Posts Tagged ‘how to buy a business’

by Glen Cooper, CBI, CBA, BVAL

Buying a business is the right thing to do for some people.

In this series of five blogs/podcasts, I am discussing all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 5.

This blog/podcast is about what you, the individual buyer, might want, what you should expect to get, and how you should go about doing it, if you decide this unique and special “buying-a-business” path is for you.

Those of you who are individual buyer prospects are usually looking for a business that will employ you as owner/operator. Because you are investing your hard earned money, you want to know that it’s worth it. You want to “run your own show,” an unparalleled personal growth experience. In Maine, especially, we buy businesses that improve our lifestyle. In some cases, it’s more than lifestyle—it’s a personal mission! We intend to leave our mark.

Can you reasonably achieve these objectives with a business purchase? Can you do it now, during a recession?

Yes, you can!

In part 1, I discussed the five things most buyers want in a business purchase and the five things they get. In part 2, we examined the resources a business buyer needs, the background he/she needs, and the home front support such a person needs, too. We also mentioned the knowledge, skills, preferences and passions one needs to get this process to work. In part 3, we discussed the five essential questions. In part 4, we touched, once again on valuation and, specifically, on rules of thumb.

Now, it’s time to make an offer, make it contingent on doing your homework, prepare to negotiate, and fast track the process so you can get to a closing on time!

Make A Contingent Offer

It all starts with an offer. Sellers and brokers can’t do much until you, as a buyer prospect, make one.

A “contingent” offer is one that is subject to the completion of some step that has not yet been taken. It allows the buyer making the offer to get out of the transaction if something goes wrong.

Before you complete your investigation of a business, you may be asked to make an offer. This is normal. Sellers can’t be expected to give you absolutely everything until you prove that you are serious. Making a contingent offer is an acceptable way to do that.

A startling fact is that only 2% - yes it’s only 2% - of business buyer prospects ever actually buy a business! Sellers want to limit disclosures to someone who will definitely buy their business. They are looking for proof in the form of a serious contingent offer.

Most offers made to business sellers are contingent upon the buyer’s completion of homework. Buyers need to verify that representations made are accurate. Buyers need to investigate. This process is called “due diligence.”

Buyers also need to make offers contingent on getting financing. Sometimes that just means working on a detailed proposal for seller financing. Other times that means making applications to lenders.

Offers can be made in two basic ways: a “purchase and sale” contract, or a “letter of intent.” To avoid wasted effort on a proposal that might not be accepted, we usually recommend just drafting a “letter of intent.” It is simpler. You can find samples on the Internet, or you can get one from your lawyer.

A letter of intent just spells out the basics: identities of the parties to the agreement, price and terms offered, details of what assets of the business will be acquired, contingencies needed and a timetable for dealing with them, proposals required for training or non-competition, and a deadline for response to the offer.

A letter of intent can often be in a format as simple as a bullet-point term sheet delivered by email. It doesn’t always have to be a formalized document. Some sellers and buyers are quite comfortable dealing with this informally.

Prepare to Negotiate

Offers are usually met with counter offers. There are some things that shouldn’t surprise us. This is one of those things. Don’t fight this process. It is normal.

Just like you, the seller is fearful of making a bad decision! You have that in common. This can be a tense time.

If there is a broker involved, use the broker. Get the advice of the broker. Consider taking any good advice given. Brokers of businesses usually represent the seller, but they also don’t get paid unless there is a meeting of the minds. They want both of you to succeed in putting an agreement together.

Make offers that are reasonable. Make offers you can afford. If you think the seller has overpriced the business, make your case rationally with evidence, not emotion. Decisions are made emotionally, but only after they are rationalized with evidence. If you don’t understand what the business is worth, and aren’t prepared to present the evidence for what you believe, you are not ready to make an offer.

Sellers often respond to well-reasoned proposals. Sellers normally can be expected to compromise a little. But if you want them to compromise more than a little, be prepared to make your case. Then open your mind to their case. That’s what an effective negotiation involves: listening carefully and reasoning out each little point.

This is good practice. When you own a business, you’ll be doing it every day – with vendors, employees, clients, customers, and – yes – even with your own family members.

Fast Track the Process

After your offer has been accepted, you now enter the real period of verification, investigation and financing, the “due diligence” and lender application phase.

The accuracy of everything you’ve been told about the business needs to be verified. Everything else that’s important to your success needs to be investigated. You really need to take a close look at where the money is coming from and where it will be going.

You may need help here. This is usually the time to get legal and financial advice from professionals. Form your team now, unless you are very experienced at this already. Lawyers, accountants and even bankers have lists of what you need to do at this time. You can also find checklists on the Internet.

There are usually two processes that have to be completed simultaneously at this point – the business due diligence and the lending applications. You will take too much time if you do them sequentially, one after the other. Even though it costs money, you won’t be timely unless you proceed down both paths at the same time. Get your facts and financing together in efforts that proceed in tandem.

Arranging the time to go over the business’ accounting records and review them thoroughly takes coordination. Market research, business plan preparation, lease negotiations, equipment condition inspections, license applications, business entity formation for your new company will take you time. The lender may also require appraisals, inspections and credit reports that take time to order, receive, verify and correct if needed.

Get to the Closing On Time

As you form your team – lawyer, accountant, banker and maybe another family member or close advisor – make sure they know your wishes and the date you need to finish the transaction. That’s called a “closing.” It needs to happen on time.

Advisors left alone and undirected to manage their own part are likely to slow the process down, sometimes because they don’t know the urgency, sometimes by intent because they don’t want to be held accountable for advising you to take a risk. You should be your own team captain. Set the agenda clearly.

You are the risk-taker, not them. Give them permission NOT to be negative. But, don’t expect them to be cheerleaders. Attorneys, accountants and bankers make lousy cheerleaders! Their job is to warn you of danger. Your job is to make the business judgment about risk.

I hope this five-part series has been useful.

I would also point my readers, again, to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

by Glen Cooper, CBI, CBA, BVAL

Buying a business is the right thing to do for some people.

In this series of five blogs/podcasts, I’ll discuss all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 3.

In part 1, I discussed the five things most buyers want in a business purchase and the five things they get. In part 2, we examined the resources a business buyer needs, the background he/she needs, and the home front support such a person needs, too. We also mentioned the knowledge, skills, preferences and passions one needs to get this process to work.

This blog/podcast is about five key questions you need to ask when you begin your search. These are the questions that must be asked of brokers. These are the questions that must be asked of individual business owners who are trying to sell you their business. Although I don’t specifically get into franchises, these are also basic questions you need to ask about any business opportunity, including franchisors and agents who represent franchisors.

5 Questions to Ask

Over many years of hearing buyer prospects ask questions of me, and of the sellers I represent, I see five questions as being vital and basic to all such inquiries.

So many times, buyers waste time asking the WRONG questions, squandering their opportunity to get insights quickly. Or, they don’t even ASK questions, but TALK instead!

When looking for a business to buy, you are looking for something that will work for you. But, the amount of research you need to do is very time consuming, and the chance of wasting that time is very real.

You don’t have time to waste! You can ask the more detailed and less important questions later, if you’re still interested. First, you need to narrow your choices as quickly as possible.

Here are the big five:

What’s for Sale? As you begin to look for a business for sale and respond to an ad or offering from a broker or seller, the first question you need to ask—on the first contact—is “What’s for sale?”

How this question gets answered tells you how organized the broker or seller is, and whether or not they actually understand what they’re selling.

Every business has tangible and intangible assets to sell. The tangible assets are the “things” that make up the business: furniture, fixtures, equipment, vehicles, inventory and real estate. The intangible assets are the “goodwill” or “going concern value,” the seller’s agreement not to compete in the future, and/or to consult with the buyer in the business transfer process.

Searching for a business is always about finding the one what works for you. It all starts with getting a clear view of just what you’re being asked to buy.

What’s the Opportunity? Buying a business should create a new opportunity for the buyer. So, that’s your next question: “What’s the opportunity for me if I buy this business?”

Again, the answer tells you something very valuable. Does the seller really understand where the business can go from here?

Many sellers put their business on the market because they are “burned out.” This “burn out” often creates the very opportunity a buyer wants. Sellers are sometimes so tired that they don’t see market opportunities that are right in front of them!

That is particularly true in this time of rapid advances in science, technology and communications, when older sellers don’t understand what younger buyers can see easily. Recession, too, discourages sellers, making them realize that the business needs a new start under new leadership.

A competent business broker will often be able to make up for the seller’s lack of vision, but not always. If a broker or seller, however, can make a good case for the “upside” opportunity, you are in good shape—ready to go on to the next question.

How was the Price Determined? This is often where the person responding will fail the “sanity check.” It is also the beginning of your negotiation.

The answer that you don’t want to hear is: We added up the losses for the last ten years and that’s how much we want for the business!

While this is obviously intended to be a humorous representation of what actually happens, it often seems that this is, indeed, a valuation method commonly used.

The preferred answer always has some relevance to market information—what buyers pay for such businesses, based upon what is actually a fair return on a buyer’s investment.

We have covered this issue in past blogs and podcasts, and we will cover it again. Right now, the important point is to find out if the person you’re dealing with has any grasp—at all—of this subject. If they do, you’re in luck! On to the next question!

What Financing is Available? A business can’t sell—and you can’t buy—if there isn’t a good source of money to do the deal: either your money, a lender’s money, an equity investor’s money, or the seller’s money.

Prepared brokers and/or sellers have considered this issue carefully. They should be able to explain how much cash down payment you will need, and perhaps how much working capital they also expect you to provide. Then, they should know how much the seller is willing to lend, and how much they expect from a bank or other source. If not, watch out!

Financing a business acquisition is difficult if it requires the use of a third party lender. Banks and others are not excited about business loans to novices that have never run a business before, even if they have a great credit score. Yes, they make loans to businesses—just not too many acquisition loans to inexperienced business buyers!

Equity investors – especially your relatives – can be a good source, but are usually not a reliable one. They tend to back out at the last minute. We brokers understand that better than buyers and sellers. So, if you are the buyer, expect to have to prove that this source is solid if you intend to use it. If your dad, mom, or favorite relative is going to loan you money to buy a business, we’d like to see that money put into your account early on in the process, so the rest of us don’t hear how it’s NOT going to happen later.

The road ahead is much smoother when the seller offers reasonable financing from the beginning. Seller financing is common, seen by buyers and lenders as a seller’s “bond for performance” that the business is healthy. Buyers should also assemble their cash resources before starting the process.

Why is the Seller Selling? Finally, you need to ask about the seller’s motive for selling. It should be something you can understand. If you don’t understand, keep asking this question until you get an answer that you do understand.

Seller’s who are “burned out” are often reluctant to disclose this. First, it is often just personally embarrassing. Second, the sellers might assume—perhaps with good reason—that what they say will frighten you away!

Sellers who can’t see a future opportunity are also reluctant to share their lack of vision. Some other reasons to sell—like divorce or health issues—are also very difficult for sellers to talk about.

If you have gotten this far—to the fifth question—because the answers to the other questions were all acceptable to you, then maybe it’s time to begin the bonding process with the seller. Only then, after you begin a relationship which involves mutual trust, will you get the “real reason” the seller is selling.

When you and the seller finally trust each other enough to tell the truth, then a good deal is possible. You’ll begin to see the real opportunity a successful transaction offers each of you. You will get the business you want and it will likely be a good deal for both of you.

In the last two blogs and podcasts in this series, I will tell you how to follow a VALUATION STRATEGY that will put you in charge, and what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.

I would also point my readers to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

by Glen Cooper, CBI, CBA, BVAL

Buying a business is the right thing to do for some people.

In this series of five blogs/podcasts, I am discussing all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 2.

This blog/podcast is about what you, the individual buyer, might want, what you should expect to get, and how you should go about doing it, if you decide this unique and special “buying-a-business” path is for you.

Those of you who are individual buyer prospects are usually looking for a business that will employ you as owner/operator. Because you are investing your hard earned money, you want to know that it’s worth it. You want to “run your own show,” an unparalleled personal growth experience. In Maine, especially, we buy businesses that improve our lifestyle. In some cases, it’s more than lifestyle—it’s a personal mission! We intend to leave our mark.

Can you reasonably achieve these objectives with a business purchase? Can you do it now, during a recession?

Yes, you can!

In Part 1 of this series, we listed the five major benefits buyers seek when they buy a business: 1) a job, 2) an investment, 3) an opportunity for personal growth, 4) a chance to live a great lifestyle, and 5) a chance to make a mark and leave some kind of legacy.

We also discussed that buying a business offers all of that by providing its new owner with: 1) immediate cash flow, 2) a known business market position, 3) working systems, 4) trained employees, and 5) the assistance of the business seller.

To buy a business, you need money, skills, energy and time.

Money is an obvious, and how much you need depends, of course, on what you plan to buy. A quick “rule of thumb” for individuals might be that the cash needed for a down payment is often about 1½ times the annual profit expected from the business.

Skills required are mostly sales skills, not accounting or even general management skills. If a buyer knows how to sell, everything else is made easier. Sales skills are toughest to teach. People management skills are more important as the business gets larger, but getting the sales right is the big deal for most businesses.

Energy is another essential. Buying a business requires as much energy as running a business. If you’re not full of enthusiasm and drive, you just won’t survive the rigors of negotiation, financing and transition.

To successfully buy a business, you need role models and a reservoir of personal knowledge. You also need sources of understanding and support, and the ability to take a risk.

Role models are keys to your life. Have you known a successful business owner in your family? Do you admire a business owner? If not, beware. If you spend your days dreaming of being someone’s top employee, you may not have the right model for your own future as a business owner.

You have to be dreaming of being a business owner to be one. Motivating day dreams and images are always important predictors of success in anything.

How’s your inventory of personal knowledge? And, I don’t just mean business knowledge. How well do you know yourself? How good is your knowledge of others? How well do you know how to advance your ideas? How well do you listen?

These types of questions are just as important as knowing about purchasing, pricing, and how to “brand” or position your product or service in a business.

 You need to have support on the home front. Does you mother know where you are?! Your immediate family members have to “get it.” If your family history is only laced with models of employment, and not entrepreneurship, that could be a problem.

Those who are not themselves inspired by the idea of you running your own business will not understand why you are. They often think that you should just climb the corporate ladder and behave yourself in your cubicle!

Finally, can you take the investment risk of buying a business? I’m not talking about gambling in Las Vegas. That’s entertainment, not investment.

Business buyers who learn to run with their strengths are successful. Your experiences, talents, preferences and passions should all merge in your successful business purchase effort.

Go with what you know. If you have spent years in a specialty field, buy a business that uses that knowledge. If you are skilled at some unique aspect of business, buy one that needs that skill. Don’t throw past experiences away. Leverage these experiences.

Know your talents. Pay attention to what others admire about you. If you’re good at something, make sure the business you buy puts you in a position to demonstrate that talent. If you have excelled at some task in the past, make that part of the job you assign yourself in the business you buy.

Know your preferences. If you’re an introvert, you’ll need to learn to sell like an introvert, and not follow the usual extrovert model. If you’re a slow decision-maker, make sure you have a way to make quick decisions when that’s important. Don’t know what I’m writing about? If you’re not familiar with these preference “types,” there’s a good psychological test (the Myers-Briggs Type Indicator - MBTI) that gives you a language to understand your preferences. You need to know about it. My favorite book on the subject is David Kiersey’s Please Understand Me, now in its revised Please Understand Me II edition and available at most large bookstores.

Get passionate about this. Do what you care about. If you can’t find a business in a field that you care about, buy a business that offers you a challenge you care about. All businesses are unique and serve unique markets. But, surprisingly, even an everyday business can offer the interesting challenge you desire.

After taking a personal inventory of your resources, background and support, and your ability to run with your strengths, you are now ready to start contacting sellers and brokers.

In the following blogs and podcasts on this subject, I will tell you 5 QUESTIONS you should to ask when you make your first contact with a business seller or business broker, how to follow a VALUATION STRATEGY that will put you in charge, and what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.

As I did in the previous blog, let me also point my readers to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

by Glen Cooper, CBI, CBA, BVAL

Buying a business is the right thing to do for some people.

In the next five blogs/podcasts, I’ll discuss all of the major issues about buying a business, especially in today’s opportunity-filled market.

This blog/podcast is about what you, the individual buyer, might want, what you should expect to get, and how you should go about doing it, if you decide this unique and special “buying-a-business” path is for you.

Those of you who are individual buyer prospects are usually looking for a business that will employ you as owner/operator. Because you are investing your hard earned money, you want to know that it’s worth it. You want to “run your own show,” an unparalleled personal growth experience. In Maine, especially, we buy businesses that improve our lifestyle. In some cases, it’s more than lifestyle—it’s a personal mission! We intend to leave our mark.

Can you reasonably achieve these objectives with a business purchase? Can you do it now, during a recession?

Yes, you can!

What You Want

Job: Owning and running a business is usually a full-time job. It offers unparalleled freedom of action. You may work very hard, but you will enjoy freedom that no salaried position can give. That’s worth a lot.

Investment: Owning a business offers a great return on investment. A purchased business should return in excess of a 20% pre-tax annual return on your cash invested in down payment and working capital. There are also legitimate expenses which, when paid for by your business, will lower your cost of living. This is often left uncalculated by owners.

Personal Growth: Owning and running a business makes you smarter! And, who among us doesn’t want to be smarter? Working on, and in, your own business will challenge you in every way you can imagine. Most of us don’t grow until we have to. Necessity is the mother of invention. Owning and running your own small business requires you to learn “Street Smarts 101.” It puts you on a personal growth regimen.

Lifestyle: In Maine, owning a small business is “the way life should be.” It really doesn’t matter precisely which service you provide or product you make, distribute or sell. It’s your chance to use the skills you love. It’s your chance to do the part of the job that you like and hire someone to do the parts you’re not so good at. If your business is located near lake or ocean, forest or mountain, (as almost all in Maine are!), it really does allow you to experience a unique “lifestyle.”

Legacy: Making a difference is an everyday experience when you own a business. Your family members, employees, clients and customers are all looking to you to set the pace. Solving business problems always presents an opportunity for deeply touching someone’s spirit. Who doesn’t remember a teacher in their life that made a difference? Business owners are always teachers. It happens at the workplace, but also in the home. Nothing will instill the “entrepreneurial spirit” in someone else like watching you succeed at running your own show.

What You Get

So, what do you get, specifically, when you buy a business? Why not just start your own business? Wouldn’t that be more fun? Aren’t you just buying someone else’s problems?

For some, starting their own business is the only way to go. Those start-up years can be exciting. But, it takes more time to get going when you start your own. It’s riskier—the chance to fail is much greater. It also costs more, not just in time, but in lost financial opportunity.  I know this from personal experience.

In 1981, my wife and I had a chance to buy what was then the most successful business brokerage firm in Maine for just $125,000. Instead, we started our own firm, Maine Business Brokers, largely for reasons of ego (mine, of course, not hers).

In just the first few years, we made little, but the firm we DIDN’T buy made a lot. I can say now, that the decision NOT to buy that firm cost us more than $1 million in lost income. We have eventually succeeded in our “started-from-scratch” company, but it took many more dollars and years than it should have.

Buying an existing business gives you a leg up—several, in fact.

Immediate Cash Flow: A going business provides customers and/or clients that are ready to buy from you the first day. No waiting. Vendors are frequently willing to extend credit to a proven business more so than a new one. A “turn-key” business is what you get. Instead of starting from scratch, which can chew up mounds of working capital before the first customers and clients even realize you exist, buying a business provides immediate cash flow.

Known Market Position: “Location, location, location” can be more than just a reference to the right real estate choice. It’s also a position in a business market—a “piece of real estate” in potential customers’ minds, if you will.

In a purchase, you know where you stand. In a start up, whether or not you will be able to create such a position is a complete unknown. In selling businesses,  there is always major value when a business is “dominant in its market.” Buying a business gives you this known market position.

Working Systems: Don’t underestimate the importance of operating systems that make it all happen. In a successful, established business, these systems are in place.

Remember the last time you did something you never did before? Well, when your money is on the line, you want a business with proven systems, not a first-time-out experience. Buying a business gives you working systems.

Trained Employees: It takes months to train even one employee. Even if the employees aren’t perfect (hint: they NEVER are!), at least existing employees can get from opening to closing each day, probably even without you.

There is an unrealistic fear among buyers that employees will abandon a new owner. In truth, when an existing business is sold, employees often respond with great enthusiasm to a new owner’s arrival. They are eager to tell the new owner their ideas. The good ones see it as a second chance for a new start, for them and for the business.

Seller Assistance: After the tensions of the purchase and sale process, the seller may very well be a fountain of wisdom, energy and help. Even if you don’t follow all of their advice (they don’t expect you to, anyway), it is still worth listening to. They know answers to questions you forgot to ask before you bought—ones that it might take you years to learn if you were starting from scratch.

And, did we mention seller financing? Yes, sellers will often even “play bank” for you—becoming a “partner” in your success. There is nearly always a good reason to take advantage of a seller’s assistance.

So, why buy a business? Buying a business is exciting! You get a job and an investment all rolled up in one, with an opportunity for personal growth, a unique lifestyle and a chance to establish a rich legacy for yourself and your family.

The advantages of buying an existing business vs. starting one are immediate cash flow, known market position, working systems, trained employees and seller assistance.

But, before you start, you must get clear about who you are and what you want to do.

What’s Next?

In the following blogs and podcasts on this subject, I will tell you what RESOURCES YOU NEED before you start, 5 QUESTIONS you should to ask when you make your first contact with a business seller or business broker, how to follow a VALUATION STRATEGY that will put you in charge, and what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.

I would also point my readers to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.