Buying a business is a serious undertaking. A buyer must make sure they are knowledgeable and can answer these crucial frequently asked questions below.
BUYING A BUSINESS FAQ
Q. WHAT ARE THE KEY MOTIVATORS FOR PEOPLE GOING INTO BUSINESS FOR THEMSELVES?
A. Before making a decision to purchase a business, a buyer should understand his or her “WHY” to ensure those objectives can be accomplished by purchasing a particular business.
Q. WHAT ARE THE 5 DIFFERENT TYPES OF BUYERS? WHICH BUYER AM I?
#1: First Time Buyers
There are millions unemployed who have to replace their income. Many of these buyers have been laid off from their jobs and corporate America. They need to replace their income; they do not have a choice. Many of these buyers are utilizing their retirement funds to acquire a down payment to purchase a business. There are resources available to assist buyers in purchasing the business of their dreams by utilizing their retirement funds without paying taxes and penalties. The majority of these buyers will enlist the services of a professional M&A Advisor to help them navigate through the buying process. Many of these buyers are green and are not familiar with the intricate details of buying a business. Many of these buyers will not pull the trigger unless they feel safe, protected, and feel confident that they are making a good decision. A M&A Advisor can assist in eliminating fear, protecting their interest, and providing peace of mind.
#2: Sophisticated Buyers
Most of these buyers are experienced in buying, starting, and running businesses. They know the pitfalls of buying and starting businesses. They understand business evaluations. They understand how to cut to the chase and determine if a business is making money or if the seller is trying to pull the wool over their eyes. These buyers also understand that most good businesses are listed with a M&A advisory firm and they will work with M&A Advisors to show them good businesses that are properly evaluated to meet their buying criteria. These buyers know what they want and pull the trigger fairly quickly.
#3: Strategic Buyers
These buyers typically buy businesses that are in the same industry. Or they purchase businesses that are a good strategic fit to their current business. A lot of strategic buyers will buy similar businesses to add additional profit centers, create additional revenue streams, or solve a particular problem they are having in their current business. They will also buy businesses to be able to fulfill the demands of their existing client base. These buyers are sophisticated and know exactly what they are looking for. They too will solicit the assistance of a M&A Advisor to help them locate businesses that meet their needs and buying criteria.
#4: Turnaround Specialist
These buyers seek out businesses that are doing poorly so they can fix them, generate a profit on them, and in most cases turn around and sell them. They find distressed businesses in a multitude of ways. But, they too will hire a M&A Advisor to bring them distressed sellers.
#5: Private Equity Buyers
These are great buyers because many of them have disposable income and funding in place. They constantly send M&A advisory firms a list of businesses they are interested in purchasing. Professional M&A advisory firms will sort these equity firms by industry, location, price range, and net income range. This is the most effective way to match sellers with private equity buyers. My firm currently works with over twenty five hundred private equity firms. Which buyer will be best suited to purchase your business? That will depend on the following points that I will discuss in great detail. When you decide to market your business for sale, there will be several items for you to consider. To maximize value and determine what group of buyers is right for your business, you may choose to engage the assistance of a professional M&A Advisor. Experienced M&A Advisors will have a database of buyers sorted by the five types of buyers we mentioned earlier. All M&A advisory firms should have a database that sorts all buyers based on industry, location, price range, down payment requirement, net income requirement, and time frame.
Q. SHOULD I START MY OWN BUSINESS OR BUY AN EXISTING BUSINESS?
A. An existing business has a track record (tried and tested) which is used to evaluate the business. Existing businesses, 5 years or more, usually show there is demand for its products and/or services, and have detailed financial records. On occasion, a seller will agree to stay with the business and help train a new owner and provide seller financing. These factors are paramount because most small businesses tend to fail during the early stages of development, especially if the company runs out of money. 8 out of 10 entrepreneurs who start businesses fail or operate in the red within the first 18 months. A whopping 80% crash and burn. Only 60% of established businesses, 5 years or more, make it through the long haul.
People don’t sell because they have a poor business plan, but rather they sell because they simply run out of money.
Q. WHAT SHOULD I LOOK FOR IN A BUSINESS?
A. Only consider a business you will feel comfortable owning and operating. Most buyers do not buy a business in a specific industry as they are mostly interested in buying specific cashflow. The time and effort required is an important consideration along with the affordability of the business. The amount of cash the buyer hopes or needs to regularly take out of the business is very important, especially if the business is to be the buyer’s only source of income.
The 4 Different types of Businesses for sale:
Under Performing Businesses
These businesses are not doing well and in most cases, will evaluate for the price of the FF&E (furniture, fixtures and equipment), inventory, AR (accounts receivables) and perhaps some good will. These businesses typically require specialized skill sets to turn around businesses and require working capital to weather the financial storm.
Businesses That Have Been in Business for Five Years or More
These businesses are doing much better than the previous category. These businesses have weathered the five-year financial storm. Most of them are doing well and are making a profit. Sellers sell these types of businesses for a variety of reasons. A lot of sellers get what I call “the seven years itch.” They sell because they are truly entrepreneurs and they become bored with their business.
The Businesses That Have Been Around for Decades with Multiple Owners
These too are great businesses to sell. They have a proven track record, a loyal client base, and are typically making good profits. These businesses are worth a higher multiple and will absolutely sell for a profit as long as the business still cash flows.
The Businesses That Have Been Around for Decades with the Same Owners
These businesses have been around for decades with the same owner or the business has stayed in the family. These are typically the best businesses to purchase. Of course with any business, there are strengths and weaknesses. The glaring weakness of these businesses is the fact that the owner has been around for so long. The age of the owner and skill sets will determine if the business has become antiquated or kept up with the changing times.
If the owner has hired new blood with a different set of skills that can bring the business into this century, then the business will maintain its value. If the business is antiquated, then the new owner will certainly take into consideration the cost of bringing the business up to speed. As long as the owner has kept up with the changing times and technology, and has reestablished itself to not only appeal to its current clientele but new clients as well, then this business will sell for maximum value. Out of the four categories of businesses for sale, this could be the most lucrative in which to purchase.
Q. WHY IS CONFIDENTIALITY SO IMPORTANT TO THE SELLER?
A. Confidentiality is very important to a seller. It can be damaging to a business if it is known that it is for sale. Customers may not be interested in buying from a business that is up for sale, competitors could use the information to their advantage, and employees generally experience anxiety which could cause them to leave.
Q. HOW IS THE ASKING PRICE OF THE BUSINESS DETERMINED?
A. We at Seiler Tucker review all aspects of the business, which will ultimately determine what the business sells for. It’s not one size fits all when evaluating a business. There are many different formulas for each particular industry. Pricing a business correctly is an art and takes many years of experience on not just evaluating the financials, but evaluating the business in its entirety. First and foremost, we look at the longevity of the business. The longer the company has been in business the higher multiple the company will typically generate.
We also make sure the industry is thriving and not dying. Also, the more branded a company is will dictate a higher selling price. We look to see if the business is based upon brand or location loyalty. In addition, we evaluate the company to make sure that the owners actually have a business with tenured employees and a management team in place as most buyers are wanting to purchase a business, not a job. We also review all intellectual property and contracts in place as this too drives a higher multiple. Finally, we conduct an extensive financial audit so we can determine the true SDE (seller’s discretionary earnings).
Q. WHAT IS DUE DILIGENCE?
A. Due diligence is a systematic process for acquiring and analyzing information to help a buyer or seller determine whether or not to proceed with a proposed business transaction. The information obtained relates to all aspects of the business in question. Due diligence should include both quantitative information, such as sales and other financial data, and qualitative information. Qualitative information includes things such as an assessment of the existing management, internal systems, existing licenses, location and other matters.
Q. HOW MUCH CASH DO I NEED TO PURCHASE A BUSINESS?
A. In most cases, a portion of the total consideration paid for a business is paid in some sort of deferred payment – whether in the form of a seller note or payments contingent on the performance of the business. Third party lenders are also available to make acquisition loans. Therefore, a cash investment of 1/3 to 1/2 of the purchase price may be sufficient to complete a transaction, depending upon the finance ability of the transaction.
Q. WHERE CAN I OBTAIN FINANCING TO HELP ME BUY A BUSINESS?
A. 100% of Seiler Tucker’s clients agree to seller financing. If a seller does not agree to some sort of financing, it is usually a large indicator of a lack of belief in the business’ chance of survival by the current owner. There are indeed other financing resources available but due to the current state of the economy, banks are not lending unless the “perfect storm” has occurred. The term “perfect storm” defines a situation where the seller of a business has immaculate books and records and the potential buyer has perfect credit, 20%-30% down payment, ability to collateralize the loan by 100%, and possess specific industry experience.
Q. HOW DO I DETERMINE IF THE BUSINESS IS A GOOD DEAL FOR ME?
A. It is important for buyers to be cash-flow specific as opposed to industry specific. Also, the company must meet the criteria of the Buyer’s Sanity Check. This is a format used to determine whether a business is worth pursuing. It consists of 5 basic questions:
- What is the required down payment for the business in question?
- Will the cash-flow of the business support the debt service?
- After the debt service is paid, how much money is leftover for me to live on?
- How soon will I get the initial return on investment?
- Does the business have potential to grow?
If the business can pay for itself, afford your lifestyle, and obtain your return on investment in under three years then it has the markings of an excellent deal.
Q. WHAT ARE THE NONNEGOTIABLES IN PURCHASING A BUSINESS THAT I MUST DEMAND FROM THE SELLER?
A. Never buy a business without reviewing all financials, the inclusion of all intellectual property, training, and a noncompete clause signed by the seller/sellers.
Q. HOW DO I LOCATE THE GOOD BUSINESSES FOR SALE?
A. Hire an experienced M&A Advisor as most healthy businesses are listed with brokers in order to maintain confidentiality and create deal structure.
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In Exit Rich, Michelle Seiler Tucker, #1 bestselling author and leading authority on buying, selling, fixing, and growing businesses, joins forces with Sharon Lechter, finance expert and co-author of Rich Dad Poor Dad, to create a must-have guide for all business owners – whether they’re gearing up to sell a business now or just starting to build out their company – to sell for huge profits in the future.
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