Key Steps for All First Time Buyers
Are you a first-time business buyer? If so, you must work with a business broker or M&A advisor. If you’ve never purchased a business before, you simply can’t anticipate all that is involved in buying a business.
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Buying a business is vastly different than buying a home, which is typically the largest purchase that most first-time business buyers have made. Sometimes buyers assume that since they have made large investments before, they will have a leg up in the business buying process. However, they typically quickly find out that they still need a great deal of assistance to navigate the complexities of the business buying process.
Business brokerage professionals know the process, the lay of the land, and the players involved. Additionally, business brokers and M&A advisors know where the traps and pitfalls are located. When it comes time to buy a business, all prospective business buyers can benefit from a guide.
Let’s take a closer look at some of the steps that are involved in purchasing a business.
Sign A Confidentiality Agreement
Prospective business buyers should always be ready to sign a confidentiality agreement. It is important to put yourself in the shoes of the seller. They have invested a great deal of their lives in their business and allowing someone to peak behind the curtain can be a stressful prospect. Signing a confidentiality agreement is an initial sign of good faith.
Investigate the Business
Next, you’ll want to gather a good deal of information about the business. Once more, working with a business broker or M&A advisor is a prudent move as business brokers understand what kind of information should be acquired. They have an understanding of how to uncover important information that might otherwise go unseen.
Armed with as much relevant information as possible and an experienced brokerage professional, you’ll want to carefully evaluate the business in question. With the right information and experienced professionals at your side, you can be sure that you are making a wise investment.
Make Your Decision
The next step is to either decide to make an offer or pass on the business. You and your business brokerage professional will carefully evaluate a range of information including financial statements and tax returns. When choosing to make an offer, it is important that all key details are clearly laid out in writing, and this includes contingencies.
Finding the right business for you, in part, means determining what kind of business you truly want to own. The good news is that business brokers and M&A advisors are experts in every point examined in this article, and they can even assist prospective business buyers with determining what type of business is a good fit. The sooner you begin charting out a plan, the greater your chances of finding the right business for your unique needs, preferences, and specifications.
Copyright: Business Brokerage Press, Inc.
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The Complexities of Business Valuations
Many buyers and sellers are not aware of the complexities that go into appraisals for businesses. To get the most accurate results, a business needs to be looked at from a variety of angles. When completing a business valuation, we look at everything from comparable businesses to EBITDA. There are a lot of nuances involved that are customized depending on the business at hand. Without looking at a wide range of factors, you could accidentally get less for your business than what it’s really worth.
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What Will Be Important for Your Buyer?
When you’re selling a business, part of the fair market value of your business relates to benefits that your buyer will receive. Obviously, your valuation will include factors such as market share and profitability that a buyer will enjoy. But there are also less obvious factors. For example, is there potential for the business to expand beyond its current niche? What is the competition like? What about access to customers?
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Current Trends
Also brought into consideration should be trends that will impact the business. These trends could be everything from trends in technology to economic or social changes. In some cases, business trends might make a business much more valuable. For example, due to the recent pandemic and fast adaptation of online conferences, companies that integrated video conferencing had a major edge over those that did not.
When business owners are aware of emerging market trends, it allows them to develop new offerings to meet current demand. In turn, this can boost business growth and increase a business valuation.
The Workforce
Recent workforce issues have definitely impacted the value of businesses across the board. If you have a strong, highly trained and dependable workforce, it will help to increase the value of your business. If your staff members are customer-facing, positive customer experiences will drive revenue growth. Further, buyers will feel more confident buying a business with a reliable roster of employees.
There are many questions that will affect your buyer and those should be considered in the price you ultimately decide upon. The savviest business owners are always thinking about trends in society and how to work with them to strengthen the value of their business. They will also consider the decisions made by their competitors and how they impacted their businesses for better or worse.
Copyright: Business Brokerage Press, Inc.
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Take These Steps Before Buying a Business
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If you’re buying a business, you might be feeling overwhelmed about all the details that are involved, especially if it’s your first business. Buying a business is certainly no small task, and that’s why you’ll want to dive into the process headfirst and make sure that you’ve carefully examined the business.
Here are some of the most important elements to consider. While some of these aspects don’t immediately come to buyer’s minds, they should be high on your list of considerations.
Legal Documents
Reviewing legal documents might not seem like the most enjoyable task, but this activity should be one of the first things you will want to do before buying a business. Most worthwhile businesses will have a long list of legal documents to show, ranging from documents showing trademarks and copyrights to consulting agreements.
Tax Documents
When it comes to paperwork, tax documents are obviously also a necessary element to review. Some things that you should be watching for are forms that do not adhere to the IRS rules. It goes without saying that you don’t want to be the one taking responsibility for a previous owner’s error.
Business and Retirement Documents
The list of documents you’ll want to review doesn’t end there, as you’ll also want to check into retirement documents such as balance sheets, investment statements, and income statements. You’ll want to ensure that all of the qualified and non-qualified retirement programs run by the business are up to date. You might need to check the parameters of the Department of Labor’s rules.
Work with a Business Brokerage Professional
Your business broker or M&A advisor will take you through the due diligence process to help you make sure that all aspects of the business have been reviewed thoroughly before you sign on the dotted line. Be sure to work with an experienced individual who is proactive when it comes to making sure all of your questions have been answered to your satisfaction.
The items on your to-do list might seem overwhelming at first, but remember that a lot of focus and effort now will save you a ton of hassles and issues later. And you might end up dodging a bullet by spotting a serious issue that causes you to change your mind about a business. Always be sure to protect yourself and your best interests.
Copyright: Business Brokerage Press, Inc.
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Is Your Deal Really Going to be Successful?
If you’re selling your business and things are looking positive with your buyer, you might be tempted to start resting easy. If you have a signed letter of intent, you might be even more tempted to think that things are pretty settled. However, the fact of the matter is that much can be uncovered during the due diligence process, and that is often when deals start to fall apart. Due diligence is an essential step that protects buyers, and sellers should be well-prepared to have things in good shape far in advance. Let’s take a closer look at some areas where a deal can potentially go awry.
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Products and Equipment
When the sale involves a business that handles manufacturing, equipment is carefully evaluated during due diligence. Buyers will be thinking about any potential environmental issues that could affect the business. If you’re selling a business and have loose ends with your equipment or facility, this should be handled in advance if possible.
Buyers will also be looking at the various product lines and inventory. They will be considering how the sales are spread among the product lines. For example, if one product makes up the majority of sales, that can raise red flags in the mind of a buyer. They will also think about supplies and how likely they are to be stable once the business switches hands.
Buyers will want to look at breakdowns of customers so they can consider the company’s market share and also where the sales are coming from. Similarly, to only having one product, if a business only has one or two key buyers, that can be a source of concern for buyers.
Intangible Assets
When you are selling a business, your buyers will also be thinking about the assets like intellectual property. Will all trademarks, patents and copyrights be transferred during the sale? If not, it can be a big source of concern for buyers.
Buyers will also consider the state of the human resources department. Sellers should be aware that buyers will be typically looking for established staff members who are unlikely to leave. This is another area where sellers have the opportunity to prepare in advance to achieve optimal results.
Sales Issues
Your prospective buyer will want to carefully examine accounts receivable. So if you have bad debt, you might want to sort out these kinds of issues before the due diligence phase. They will also want to have a firm understanding of everything that is included in the sale. Oftentimes during due diligence, a buyer finds out that equipment or patents are not included with the sale, and it quickly derails the deal.
If you’re selling a business, you’ll want to put yourself in the buyer’s shoes and consider what you would want to see if you were buying a business. Anything that you can do in advance to improve your workforce, equipment, premises, and financial records is highly recommended. The goal is to have a smooth transition for the buyer, and anything that could stand in the way of that taking place should be analyzed and improved if possible. When you work with a business broker or M&A advisor to sell your business, you will have an expert in your corner to help sort out the details.
Copyright: Business Brokerage Press, Inc.
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How Leases Factor into Business Sales
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.
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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.
Future Contingencies
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.
Copyright: Business Brokerage Press, Inc.
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Can You Buy a Business Without Collateral?
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.
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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 the 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.
Copyright: Business Brokerage Press, Inc.
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The Top 3 Reasons Why Deals Fall Through
No one likes to think about the deals that didn’t succeed. However, the fact of the matter is that sometimes things go wrong during the process and a sale doesn’t successfully close. We have pinpointed the most common reasons why this happens into three main categories. By understanding the issues that can prevent a deal from finalizing, we are able to dramatically maximize the odds of success for clients.
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1. Issues with the Seller
If a seller lacks a strong reason for wanting to sell his or her business, that seller is often unable to be flexible on the terms of a deal. As a result, when complexities arise during the sales process, the seller doesn’t have the patience, commitment and/or stamina to work to overcome those issues. In many cases, a seller has presented an unrealistic price for the business and simply cannot be realistic about the true value the business will sell for on the market. Another common issue that arises with sellers is that they are not fully transparent with the potential buyer. For example, they might be neglecting to mention serious problems with the business, such as new competition on the horizon.
2. Issues with the Buyer
Just like circumstances surrounding the seller may interfere with the sale of a business, the same is true for buyers. In some cases, the buyer is just mildly interested in being a business owner. As a result, he or she doesn’t have the wherewithal to continue on and navigate the complexities that can arise during the stages leading up to a successful deal. There are other issues that often pop up with buyers as well. For example, they also may have unrealistic expectations regarding price. Some buyers are not willing to pay the fair market value for a given business. In other cases, once they find out the amount of work that will be required to make the business successful, they are unmotivated to continue.
3. Third Party Interference
In some instances, there is no issue regarding the buyer or seller. Instead, it is a third party that interferes. An example of this would be a landlord being unwilling to transfer a lease or grant a new one. Or unexpected issues with the federal or local government could cause problems. Another problem that involves a third party occurs when outside advisors, such as attorneys, overlook the fact that the goal is to put together a deal that will work. Instead, they get so caught up in protecting the best interests of their clients that they erect too many roadblocks for a deal to succeed. These types of problems are often completely unexpected by either the buyer or seller.
It is hard to argue with the fact that if a buyer isn’t really committed to selling, perhaps it is not the best choice for them in the long run. The good news is that if potential problems are handled at the appropriate stage of the deal, most business deals do come to a successful conclusion. Business brokers and M&A advisors are specialists when it comes to resolving and circumventing potential issues.
Copyright: Business Brokerage Press, Inc.
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5 Elements for Buyers to Investigate
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.
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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.
Copyright: Business Brokerage Press, Inc.
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3 Reasons Why You Might Want to Own a Business
Have you been thinking that business ownership is for you? Many people are committed to the idea of owning a business and work hard to pursue this goal. Of course, the path towards buying a business is indeed complicated and requires a significant investment of not only money but also time. As a result, you’ll want to ensure that you are fully committed to business ownership before beginning the process. Let’s take a look at some common reasons why individuals choose to buy a business.
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Desire to Grow Your Income
Most people will say that they would like to make more money. However, keep in mind that while owning a business will likely mean you grow your income, it also requires a significant amount of work, especially in the early stages.
Research shows that the longer you own your business, the more profits you will generate. Those who have owned their business for more than a decade will typically earn more than 100K a year. Of course, owning a business always comes with a degree of financial risk, but if you do successfully run your company for a series of years, you will likely succeed financially. Just be prepared for the possibility that the first few years may not generate as much income as you had hoped.
On the positive side, owning your own business allows you to have control over your financial destiny. You have the ability to make decisions that will grow your business
Interest in Shaping Your Lifestyle
When you work for someone else’s business, the way your life is organized is dictated by the rules and regulations of the company. For example, you may want to work at home, but your job requires you to spend 40 hours a week in the office.
If you want to make key decisions that impact your day-to-day life, owning a business will be quite attractive to you. You will be able to decide not only where you work, but also how many hours you work and with whom you work. You have the power and ability to shape many aspects of not only your life, but the life of your employees as well.
You are Willing to Take on Some Risk
The personality of a typical business owner is a person who is comfortable with taking on some risks. After all, not all businesses succeed. At some level, you are always risking your time, money, and energy. Of course, this aspect will vary dramatically depending on the kind of business you acquire.
It is also important to consider that many business owners find that they are working around the clock. They simply cannot go home and forget about their job at the end of the day. In sharp contrast, they are always on call and actively thinking about their business and relevant decisions. You also may not get paid vacation or sick days.
Guardian Life Small Business Research Institute studied the ideal personality traits for a business owner and found that successful owners are action-oriented, curious, self-fulfilled, tech-savvy, and future-focused. They surveyed over 1,000 small businesses to generate this data. If you resonate with these traits, it is likely you are indeed cut out to own a business.
Copyright: Business Brokerage Press, Inc.
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3 Warning Signs for Sellers to Be Aware Of
If you’re getting ready to sell your business, you’ll want to be on high alert for potential warning signs that could potentially derail the deal. Of course, time is of the essence when it comes to finalizing your deal. Why spend time negotiating with a buyer who is either not really interested or is simply not qualified to buy? Let’s take a look at some of the top buyer warning signs.
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1. Lack of Buyer Experience
When it comes to individual buyers, you’ll want to see if they have experience in your industry. If a prospective buyer is not knowledgeable about your business, they might initially seem very excited but then get cold feet once they dive in and learn more about the industry.
The same can be said for a potential buyer who has never purchased a business before. If you’re dealing with a newbie, you’ll want to feel confident that this individual understands the ins and outs of buying a business before you dedicate too much time to their deal. After all, the process of buying a business can be long and complicated. Inexperienced buyers might find that they no longer want to continue progressing once they get a better idea for what is involved.
2. Undisclosed Financial Information
Along similar lines, you’ll want to work with a buyer who is open about their financials. If you are denied access to financial statements, you will have no way to verify that this buyer is actually equipped to purchase your business.
3. Early Communication Issues
Another common red flag to watch for is that a company says they are interested in buying your business, but the company’s actual decision makers are uninvolved in the communication. If a company is legitimately interested in purchasing your business, you will be communicating with a key player like the President or CEO.
Protect Your Interests
When your business is on the market it is a very important time to make sure that things stay consistent. If a legitimate buyer sees dips in sales or quality of your offerings, it could put a future deal on the line. That’s why you will want to protect your time by not wasting it with buyers who are not a good fit or who lack a high level of interest. Along the way, be sure to trust your intuition. If you sense something might be “off” with a potential buyer, this might very well be the case.
When you work with a business broker or M&A advisor, it will offer you a high degree of protection against falling into a rabbit hole when you should be focusing on keeping your business running as successfully as possible. Your brokerage professional will carefully vet buyers to ensure that they are actually viable candidates.
Copyright: Business Brokerage Press, Inc.
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