10 Tips for Buyers of a Business
Tip number 1, Buy an existing business: Sure, you can start a business from scratch, but your chance of failure is drastically increased. Buying a well established business with an existing client base and a proven cash flow is a lot less risky and your chances of “making it” are much higher.
Tip number 2, Decide what type of business to buy: It is important to buy something that you can enjoy owning at a location that you can live with. If you hate pizza, don’t buy a pizza shop. Buy something that you will be happy owning. If you hate the city of Philadelphia, don’t buy a business in the city of Philadelphia. Buy one in Florida. My office gets calls all the time from buyers who have no idea what they want to buy or where they want to buy. It seems as if they concentrate more on the cash flow number. While cash flow is undoubtedly an important variable, it should not be the single most important factor in deciding to buy a business. Decide whether you want a service based, retail based or manufacturing based company.
Tip number 3, Determine whether you can afford to buy a business: Many people never make the leap because they think that buying a business is a financial impossibility for them. The truth is, typically you do need some money, but perhaps not as much as you think. There are several options for financing the purchase of a business. An SBA (Small Business Administration Loan) can usually be acquired if you have a good credit score, some relative experience in the type of business that you want to buy and 20% of the purchase price. The purchase can also be funded with seller financing in the form of a promissory note or an installment purchase agreement. A purchase can even be funded through your 401k or IRA.
Tip number 4, Surround yourself with professionals: Buying a business is probably one of the most important events in a person’s life. It is important to surround oneself with the appropriate professionals. There are three key individuals that you should use to assist you in buying a business; they are a business broker, an attorney and an accountant. Business brokers are instrumental with identifying businesses, negotiating the price, and getting everyone to the closing table. Most business brokers have an attorney that they work closely with. You should be somewhat careful with going with that attorney. They will be torn between protecting your interest and making sure they don’t muddy the waters too bad essentially dissuading the broker from sending them more work. Regardless, you should choose an attorney that has experience with business transactions. Do not use your relative or close friend that happens to be an attorney if they specialize in something other than transactional law. You don’t need a powerful Tampa attorney, but an attorney with knowledge of Asset Purchase Agreements is a must. A CPA can be instrumental in the due diligence phase of the purchase. They will scour the books and records of the company to make sure the represented revenue and cash flow numbers are accurate. They can also educate you as to the tax implications for the allocation of the purchase price. Most major life events require the assistant of professionals, buying a business is no different.
Tip number 5, Identifying the Business: Once you have identified what kind of business that you want to own and the location you want to be in, the next step is finding a business that meets your criteria. There is no magic list of businesses that are closely held to the chest of businesses brokers. Usually, most businesses are advertised on the Internet on two key websites, www.bizbuysell.com and www.bizquest.com. While it may be true that some brokers don’t publicly advertise some businesses because some Sellers want the utmost confidentiality, most brokers list their businesses for sale on those two sites. You or your broker should complete a search to locate businesses that fit your profile. Try to find businesses of the type that you desire that are throwing off enough cash flow to sustain your personal obligations and give you the ability to grow the business.
Tip number 6, Prepare questions for the Seller. There are several key questions that a potential buyer should ask every Seller. The first, why are you selling? This is the most common question of the initial meeting. Sellers decide to sell for a variety of different reasons. The best-case scenario is that they are retiring. Some are forced out by partnership disputes or divorces. Others legitimately want to pursue other business opportunities. Some business owners spend so much time and effort getting a business off the ground that they are simply burnt out and want to cash in. A buyer should be leery of any business with a historic downtrend in revenues or cash flow. Sometime Sellers want to get out because they foresee a continued decline in their business or because they know of some impending event that will undoubtedly harm their business. Whatever the reason, make sure it is a good one. Secondly, ask the Seller if they know of any reason that business will downtrend in the near future. Find out if there is a major competitor coming to the area or some regulation that is poised to impact the industry. Third, find out who the key employees are, what their roles are and if they would be likely to continue to work under a new owner. Fourth, ask about the immediate competition, who they are, where they are and what percentage of market share they have. Fifth, find out how long the owner is willing to stay on to assist with the transition. There are many questions that a Buyer should pose to the Seller. The most important thing is being prepared with questions.
Tip number 7, Make an Offer. You have located your dream business and now you are ready to make an offer. There are several key things to know before doing so. Do not sign an Asset Purchase Agreement at this point. Buyers want to sign something less committal such as an Offer to Purchase or a Letter of Intent. You want to make sure that you offer has a due diligence contingency, a financing contingency if applicable, a lease transfer contingency if applicable, a liquor license transfer contingency if applicable. You also want to make sure that your offer contains the key terms of the transaction so that the drafting of the Asset Purchase Agreement is more of a formality. Be careful with making an offer that is too low. You do not want to insult the Seller and potentially kill the deal on the spot. Make a reasonable offer and leave yourself some room to negotiate with the Seller.
Tip number 8, Perform thorough Due Diligence: This is a Buyer’s chance to really open up a business to confirm that it is as financially healthy as claimed. Most due diligence is done simply by looking at a Seller’s tax returns and profit and loss statements. The represented revenues are easily discernable by simply looking at the tax returns. Where things get a more challenging is when a buyer tries to vet the represented cash flow. If a business is being marketed at 2 million in revenues with a $500,000 cash flow, buyers want to make sure that the cash flow number is accurate. Most of the time, the purchase price is based on some multiple of cash flow. If you determine that the number is less than being represented you have reason to renegotiate the purchase price or cancel the transaction. Although tax returns and profit and loss statements are good tools to perform an initial due diligence, buyers should go beyond that by checking merchant account histories, internal revenue reports, bank accounts, etc. The typical due diligence period is somewhere between 15 to 30 days. If a Seller is having a hard time getting you the requested information and it seems as if they are dragging their feet, this may be a good indication that there is something wrong with the representations made. This is the Buyer’s time to make sure they are getting what they are paying for.
Tip number 9, The Closing: After completing a thorough due diligence it will be time to move toward the closing. The closing should be a mere formality. All negotiations should be done and all documents should be prepared in advance of the actual closing date. You don’t want to be sitting at the closing table with a negotiating posture. The parties may potentially have to sign a myriad of documents. Those documents may include: an Asset Purchase Agreement, Bill of Sale, Promissory Note, Employment Agreement, Stock Purchase Agreement, a Property Lease, Personal Guarantees, and a whole host of paperwork from the bank financing the transaction. The attorney and bankers should take charge of the closing. Buyers and Sellers usually sign away and collect their checks or keys. This should be an exciting day for both the Seller and the Buyer.
Tip number 10, Now you own it, do not make any drastic changes: The biggest mistake a new Buyer can make is making drastic changes to the business. If the business that you purchased has a strong history of revenues and cash flow then there is no reason to make immediate major changes to the business. You risk alienating customers and your revenue stream. I have seen this happen time and time again with business buyers. Try to make as little of an impact on the face of the business as possible. Of course new owners have their own ideas and want to make changes. If that is the case, make the changes as subtle as possible and over time. It is a totally different situation if the buyer has purchased a distressed business. If that is the case, then the new Buyer has to make drastic changes to turn things around.
Tip number 2, Decide what type of business to buy: It is important to buy something that you can enjoy owning at a location that you can live with. If you hate pizza, don’t buy a pizza shop. Buy something that you will be happy owning. If you hate the city of Philadelphia, don’t buy a business in the city of Philadelphia. Buy one in Florida. My office gets calls all the time from buyers who have no idea what they want to buy or where they want to buy. It seems as if they concentrate more on the cash flow number. While cash flow is undoubtedly an important variable, it should not be the single most important factor in deciding to buy a business. Decide whether you want a service based, retail based or manufacturing based company.
Tip number 3, Determine whether you can afford to buy a business: Many people never make the leap because they think that buying a business is a financial impossibility for them. The truth is, typically you do need some money, but perhaps not as much as you think. There are several options for financing the purchase of a business. An SBA (Small Business Administration Loan) can usually be acquired if you have a good credit score, some relative experience in the type of business that you want to buy and 20% of the purchase price. The purchase can also be funded with seller financing in the form of a promissory note or an installment purchase agreement. A purchase can even be funded through your 401k or IRA.
Tip number 4, Surround yourself with professionals: Buying a business is probably one of the most important events in a person’s life. It is important to surround oneself with the appropriate professionals. There are three key individuals that you should use to assist you in buying a business; they are a business broker, an attorney and an accountant. Business brokers are instrumental with identifying businesses, negotiating the price, and getting everyone to the closing table. Most business brokers have an attorney that they work closely with. You should be somewhat careful with going with that attorney. They will be torn between protecting your interest and making sure they don’t muddy the waters too bad essentially dissuading the broker from sending them more work. Regardless, you should choose an attorney that has experience with business transactions. Do not use your relative or close friend that happens to be an attorney if they specialize in something other than transactional law. You don’t need a powerful Tampa attorney, but an attorney with knowledge of Asset Purchase Agreements is a must. A CPA can be instrumental in the due diligence phase of the purchase. They will scour the books and records of the company to make sure the represented revenue and cash flow numbers are accurate. They can also educate you as to the tax implications for the allocation of the purchase price. Most major life events require the assistant of professionals, buying a business is no different.
Tip number 5, Identifying the Business: Once you have identified what kind of business that you want to own and the location you want to be in, the next step is finding a business that meets your criteria. There is no magic list of businesses that are closely held to the chest of businesses brokers. Usually, most businesses are advertised on the Internet on two key websites, www.bizbuysell.com and www.bizquest.com. While it may be true that some brokers don’t publicly advertise some businesses because some Sellers want the utmost confidentiality, most brokers list their businesses for sale on those two sites. You or your broker should complete a search to locate businesses that fit your profile. Try to find businesses of the type that you desire that are throwing off enough cash flow to sustain your personal obligations and give you the ability to grow the business.
Tip number 6, Prepare questions for the Seller. There are several key questions that a potential buyer should ask every Seller. The first, why are you selling? This is the most common question of the initial meeting. Sellers decide to sell for a variety of different reasons. The best-case scenario is that they are retiring. Some are forced out by partnership disputes or divorces. Others legitimately want to pursue other business opportunities. Some business owners spend so much time and effort getting a business off the ground that they are simply burnt out and want to cash in. A buyer should be leery of any business with a historic downtrend in revenues or cash flow. Sometime Sellers want to get out because they foresee a continued decline in their business or because they know of some impending event that will undoubtedly harm their business. Whatever the reason, make sure it is a good one. Secondly, ask the Seller if they know of any reason that business will downtrend in the near future. Find out if there is a major competitor coming to the area or some regulation that is poised to impact the industry. Third, find out who the key employees are, what their roles are and if they would be likely to continue to work under a new owner. Fourth, ask about the immediate competition, who they are, where they are and what percentage of market share they have. Fifth, find out how long the owner is willing to stay on to assist with the transition. There are many questions that a Buyer should pose to the Seller. The most important thing is being prepared with questions.
Tip number 7, Make an Offer. You have located your dream business and now you are ready to make an offer. There are several key things to know before doing so. Do not sign an Asset Purchase Agreement at this point. Buyers want to sign something less committal such as an Offer to Purchase or a Letter of Intent. You want to make sure that you offer has a due diligence contingency, a financing contingency if applicable, a lease transfer contingency if applicable, a liquor license transfer contingency if applicable. You also want to make sure that your offer contains the key terms of the transaction so that the drafting of the Asset Purchase Agreement is more of a formality. Be careful with making an offer that is too low. You do not want to insult the Seller and potentially kill the deal on the spot. Make a reasonable offer and leave yourself some room to negotiate with the Seller.
Tip number 8, Perform thorough Due Diligence: This is a Buyer’s chance to really open up a business to confirm that it is as financially healthy as claimed. Most due diligence is done simply by looking at a Seller’s tax returns and profit and loss statements. The represented revenues are easily discernable by simply looking at the tax returns. Where things get a more challenging is when a buyer tries to vet the represented cash flow. If a business is being marketed at 2 million in revenues with a $500,000 cash flow, buyers want to make sure that the cash flow number is accurate. Most of the time, the purchase price is based on some multiple of cash flow. If you determine that the number is less than being represented you have reason to renegotiate the purchase price or cancel the transaction. Although tax returns and profit and loss statements are good tools to perform an initial due diligence, buyers should go beyond that by checking merchant account histories, internal revenue reports, bank accounts, etc. The typical due diligence period is somewhere between 15 to 30 days. If a Seller is having a hard time getting you the requested information and it seems as if they are dragging their feet, this may be a good indication that there is something wrong with the representations made. This is the Buyer’s time to make sure they are getting what they are paying for.
Tip number 9, The Closing: After completing a thorough due diligence it will be time to move toward the closing. The closing should be a mere formality. All negotiations should be done and all documents should be prepared in advance of the actual closing date. You don’t want to be sitting at the closing table with a negotiating posture. The parties may potentially have to sign a myriad of documents. Those documents may include: an Asset Purchase Agreement, Bill of Sale, Promissory Note, Employment Agreement, Stock Purchase Agreement, a Property Lease, Personal Guarantees, and a whole host of paperwork from the bank financing the transaction. The attorney and bankers should take charge of the closing. Buyers and Sellers usually sign away and collect their checks or keys. This should be an exciting day for both the Seller and the Buyer.
Tip number 10, Now you own it, do not make any drastic changes: The biggest mistake a new Buyer can make is making drastic changes to the business. If the business that you purchased has a strong history of revenues and cash flow then there is no reason to make immediate major changes to the business. You risk alienating customers and your revenue stream. I have seen this happen time and time again with business buyers. Try to make as little of an impact on the face of the business as possible. Of course new owners have their own ideas and want to make changes. If that is the case, make the changes as subtle as possible and over time. It is a totally different situation if the buyer has purchased a distressed business. If that is the case, then the new Buyer has to make drastic changes to turn things around.
For a complimentary consultation:
Contact Cecil Williams (cecil@bizbrokerflorida.com) or call at 888-925-5055 ext.206. Visit my personal website to search for business for sale in Florida www.bizbrokerflorida.com Also, visit our Florida Business Exchange website at www.fbxbrokers.com
Contact Cecil Williams (cecil@bizbrokerflorida.com) or call at 888-925-5055 ext.206. Visit my personal website to search for business for sale in Florida www.bizbrokerflorida.com Also, visit our Florida Business Exchange website at www.fbxbrokers.com
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