transaction.
If you are using your company attorney, make sure they are familiar with the business closing procedures and documents in use in this area. Many attorneys do not regularly handle the sale of businesses and their unfamiliarity with the procedures can either delay or sometimes torpedo the transaction. Make sure the attorney that you do use has the time to handle the transaction.
You too should be prepared to close quickly. Once an agreement has been reached between buyer and seller, buyers generally want to close as soon as possible. It is a fact that businesses rarely improve between the time a seller signs a contract to sell and a closing. Customers, competitors, and key employees may react in different ways when they hear of the sale. The sooner the new owner takes over, the sooner some of those fears and anxieties will go away. If there are actions that you have deferred, such as maintenance or repairs, you should take care of them at once. There will be lots to do as the closing approaches so everything that can be done in advance of an offer should be done.
Cosmetic things that can be done to improve the appearance of the business should be done. Remember, a buyer will see all the old warts on a business that you have been meaning to fix or replace but never got around to doing. Before a potential buyer sees the business, fix or replace those items.
Your team of advisors must all be working toward the common goal of selling your business to the best buyer and for the best price and terms. Only through the close cooperation of all parties can we do our best to help you through this very important transaction.
We look forward to assisting you in the sale of your business.