Truly understanding a business is much like understanding the condition of a car. It is necessary for a skilled mechanic to “pop the hood” to access the true condition of a car. In much the same way, you and your team of experts need to “pop the hood” of the business in order to understand the business’s long-term health and viability. Here are four things to consider before signing on the dotted line.
Will You Enjoy the Work?
Owning a business, especially if you are planning on being an owner-operator, can be a demanding path. You will likely have to log many hours, especially in the beginning. For this reason, you’ll want to select a business that you will enjoy owning.
Life is too short to own a business that you would not want to be involved in. Importantly, if you do not like the business you own, the odds of facing burnout and losing interest are higher. It goes without saying that these kinds of obstacles can dramatically harm your business. Think long and hard before selecting a business to buy, as it is a decision that you will have to live with for years to come.
Did You Examine the Business Plan?
A second factor to consider is that there is no replacement for a good business plan. When you are considering buying a business, you’ll want to dive in and understand every aspect of the current owner’s business plan. If the business plan has major holes or just doesn’t seem to be adding up, you should move on.
Do You Understand the Financials?
Similar to understanding the particulars of a business’s business plan, it is also critical that you have a very precise and clear view of a business’s financials. You should look over everything from profit and loss statements to tax returns and more. It is a smart idea to consult your accountant and a brokerage professional regarding what financial documents you should review. Before you buy a business is the time to understand every small detail of a business’s financial health, not after.
How is the Business Performing?
A fourth factor to consider when evaluating a business is the business’s overall performance. It is possible for a business to have a good business plan (at least on paper) and strong financials and yet it could still have a less than stellar future. Oftentimes, the true health of a business lies beyond the business plan and the current financials.
You’ll need to know about a wide variety of factors including how vulnerable the business is to competition, changes in market forces, the status of key management and employees, the relationship with key suppliers and customers, and any pending litigation. When buying a business, you simply can’t afford to overlook any area.
If you keep an eye on these four key areas, and work closely with experienced professionals like business brokers or M&A advisors, your odds of finding the right business for you will skyrocket. Owning a business that you love will greatly increase your chances of success, so don’t underestimate the emotional factor in the equation.
If you’re planning to buy or sell a business that involves a lease, this can lead to an extra level of complication. Oftentimes, such as in the case of a restaurant or retail establishment, the location is essential to the success of the business itself. That means that if you’re buying a business, you’ll have to make sure any lease issues you might encounter are straightened out before you sign on the bottom line. But even if you’re buying a business that isn’t location-sensitive, you’ll still want to iron out all the details about your lease ahead of time.
Negotiating a Lease
If you’re buying a business with a lease, one word of advice is to have a clear way out of the lease in the near future. After all, with a business so new to you, you might make changes in the short term. The general recommendation is to negotiate a one-year lease that has an option for a longer period of time.
In many instances, the buyer of a business with a lease will find that he or she doesn’t have too much leverage. However, buyers typically find that there is more opportunity to negotiate if the lease is close to its expiration date or the business is performing poorly.
When you’re first negotiating your lease, you may also want to think about the big picture. For example, if your business is in a mall, you might want to confirm that no future tenants will be allowed to move in and be your competition. Along similar lines, some businesses located in shopping centers seek to outline a reduction of rent if the shopping center’s anchor store were to close, as that could negatively impact the business.
When you negotiate your lease, you’ll also want to think about the far-off future when you’d like to sell the business. You will want to make sure that the landlord allows for lease transfers, and you’ll want to confirm the requirements necessary for a potential transfer.
Another thing to consider is what if the property did become available in the future? If this were to occur, you might want to negotiate the option to potentially buy the property. Otherwise, you might find yourself in an unfortunate situation where you are forced to move your establishment.
Basics for Your Lease
A lease should always outline your responsibilities as well as those of your landlord. Make sure you carefully review the lease with your attorney. You’ll want to be sure that you thoroughly understand all the terms. It should cover various issues that might arise in the future and how they will be handled. For example, if there were a fire or disaster, who would pay to rebuild the building? How are the taxes, fees and maintenance handled for the property?
Unfortunately, in some situations a landlord’s lack of flexibility with a lease has even sunk a deal. If the landlord is unwilling to agree to a new lease or offer concessions to an ongoing one, buyers often will find the situation too restrictive. In certain instances, however, sellers have been willing to offer concessions to buyers to counterbalance issues with a lease.
The fate of your business could literally depend on your lease. If you set things up correctly in the beginning, it will most likely benefit you tremendously in the long run.
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There are clearly qualities that make a person an ideal candidate to be a business owner. On the other side of the coin, however, it’s clear that owning a business isn’t for everyone. Let’s take a look at some of the unique personality aspects that help motivated individuals identify owning a business as a good fit for them.
You Seek to Guide Your Destiny
A common reason people become business owners is that they want to have more control over their lives. After all, if you’re working for someone else, your fate is never truly in your own hands. You can always be fired or let go. When you are a business owner however, not only do you have control over your job itself and the tasks you accomplish on a daily basis, but you can also determine who you work with and where you work. You also need to have optimism to keep working with the belief that things are moving in a positive direction.
You are Comfortable with Risk
When you take the role of business owner, you invite a certain degree of risk into your life. That means you are responsible for the success of your business, and you will also have a team of people depending on you. That’s why it’s so important to have a clear vision for the business before you take on the responsibility. You are likely to invest a great deal of your own money into the venture. You may even have to put up valuable assets as collateral, such as your house. You may also have to make sacrifices such as taking a reduced income as the business gets off the ground. It’s important for business owners to possess the inner strength to stay motivated and on track to keep the business growing.
You are Motivated
People who make good business owners are typically inspired by the idea of growing their income, and they are willing to put in the work to achieve that goal. The idea of making key decisions to grow their business is something they find exciting. The truth is, the longer you own your business, the more money you will make. Often you will have to exercise patience in order to reap the financial benefits you’re seeking.
You are Collaborative
Not everyone is great at collaboration. As a business owner however, you will need to work well with others for the business to be a success. It’s rare to do everything on your own. That’s why you need to be a good communicator and will need to be talented at managing others. Great business owners are bosses that are disciplined, self-aware and able to operate comfortably with a high degree of vulnerability.
Before you decide to own a business, it makes sense to do some self-reflection to ensure that your personality really does lend itself to being a business owner. If you have questions about what owning a business entails, be sure to discuss this topic with a business broker or M&A advisor.
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If you’ve ever gotten any type of substantial loan, chances are that you’re already familiar with the concept of collateral. This is when something of value is pledged as security. As a result, the lender has something of value that they could potentially take if the loan is not repaid. Collateral is designed to protect the lender. Of course, the most common example of collateral is your house when you have a mortgage.
Oftentimes, those looking for a loan to buy a small business wonder if they can do so if they have no collateral. Let’s take a closer look at some of the most popular options in this situation.
The 7(a) Loan Assistance Program
If you’re lacking collateral and looking for a business loan, it’s a good idea to check with the Small Business Administration. The SBA 7(a) loan is one of their most popular programs. While it can be used for establishing or acquiring a new business, it’s also commonly used for long and short-term working capital, refinancing business debt, or the purchase of real estate or equipment.
The SBA guarantees up to 75 percent of the amount of the loan if you can contribute 25 percent of the money. This can be a very good option for buyers who don’t want to contribute collateral. You can even use cash that came as a gift from investors. As a result, this program is frequently used by first time business owners. More information is available here: https://www.sba.gov/funding-programs/loans/7a-loans.
One thing you’ll want to note about the 7(a)-loan program is that the seller will not be able to receive payments for two years. As a result, the seller may request or require some other kind of incentive.
Seller Financing Options
Seller Financing happens more often than you would think and is another great way of buying a business without collateral. Most sellers are motivated and will agree to help with financing. Some buyers have even combined SBA loan 7(a) program with seller financing for maximum results.
If you are looking for creative financing options, be sure to talk to your business broker or M&A advisor about the specifics of your situation. You can also look to S.C.O.R.E to receive information about best practices for proceeding.
If you’re looking to buy a business and have no collateral, just remember that people use ingenuity to buy businesses every day. You just need to set your goal and be determined to reach it.
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A partnership agreement is a legal document that provides an outline of how a business will be run. This agreement will often be used by small for-profit businesses when two or more people are involved. It’s an essential document to have, especially in the case when a dispute arises between partners. Even if you have gone into business with a friend or relative, you should have this document in place to make sure everyone is protected. Let’s take a look at some of the key elements that should be in this document.
It goes without saying that your partnership agreement should include the basics, such as the name of the business and the names of key parties involved. You’ll also want to outline the goals of your partnership and how long it will last.
Rules and Responsibilities
When you create your partnership agreement, you’ll want to make sure it offers a lot of clarity on different points with an eye to everyone’s responsibilities. Think through what concerns or disagreements could possibly arise and then outline how you would solve them.
You’ll want to cover everything involving finances in your agreement. This should include key points on income and how it will be distributed. You will also want to clearly outline the ownership interests of each partner involved. Also be sure that the agreement includes the accounting obligations of the partners, and how you’ll handle salaries, vacation, sick leave, etc. Also think about the funds that will be necessary to operate the business. Who will be contributing these funds?
Partners and Staff
The partnership agreement should also cover points involving the work itself. Who is in charge of managing your staff? What kind of authority role does each partner have? What if you decide to bring in a new partner? The agreement should discuss the procedure for adding people to your partnership and what that entails.
Issues Involving Key Decisions
Another important issue to explore and detail in the agreement relates to decision making. How will your company make its business decisions? What will occur if a conflict cannot be resolved? Will you go to court or take another route? What if the partnership was terminated? What would the terms and conditions of your termination be?
When your partnership agreement is under your belt, it should empower you to feel confident in the core structure of your business and its ability to function smoothly.
Obviously, you’ll want to avoid the DIY approach and instead work with an experienced attorney. While it might take more time and money to do so, you’ll be glad that you hired a professional if and when you run into conflicts down the line. Your business broker or M&A advisor should be able to recommend a lawyer who has experience crafting partnership agreements.
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BizBuySell has issued their latest insight report, which summarizes market growth and trends from last year. In this report, they have several interesting areas to report including a summary of how lower sales prices and rate hikes impacted the value of businesses in recent months. The report can be found at https://www.bizbuysell.com/insight-report/#reportArchive.
Overall Trends in 2022
Buyers currently appear to have some leverage when it comes to the prices of businesses on the market. When comparing 2022 with 2021, we see a 4.7% increase in closed transactions. Comparing it to the year prior, there is a 19% gain. Obviously, 2020 sales were negatively impacted by COVID.
While sales grew substantially in the first half of 2022, there was a decrease in momentum in the second half of the year due to inflation and interest rate increases.
The number of transactions recorded by BizBuySell.com in 2022 are actually fairly comparable to 2021, with numbers of 9054 and 8647, respectively. While the transactions raised 27% and then 14% in the first and second quarters, transactions then lagged in the second half, dropping by 2% and then 12.7%.
Trends Among Business Owners
BizBuySell’s surveys showed that the majority of owners are concerned about rate hikes and inflation. In fact, 53% say that the rate hikes are having a negative impact on them. They also reported concerns about rising SBA loan rates, as many business owners utilize their lines of credit. In addition to that aspect, there are still supply chain issues that are negatively impacting businesses.
The main takeaways from 2022 seem to be a steady but slow progression in growth. Moving into 2023, interest rate hikes and inflation seem to be on everyone’s mind as a prevailing factor that will have an impact on sales and growth.
It’s Never Too Early to Create an Exit Plan
The report also reveals that according to data acquired by BizBuySell, only 53% of business owners say they have an exit plan. Only 58% of owners reported knowing what their business is worth. If you are a business owner and would like to find out more about what your business is worth, a business broker or M&A advisor can assist you with that information.
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BizBuySell just released its latest insight report, which tracked sales and growth in 2022 and compared it to the prior year. Overall, we are seeing a high demand for service-based businesses as well as an increase in restaurant business sales. The insight report also reveals what business brokers across the country are expecting for 2023 and beyond.
Data on Service Business Sales
In 2022, 39% of the acquisitions tracked by BizBuySell were service businesses, and their transactions were 7% higher than 2021. The service sector typically includes predominantly financial and healthcare related businesses. These types of companies are usually considered to be low-risk.
Across the map, buyers were willing to pay more for service businesses last year. In fact, the median sales price for service businesses rose 4% over 2021. It’s interesting to note that the sales prices were even higher than the pre-pandemic levels. Also, there is a trend towards buyers seeking out socially responsible and environmentally conscious businesses.
Data on Restaurant Businesses
Restaurant businesses also did quite well in 2022. In fact, the acquisitions of restaurants jumped 20% over 2021. They previously had plummeted 38% in 2020. While these numbers are strong, they are still 21% lower than before COVID.
Restaurant businesses also had less time on the market. The median days were 169 instead of 176 the year before. Restaurants also sold for more money. The median revenue for closed transactions was up 7% and the cash flow was up 13%. It seems that the general consensus is that dining out is popular again after years of struggles due to people avoiding meals in public.
Expectations for 2023
The conclusion of this data collected about 2022 is that buyers no longer will benefit from sitting it out. Higher interest rates are expected to be more and more of an impact for buyers in 2023. The good news is that most experts are expecting rates to get better in 2024.
Business brokers surveyed by BizBuySell expect that the market in 2023 will continue at the same place as it did in 2022. Many sellers will seek to retire. The concern of a recession should also motivate more baby boomers to sell. In fact, 45% of owners are saying they are selling to retire. At the same time, buyers will be looking for profitable companies that will grow.
The data revealed by BizBuySell indicates that those who are buying businesses may currently have the upper hand. In fact, 47% of brokers say that their view is that the market has shifted towards buyers. They attribute this to rate increases. They are finding that the majority of buyers are saying that current businesses are overpriced.
Sellers Must Be Flexible
The insight report shows that overall business brokers believe there is pressure on sellers to be more flexible in their pricing and terms. As always, seller financing is essential. In fact, 90% of buyers are saying it’s important for owners to offer this option to them. 95% of brokers echo this sentiment.
It should come as no surprise that businesses with strong financials are in high demand. When these businesses are considered recession proof, this fact is even more true. But even sellers with the strongest businesses may still have to consider offering financing or adjust prices due to the higher rates. Sellers who want to sell in the near future, of course, should begin preparing their exit now.
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When you’re in the process of buying a business, it’s important to stay logical. No matter how good the opportunity may seem at first glance, be sure to carefully evaluate the business in a step-by-step manner. Regardless of how excited you might be about the prospect of ownership; you’ll want to have your guard up when you go through the due diligence process. Let’s take a look at 5 of the most important questions to ask yourself before signing on the dotted line.
1. Do you have a personal interest in the business?
Needless to say, owners have made businesses successfully thrive even if they lack a personal interest in what is being sold. However, you might want to stop and ask yourself if you do indeed have a passion for the goods or services offered by the business in question. If you are uninterested, you may find it harder to make a long-time commitment.
2. What is the business plan like?
It’s helpful to see the goals of the current owner and evaluate which of these goals have actually been achieved. If there is no business plan, this should give you pause.
3. How does the business perform?
Take a look at the business’s overall performance. Do you get the feeling that the business requires many hours of intensive work from the owner? If so, remember that this owner putting in all of those hours could be you in the near future. Is there a reliable manager to oversee operations in your absence?
4. What are the demographics?
Who are the key customers? Are there several main accounts that the business depends upon or a wide variety of customers and clients? Needless to say, if the business relies on just a few key accounts, this could be problematic if things were to change. Further, do you see a clear way to add new customers in the future? Before you buy a business, you’ll want to feel confident that you can help it thrive and grow.
5. Are you satisfied with the financials?
Once you’ve successfully signed the necessary written agreements, you’ll want to take a deep dive into the business’s financials. Make sure that everything has been provided including:
- Tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
The bottom line is that you will want to be careful when purchasing a business and watch for any red flags. The last thing you want is to make a hasty decision that you regret later on.
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There have been countless instances when someone has gone into business with a relative or close friend and made the mistake of skipping a formal agreement. No matter how good a friend may be, you will always want to get the terms of the partnership in writing. A partnership agreement is a vitally important document that is designed to protect all parties. It will reduce the possibility for disagreements or misunderstandings down the line. When you make sure you have everything documented legally, it will greatly serve you and your partner(s).
Building Your Partnership Agreement
Your partnership agreement should first and foremost address the general rules of the partnership. This means it should cover who owns what, and how you will handle profits and losses. It should cover the basics of issues that may seem obvious, such as what are each partner’s roles and duties. And it should also address the details pertaining to resolving small potential problems that you may never expect to actually arise.
A good part of your partnership agreement should address issues related to money. As you can imagine, misunderstandings about earnings can quickly become huge disagreements if the details are not plainly stated in writing. On a very practical level, you’ll want your document to cover what percentage of earnings both you and your partner will receive. You will even want to go into detail about how money is distributed. What if money is required to keep the business operational and thriving? You’ll want to cover the details of who will contribute any necessary funds and how this will be handled.
Another decision you’ll want to make now will cover the nature of decisions themselves. For example, how will you make business decisions? Is it a vote, and if so, how does that vote work? You can also include other situations that could arise, such as what happens in the instance of the unfortunate death of one of the owners? What happens if you decide to bring in an additional partner or partners?
Getting Assistance with Your Legal Documents
While it might seem possible to create your partnership agreement on your own, the best thing you can do is hire a competent professional to help you. That way you’ll know that your partnership agreement is written in the most accurate way possible.
When you have this document established, you can proceed with your partnership with confidence that any potential problems down the line are addressed. It may take some extra time and consideration now, but in the long run, you’ll be able to run your business smoothly and more efficiently. The fact of the matter is that if you address everything now in a partnership agreement, it will benefit your business for years to come.
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The Market Pulse Report Survey is a resource that has a variety of information that business brokers and M&A advisors regularly utilize to better understand the business landscape. The most recent survey was conducted April 1st to April 15th 2022 and had 360 broker and advisor respondents. It also marked the 40th edition of the quarterly report. The Executive Summary of the report can be accessed here https://www.ibba.org/resource-center/industry-research/
The Main Street Market
One notable fact included in the latest report is that in the Main Street market, between 70% to 80% of buyers are likely to come from within a 20-mile radius. However, with larger companies, it is common for buyers to originate from a distance of over 100 miles away or greater.
The survey also indicated there are two key “headwinds” that businesses are currently facing. These include labor shortages and supply chain issues. Not surprisingly, labor issues are currently creating problems for organic growth. Likewise, supply chain issues can cause prospective buyers to shy away from a business.
The Profile of Current Buyers
The survey also indicated that Main Street buyers not only include the “typical” first-time business buyer. These individuals are often looking for a job in the form of owning a business. Serial entrepreneurs who have made money off previous deals are also now seeking to jump back in and buy another business. The survey indicates that about one-third of buyers who purchased businesses in the $500K to $1M range are serial entrepreneurs.
Additionally, there is a great deal of money flooding into the industry. The money is mostly coming from private equity, family offices, and corporations. Feeling burned by the lack of bank credit by the 2008-2009 economic downturn, these buyers don’t want to get caught in a similar situation again.
A Seller’s Market
The survey indicates that it is currently a seller’s market and that record setting multiples have been occurring. In Q1, an impressive 97% of businesses were receiving their asking price. However, nothing lasts forever. If you’re considering selling your business, it’s a good idea to start making progress now before this trend stops benefitting sellers.
Even with the strong sales track record last quarter, it’s important to note that a fast sale is still improbable. Even in the best economic conditions, it typically takes many months to sell a business.
There are many factors currently benefiting sellers, such as low interest rates, SBA involvement, and people not wanting to work for corporations. However, it’s important not to wait for the “right moment” as often that moment never comes.
It’s always a good idea to begin taking steps to prepare for the sale of your business as soon as possible. This can make a tremendous difference toward fostering a positive final outcome.
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