Frequently Asked Questions For Business Buyers
Q –What is the best strategy and procedure to assure bank support or secure other lenders?
A- The best way to assure bank support for a business is to have a business plan. Banks love business plans.
The other way is just make sure you are borrowing an amount the business can pay back!
I’ll give you a little secret – one that might shock you.
Ready? I’m going to pull back the curtain here LOL:
There are so many SBA lenders out there and the bank representatives are practically tripping over one and other, all you need to do is ask a SBA lender to take a look at the finances and see if they will finance it for you.
They will take the information to their office and have some geek in the back room plug in all the numbers, run sophisticated algorithms and look at any way they can possibly lend you the money.
They will give you all the information you need whether they can finance you or not.
If they can’t finance it, the information they will provide you with will give you a VERY POWERFUL negotiation point with the seller.
Q- How to evaluate and compare between similar opportunities to invest. (2 PARTS)
Q-1 What is the best valuation software to valuate small to medium businesses?
A-1 There are hundreds of spreadsheets available for purchase online.
However all of the ones I have found need to be run by geeks.
They neglect using past performance and depend on using projection data. They are way too advanced for a medium or small business as far as I am concerned. Using one of them would paralyze the analysis process.
I actually developed my own spreadsheet where I can take the previous 3 years tax returns or P&L statements, plug in the numbers, add back owner compensation such as depreciation, travel, meals, phone bills, and everything else a business owner can let the business pay for.
The spreadsheet spits out a number that is the business owners ACTUAL BENEFIT.
Once you have the Actual Benefit to the owner, you can set a price you are willing to pay, and begin negotiations.
You get this excel spreadsheet as part of the course I offer.
Q-2 What is the best short “napkin” decision formula.
A-2 Take the Gross revenue of the business and divide it by the average selling multiple of the industry you are interested in.
EXAMPLE: Restaurants in Florida have been selling at 28%-31% of Gross Sales.
So, if a restaurant is grossing $1,000,000 in sales, multiply $1,000,000 times 28% and you get $280,000 on the low side, and $310,000 on the high side.
As a member of the Business Brokers of Florida (BBF) we have access to data on all business sales in the state.
It is a simple matter of clicking a few buttons and I can come up with the “Actual Sale Price” of any business with a whole selection of criteria.
I can also do the same thing for business’s listed for sale.
It makes for a very efficient use of time and makes for a very powerful negotiation point.
Q- How to generate a complete cashflow table that allows you to create a budget and control the company?
A- Quickbooks – pure and simple.
I love Quickbooks for a variety of reasons and can’t think of a better way to create a budget, oversee operations and control. Business is all about the numbers, and Quickbooks does a spectacular job.
I recently switched over to Quickbooks Online because I now have the ability to watch the numbers of all of my businesses from anywhere I am.
All I need is internet access.
Q- What are the most relevant suggested legal forms and legal advice to avoid risks?
A- When it comes to legal forma, a business broker will have forms at the ready. A simple purchase and sale agreement will work, but it is best to use an agreement specific to the purchase.
What I mean is, you don’t want to use a residential house agreement to buy a business.
Contracts are expensive if an attorney has to draw them up.
We just sold a business where the seller insisted on using his attorney’s contract.
It cost him $3,000!
While there is risk in anything, it is a really good idea to hire someone to represent you.
If you are selling a business, hire a business broker. The commission they charge is minimal when it comes to the cost and the value they bring to the table.
In most cases, a competent business broker will get you more for your business than you can for yourself so the commission they charge will end up being free.
When you are buying a business, I HIGHLY RECOMMEND you hire a business broker to represent you and your interest exclusively.
More often than not, they get paid out of the transaction so the seller ends up paying most or all of their fee, so the work they do for you is free or close to it. Not only that, but an experienced business broker has the ability to learn things you might not be able to, and it will give you a negotiation edge.
Getting back to the forms, I will be including about 30 of them in the course that is soon to be released – the value of them is probably in the $75,000 range if you were to have them done by and attorney.
Q- What are the general risks and the most common mistakes buying or selling, and the most dangerous risks in each one of the main segments?
A- The biggest risk you can take in buying a business is doing it haphazardly.
I am shocked at the amount of business failures I see because the buyer went blindly into business thinking their idea would work, or got into a business they knew nothing about.
As I mentioned numerous times before, all businesses are the same and they all share 5 specific points.
The biggest risk one takes is not knowing what they are.
I go into this is great detail in the course.
Here are the 5 points every business on the planet has and needs to have in order to be profitable:
- Customer Identification
- Front end sales for taking orders
- Back end systems for product fulfillment
- Marketing and promotions
If a business is missing any one of them it is off balance and faltering, If it is missing 2 or more, failure is imminent.
Q- When do you start a new company or corporation once you start are in agreement to buy the business or after?
A- Good question and that is completely up to you.
I personally go into contract to buy a business, and put in the agreement I have the right to assign the purchase to another entity.
(i.e. My Name and/or assigns).
Once I am happy with the due diligence I go online to http://www.mycorporation.com/ and get one.
I prefer a LLC because it has better tax advantages than a Sub S or a C corp.
Q- What are some of the best types of business to buy and the worst types of business to buy?
A- This might be a loaded question in the sense that all businesses are worthy of buying – according to your interest, personality and competency.
Personally, I stay away from highly specialized businesses such as electronics repair, medical practices and software companies. The reason is simple: my personality and the people in that field are like oil and water.
I prefer businesses I am familiar with, or can be operated by people with minimal skill set.
For example: I come from the fishing, ferry and marina industry, so I speak the language of just about every business related to that industry, or related to fixing things.
We recently purchased an auto repair shop and I know nothing about fixing cars, but I know a lot about the people who do. I can relate with and motivate them. When it comes to the business end of it, all businesses are the same. They all have 5 specific parts, like spokes on a wheel and all you need to do is identify the weak ones and make them better.
The family business had 6 different corporations and over 60 seasonal employees.
I was helping my mom doing payroll, bill paying, accounting, ledger sheets and marketing when I was in my early teens. This gave me “hands-on” knowledge about business operations, marketing, so when it comes to business’s.
Q- How do you get the owner to finance the you buying the business?
A- All you need to do is ask.
Depending on what phase of the business cycle the owner is in will determine the motivation of the seller.
The more motivated, the more willing the are to finance the purchase.
I just posted a blog about the 7 stages of the business cycle http://bizbuyerbroker.com/business-life-cycle/ and you can see that when a business owner is in about stage 5, they are quite willing to help with the financing.
FYI: 75% of all business sales have some sort of owner financing in the deal.
It is not a concern. Just ask.
Q- When I buy a business, how is Goodwill determined?
A- Goodwill is the difference between the selling price and the estimated values assigned to all the assets, not including the goodwill.
The seller’s asking price will be broken down into its various components such as equipment, inventory, furniture, accounts receivable, (if being purchased) miscellaneous assets, assumed liabilities (if agreed upon), possibly real estate.
The mathematical difference between the sum of all these other assets and the selling price by definition equals the goodwill.
Goodwill is a highly valued asset in any on-going business.
Think of Goodwill as the “profit-generating intangible” that makes that business worth more than a start-up with no current customers, no employees, no name recognition, no established vendors, no distribution system, no lessons-learned, no mentor to help with the transition, etc.
Goodwill is the difference between the actual value of the assets in the business and the price a buyer is willing to pay for the name. The reason one business in the same industry doing the same amount of business will sell for a higher price than another is the value perceived in the name from the new buyer.
Q- How do the parties allocate the purchase price of a business to various assets?
A- This is all math ….
It is up to the buyer and seller agreeing to the values of each, or you can turn it all over to a competent CPA. Let them do the math and allocate the value of the assets to the purchase price.
The breakdown of these assets is important because certain assets can be depreciated or written off faster than others.
This is a very important part of buying a business with a tax strategy and should not be taken lightly!
The IRS will verify that the seller and buyer have done an identical allocation, so the parties must agree upon it.
Q- Can I use my IRA to purchase a business?
A- YES … Absolutely!
Many people tell me they want to Buy a Florida Business, but they don’t have the cash to get started. After asking them a few qualifications, I learn many of them have plenty of money available to buy a Florida Business inside of their IRA.
Here is a very brief overview of “How To Buy a Florida Business With Your IRA”.
For more information visit our website where I published a blog posting on this exact subject.
I even have a Free Report which I have permission to distribute from Advanta IRA. They are one of the largest IRA custodian companies in the country.
You and to request your copy of the FREE Report from within the blog.
Q- Am I responsible for the prior businesses debts after I buy the business?
A- This is a Good one.
The Laws vary from state to state, but perhaps the best way to answer that is, it depends how the transaction is completed.
• The majority of small business transactions, the sale will be an “asset sale,” and the seller will pay liabilities and keep current assets. (Sell the business, pay the bills, and keep whatever cash is left over from the sale.)
• Unless you buy the actual Corporation also known as a “stock sale.” In this case, you would assume responsibility for liabilities, unless they are specifically agreed to in the Closing Documents. (You take the business lock-stock-and-barrel – bills included).
You should check for possible back taxes, liens, penalties and fines that may transfer to you upon purchase of the new business. Your CPA or Attorney, or the Closing Attorney will generally handle that task, so that you are assured you are receiving a clear title.
Many business sales involve the sale of the corporation because the age of the corporation plays a big factor when it comes to bank financing and also for a “legacy” sale where the name of the business means a lot.
Most times, when a buyer takes over the corporation the seller signs a “Pledge Agreement” where they Guarantee payment of anything that should turn up that was not disclosed during the due diligence period or for a certain time after the closing.
I recommend a “Hold-Back” where the closing Attorney “Holds-Back” a pre-determined amount of proceeds for 60 days. In the event something shows up that was not disclosed, the funds are immediately available to pay off whatever it is.
An experienced Broker working for the buyer will insist on it, and so will any attorney worth his salt in a business closing.
Q- What is Due Diligence and When Do I Do It?
A- After you have met with the seller of the business, and analyzed the material made available to you by the seller or their broker, you will make a decision on whether you are going to move forward or not.
Once you have an agreement in writing, you will begin the Due Diligence peroid.
Due Diligence is necessary for the buyer and the seller. The buyer needs to verify that the seller is selling what they are presenting, and the seller needs to verify that the buyer is what and who they say they are.
Both parties need to know the other party can perform because no-one wants to be surprised at or after Closing.
• The parties will often have their CPAs participate in this process.
• The buyer will want to verify that the business information he has received is accurate. This will entail, at a minimum, a review of the books & records of the business, counting any inventory, and surveying the equipment.
• Due diligence can be complicated so there is no standardized list of usual items.
• The seller will want to verify the claims of the buyer regarding his business experience, creditworthiness, and available liquid cash for the business down payment.
o This is especially critical when the seller is considering financing the buyer for some portion of the Purchase Price. This may entail checking references, running a credit check, and reviewing copies of certain account summaries.
Having a business broker on your side during the due diligence period is a HUGE time saver because part of their service is actively collecting, compiling and coordinating the information for your review.
Q- When buying a business, what are some basic questions to ask?
A- Most professional Business Intermediaries will have an information package available to you after you have signed a Non-Disclosure or Confidentiality Agreement.
The “Confidentiality Agreement” protects the seller and new buyer’s interests from damage done if confidential information is shared with the wrong parties.
Here are a few questions you will want to ask the Seller or the Broker:
1. Why are you selling your business?
2. How many years have you been in business?
3. How many years have you been in business at the present location?
4. Did you create the business or did you buy it from someone else?
5. Are you a sole proprietorship, partnership, or S or C corporation?
6. Do you have tax returns and financial statements that my CPA can look at?
7. What types of insurance must your business carry?
8. What licenses are necessary to own and/or run this business?
9. How many employees do you have?
10. *** How many hours do you work per week in the business?
11. *** Do family members work in the business?
12. Will the family members stay after the sale?
13. Are you willing to take a note and be paid over time instead of all at once?
14. Will you stay and work for a while after the business is sold?
15. How is inventory controlled?
You are going to want to know the answers to these questions because it will help you drill down to the seller’s motivation level and possibly raise any “Red-Flags.”
Questions # 10 and #11 are very important.
Many times a seller will say they work a lot less than they actually do, and they discount the amount of work family members contribute to the business. Pay close attention to the body language when asking the questions. Eye movement tells you a lot about the quality of the answer.
It pays to have a Broker representative on your side asking the questions, or watching the responses.
A broker normally gets paid out of the seller proceeds. The way it normally works is this; the seller agrees to pay a transaction fee to the person they hire to represent them. As professionals, the brokers split the transaction fee between them when a sale happens.
This being said, it makes no sense for a business buyer to “Go-It-Alone” when looking for a business.
I hope you learned a lot from the Frequently Asked Questions For Business Buyers and the answers.
PLEASE leave comments and questions below in the comment section!