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How to buy a business Flipbook PDF
How to buy a business
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HOW TO BUY A BUSINESS A QUICK GUIDE TO THE FUNDAMENTALS OF BUYING A BUSINESS
2015 Vested Business Brokers™
vestedbb.com
HOW TO BUY A BUSINESS A QUICK GUIDE TO THE FUNDAMENTALS OF BUYING A BUSINESS
First Business Purchase?
C
ongratulations on your interest in buying an established business! When it comes to business transactions, buying a business in and of itself can seem daunting task. Fortunately, we’re here to help. Did you know that fifty percent of businesses will change hands in the next five years? The How to Buy a Business
sales of businesses themselves have the potential to be (and often are) a profitable experience for all involved; the seller profits off of what he’s been building up for years and the buyer steps in to operate a virtual cash-flow machine. With the proper intermediary, the transaction is bound to be a success.
We’ve Got You Covered. This is a step-by-step guide written by the subject-matter experts at Vested Business Brokers™ to help new buyers in the process of their first business purchase. We urge you to peruse the numerous helpful hints we’ve provided regarding how to find, analyze, investigate, and
negotiate in the process of buying a business. This report should provide you with useful and thought-provoking tips to consider in the rigorous (but rewarding) process of buying a business that, with proper guidance and an iron will, will be a profitable investment for you in the future. 2015 Vested Business Brokers, LTD
How to Buy a Business Is Business Ownership the Right Choice for You? Becoming a business owner is a huge undertaking and is a decision that should not be taken lightly. Even though there are risks associated with it, purchasing an established business has certain advantages over building one from the ground up. New entrepreneurs are faced with an uphill struggle as forty percent of new businesses fail in the first year. Fortunately, when you purchase an established business, it’s generally a safer bet. Some of the advantages of buying an established business are as follows:
It’s a Proven Concept
Customer Relationships
Branding
Staff
As a buyer of an established business, you already know the process/concept is proven to work via the business’s (or similar business’s) history. When a buyer acquires an established business, they are acquiring the brand as well. All of the on-going benefits of any marketing and/or networking the previous owner has done will transfer to the buyer along with the business
Similar to branding, when a buyer acquires an established business, the existing vendor and customer base that took years to build also transfers to the new business owner. One of the most valuable assets in a business is its employees. When you buy an established business, you also acquire its staff. With the right business team in place, a buyer will have an easier time implementing growth strategies (not to mention lower training costs).
40% of new businesses fail within the first year. Fortunately, when you purchase an established business, it’s generally a safer bet.
vestedbb.com
Focus on Growing
The previous owner has already laid the business’s foundation and taken care of the tedious and timeconsuming start up work. When this ownership is transferred, the new business owner can pick up where the prior owner left off and immediately begin focusing on the business’s growth and development.
Existing Cash Flow
New entrepreneurs often “starve” at first by investing all of their assets into the business’s initial success. Established businesses, however, have cash flow that can be used for salaries and to grow the business.
Decreased Risk
As you can see, the there are several advantages to buying an existing business over starting a new one. When you purchase a business that has been operational for some time, your buying so much more than just the brickand-mortar, product and/or web presence. You are buying a reputation. And, you’re buying everything necessary to keep that reputation as successful as it’s come to be thus far.
It’s considerably less risky to take a loan to buy a business that already generates cash flow than it is to take a loan to start a business that has no cash flow and whereas the future prospects of cash flow are unknown.
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How to Buy a Business Because they’re filling a role and purchasing a business’s credibility, a new business owner will also acquire a great deal of responsibility. For this reason, a person considering buying an established business should ask themselves the following questions:
Am I passionate about the business that I’m buying?
As the business owner, you’re also the chief salesperson and promoter for your company. Your enthusiasm and dedication for your product or service is what will attract customers, ensure return-business, land deals, attract investors and motivate employees. Thus, you must have enormous zeal for your business to get you through the long hours and pressures that come along with business ownership.
What is your risk tolerance?
Nothing about owning and operating a business is for the faint-of-heart; you could find any number of situations that could cause failure. Business owners must be willing to “jump off the cliff and figure out how to fly on the way down.” There’s no guarantee of success. Business ownership is not for the risk-adverse.
Am I good at making decisions?
When you purchase an existing business, you will immediately be responsible for making decisions on which the success of your business depends. Clients and
vestedbb.com employees who are dependent upon the business are also directly or indirectly affected by the decisions that you make. In short, you must be confident in your ability to make decisions.
Am I willing to take on numerous responsibilities?
A business owner must be willing to contribute to any part of the business at a moments notice and take on the tasks of many roles. These roles can include anything from bookkeeper and HR person to sales and marketing. If juggling many roles doesn’t suit you, business ownership probably won’t either. While you’ll undoubtedly have many opportunities to learn from experience during the course of business ownership, having (at least) an approximate knowledge of the different departments that your future business comprises is essential to operating it successfully.
“If juggling many roles doesn’t suit you, business ownership probably won’t either.”
Will I be able to avoid burnout?
Working seven days a week, losing touch with friends, abandoning old hobbies and interests and not making time for loved ones can quickly lead to burnout in the midst of business ownership. Business owners must stick to good habits to maintain a work/life balance.
If you can answer “yes” to all of these questions, then business ownership is a good decision for you. You should now read on to learn the helpful tips regarding the process of buying a business.
How to Buy a Business
Choosing a Business The actual step of determining which type of business to buy can be a major roadblock for many prospective buyers. With literally thousands upon thousands of business choices available from just a simple search on the internet, the process can seem overwhelming. The thought of making the wrong decision or simply not knowing what criteria to look for when choosing a business often freezes many people in their tracks. One approach that you can take to simplify the process is to break it down into smaller steps as follows: The Process of Elimination
Know Your Strengths and Skill Set
Simply put, what business or type of business do you not want to buy? Answering this question begins to rule out many of the businesses that you don’t want and, in turn, narrows down your selection. If you’re unsure about a specific business or business type, look into the details about exactly what the operational and dayto-day side entails. By excluding all of the businesses or business types that you aren’t interested in driving to success, you’re indirectly helping yourself identify the one that you are.
After you’ve determined the businesses that you don’t want, that once-daunting list of potential businesses should have shrunken considerably. The next step is to link your strengths and skills to businesses that mirror them. It is imperative that you remain honest with yourself during an assessment of your attributes. List your strengths and skills according to your own assessment and also according to the opinions of friends and family. As your list forms, you’ll begin getting a clearer picture as to what businesses fit in with your strengths, experiences and skill sets. At the end of the day, you want to put yourself in the best possible situation within an industry you can thrive and prosper in.
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vestedbb.com A successful business is a direct reflection of the business owner’s core values, strengths and skill-set. Below are some questions to help you get started on finding out what you have to offer as a future business owner: What do I like to do (interests)? What am I good at? What do I dislike? What are my passions? My are my hobbies? What are my resources? Capitalize on your knowledge
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How to Buy a Business Choosing a Broker Business brokers are great assets to have in your corner. Regardless of whether or not you’ve decided which industry you’d like to get involved in, you’re going to have questions and it’s a comfort to have someone who knows the answers. A good broker will provide plenty of food for thought, open your eyes to things you haven’t thought about and decipher anything confusing about the business-buying process. These individuals are great intermediaries between you and the owner of the business you’re looking to buy. There are over 3,000 business brokers nationwide. So, how do you go about choosing which one is right for you?
The Niche Broker
The Generalist Broker
Many brokers specialize in a specific niche (such as car washes or laundromats). These are brokers who work on commission and brand themselves as industry experts. If you have isolated a specific type of business, this might be the type of broker who would suit you best. The downside with niche brokers is that they usually have a limited amount of selections and opportunities at any one given time. This could mean a waiting game for you as a prospective buyer.
These brokers typically sell a variety of different types of businesses. Working with a generalist broker has the potential to open many doors and the experience can broaden your horizon by providing insight into different opportunities you might not have considered pre-consultation. Being that they work with a wide array of industries, generalists often have knowledge of new business opportunities. They also understand the various intricacies of many different businesses which can be a useful resource for any prospective business owner.
Regardless of the type of broker you choose, do your research and work with someone who communicates with you often and makes you a priority.
vestedbb.com
Be Seller Ready and Broker Ready A little-known tip that can distinguish you from the “tire kickers” (and even other serious buyers) as someone with rock-solid means and intent is to have a Buyer Resume. It’s a simple letter (similar to a job resume) that you are going to prepare for either a seller or a broker of your choosing. This letter should comprise several things, such as your business-buying criteria, your background, your work experience, your strengths, your likes and dislikes and anything else pertaining to your business ownership aspiration. Essentially, it’s an overview of who you are and what you’re looking for in a potential business opportunity.
Your Buyer Resume Should also Include Proof of Funds At some point in the transaction, you will need to present a statement of funds. This could be a bank statement, a brokerage account or even a simple letter from your accountant stating that you are ready, willing and able to purchase a business within your budget. Remember to black out or withhold all account numbers (and any other irrelevant sensitive information); just leave your name and address regarding your documentation of proof of funds. This will let the brokers and the seller know that you are a serious prospect and are qualified to complete a transaction.
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How to Buy a Business Location, Location, Location You’ve heard it before: “location is everything.” The location of a business is often the most important factor because it’s where the traffic is driven. You’ll know right away if you have a good location because the revenue and profits of that location run hand-in-hand. When you get that, you’ll want to make sure that you have a long enough lease to amortize the debt and make yourself very happy with the rate of return on your investment. An advantage of buying an established and profitable business is that the location aspect is already taken care of for you.
But, there’s another aspect of location that needs to be considered before you buy a business… The location of any business you buy has to work for YOU! The geographical location has to be convenient for you to get to everyday or it will not work. How far are you willing to commute to get to your business? Whatever your timeframe is, make sure that this is a major component that is factored into your search. When strongly considering purchasing a specific business, take a drive to the location during rush-hour to make an accurate real-time assessment of the time it will take for you to get to (and from) your business.
vestedbb.com Choosing a Legal/Business Structure The business structure you choose will have both legal and tax implications. A cookie-cutter approach should not be taken when choosing the structure; the choice will be dependent on many factors. There are specific reasons for any one type of legal/ business structure, so it is in your best interest to consult your lawyer and accountant when making this decision. Below are some examples of legal/business structures:
• • • •
LLC (Limited Liability Company) Corporation Partnership Sole Proprietor
You’ll know right away if you have a good location because the revenue and profits of that location run hand-in-hand.
Take a drive to the location during rush-hour to make an accurate real-time assessment of the time it will take for you to get to and from your business.
How to Buy a Business How Much Do You Have to Invest? What are your Options? Establish What You Can Afford Questions that you will be asked: 1. 2. 3. 4. 5. 6. 7.
What is your FICO score (credit score)? What collateral do you have? Home (how much equity you have) Bank (how much cash availability you currently possess) Stocks & Bonds (how much your stocks and bonds are worth) 401K (you may qualify to use your 401K for the purchase of a business) Credit Cards (many people look for zero percent interest for one year from credit facilities)
Other Options: 8. All Cash 9. Borrow from Friends and Family 10. Partner Percentage (if applicable) 11. Loan from a Bank (typically, you will need 25-50% down in cash) 12. Seller financing 50% down (this is the MOST typical way for businesses that are sold for less than $2 million dollars. If you were looking to buy a business that nets $250 thousand dollars, you might have to pay $750 thousand for that business and you would most likely have to put a down payment of $375-$400 thousand dollars in cash)
Top-Ten Businesses for Sale in the US • Pizzerias • Laundromats • Restaurants • Delis • Gas Stations
• Liquor Stores • Convenient Stores • Manufacturing/Dist • Auto Repair • Retail
vestedbb.com Where to Perform Your Search
Compare features of six of the most popular national business-forsale marketing sites that every business brokerage firm in the US (and abroad) uses to attract business buyers. Any of these sites would be a great place to begin your business search.
Features
bizbuysell.com
businessesforsale .com
businessbroker .net
businessmart .com
buybusiness .com
globalbx.com
Buy a Business Establish a Business Asset Sales
Franchises
Find a Broker
Small Biz Forums
Buyer Resources
Business Alerts For Sale by Owner
Search engines ranked by popularity
6 5 4 3 2 1 0
BizBuySell.com
Businessesforsale.com Businessbroker.net
BusinessMart.com
BuyBusiness.com
Globalbx.com
How to Buy a Business
Who to Hire to Help You with the Transaction There are two very important advisors you will need to hire when buying a business: a lawyer and an accountant. You’ll also want to make sure that both the lawyer and accountant that you hire have business-transaction experience. These are professionals you’ll need (and want) in
your corner to help you avoid the hidden pitfalls of business ownership. Their expertise can save you a lot of money. An experienced business lawyer and accountant are well worth their weight in gold, so make this a priority.
vestedbb.com Lawyer
Average Cost*
The lawyer you choose will be a very valuable resource throughout the process of buying a business. There will be a multitude of documents ranging from drafting contracts to purchasing agreements as well as processes such as reviewing the lease and even coordinating inspections that your lawyer will oversee. Even the parts of the transaction that seem simple can, in actuality, be quite complex and you’ll want to rely on your lawyer to avoid legal and costly ramifications. As the saying goes, “the devils in the details,” and your lawyer will go through all of these documents with a fine-tooth comb to ensure you are protected.
Lawyer: Avgerage cost of deal is 1-3% of the sale price. Accountant: Average cost of deal is 1-4% of the sale price.
*Please use this only as a guide, as many professionals charge different fees in different areas of the nation.
Accountant Accountants are vital to your bottom line and will be throughout the duration of your entrepreneurship. However, having an accountant is especially important during a business purchase. They will be inspecting and analyzing the business’s documented financial numbers such as balance sheets, tax records, profit and loss statements and more. A competent forensic accountant will very quickly become one of your most valuable assets.
Make sure that both the lawyer and accountant that you hire have business-transaction experience.
How to Buy a Business When You’ve Found a Business When you’ve found a business that you’re intent on purchasing, the first step is signing a Non-Disclosure Confidentiality Agreement along with a Non-Circumventing Agreement. These are documents that all brokerage firms will require you sign prior to introducing you to the inside-workings of the specific business opportunity. Below are some questions that we encourage you to ask when you meet with the seller:
• Why are you selling? • Does any customer account for more than 25% of sales? • When was the business established? • What is your most popular product of service? • What’s the EBITDA (Earnings, Before Interest, Taxes, Depreciation and Amortization [see right])? • What’s the SDI (Sellers Discretionary Income [next page]) used for add • backs in small business transactions?
Earnings Before Interest, Taxes and Amortization (EBITA) EBITA refers to a business’s earnings before the deduction of interest, taxes and amortization expenses. It’s is a structure that is used widely to measure a company’s efficiency and profitability.
Regardless of the type of broker you choose, do your research and work with someone who communicates with you often and makes you a priority.
vestedbb.com
Seller Discretionary Income (SDI) Seller Discretionary Income seeks to determine the true earnings of a business and takes into account all of the benefits that the business owner takes from the business. A big problem is that many small businesses categorize expenses for the owners as business expenses. Business expenses should always be strictly for the business and personal expenses should always be solely personal expenses. To get a handle on how much money a small business makes, you must recalculate what is known as Sellers Discretionary Income (SDI). SDI will include salary and any benefits the owner takes for his personal account. Businesses have to be investigated to determine the expenses that the business owner takes for his own personal gain. Conclusively, a seller must be able to prove all the cash flow that benefits them directly.
Some examples of SDI are as follows: • • • • •
Salary (Directly) Car Health Insurance Life Insurance Golf Club Memberships
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How to Buy a Business Training In most business purchases, the seller usually agrees to train the new buyer for a set period of time. In most cases, two weeks will be an ample amount of time but training can last as long as six months out of necessity. Usually, you can get the first two or three weeks of training for free. It can also be beneficial to keep the seller on as a consultant after the training period has ended to ensure you have additional guidance along the way. Oftentimes, the training duration can be reduced if there is a key employee that is staying on with the company. Below are some questions you’ll want to have answers to when factoring training into the buying process:
• Is there a key employee? • If you lost your key employee, who’s the second most knowledgable employee? • Does the seller have a documented training program in place? • How much training will I need?
vestedbb.com Non-Binding Letter of Intent (LOI) In order to secure your position with the seller, you’ll want to establish an LOI (Letter of Intent). Submitting this document means that it is your intent to buy the business at a predetermined price with predetermined terms as long as everything is disclosed and uncovered during the due diligence period to your satisfaction.
Make Sure the LOI is Non-Binding As a buyer, you’ll want to make sure it is a Non-Binding Letter of Intent because many small businesses have non-audited financials and it’s critical to prove all of the numbers before you agree to a contract that binds you to the transaction. Oftentimes, the seller is obligated to take the business off the market until you complete the due diligence inspections. This process normally lasts anywhere from two to three weeks and, due to the confidential nature of the financial information, is typically done on the seller’s premises. Your lawyer and accountant should be aiding and assisting you throughout this.
Make sure the LOI is NonBinding. Your lawyer and accountant should be assisting you with this.
This guide is concluded with a sample LOI that we use at Vested Business Brokers™. If you would like to know anything beyond the scope of this report, please contact us toll-free at 1(877) 735-7505.
Phone: (877) 735 5224 Fax: (877) 745 7505
Letter of Intent Listing Broker
Listing ID
Selling Broker
Date
THIS FORM HAS BEEN PROVIDED BY VESTED BUSINESS BROKERS, LTD. (HEREINAFTER “VBB”) AS A CONVENIENCE TO THE PARTIES TO ENABLE THEM TO FACILITATE THE PROSPECTIVE TRANSACTIONS OFFERED HEREIN. IT IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS A BINDING AGREEMENT OF SALE OR PURCHASE. IT IS A REFLECTION ONLY OF THE PARTIES INTENTIONS.
Business Name:
Purchaser(s):
Business Location:
Purchaser Address:
DBA: 1.
Form of Transaction (Asset Purchase/Stock Purchase, Net Lease or other):
2.
Purchase Price and Terms: The total purchase price of purchase/sale shall be: a. Refundable Good Faith Deposit: Upon Seller’s execution of this agreement, Buyer will place on deposit the fully refundable sum of five thousand ($5,000.00) dollars, to be held at Vested Business Brokers, Ltd. Such deposit will be returned to the Buyer at Closing. (Certified Funds made payable to Vested Business Broker, ltd) b. The amount of shall be paid at contract signing, which represents the entire down payment. c. Balance of to be paid at closing.
3.
Note Payable Terms: a. A promissory note to be executed for remainder of purchase price for Months. b. Additional Terms
4.
5.
payable in monthly installments over
Contingencies: The purchase/sale transaction shall be made expressly contingent upon the occurrence of the following: (choose those that are applicable) a. Assumption, renewal or modification of Business lease arrangements; b. Mutual acceptance of list of furniture, fixtures, equipment. c. Mutually acceptable terms for the transfer of inventory; d. Verification of certain key customer/supplier relationships; e. Contribution of certain other key employees; f. Seller standard non-compete for at least two years; g. Complete review of financial information pertaining to the business h. Subject to accountant’s review. i. Subject to transferability of all applicable license j. Seller will provide weeks of support and training. k. Assumption, renewal or modification of franchise arrangements; l. Other (specify). Purchase Price Allocation: The allocation of the purchase price of this transaction for accounting and tax purposes will be agreed upon between the parties prior to closing.
1(877) 735-5224
|
50 Karl Ave Suite 3 Smithtown, NY 11787
|
vestedbb.com
Phone: (877) 735 5224 Fax: (877) 745 7505
6.
Due Diligence: The Buyer shall conduct due diligence for no longer than two (2) weeks from the inception of this agreement.
7.
Buyer Responsibility: It is the sole responsibility of the Buyer to perform due diligence. Buyers are advised to seek counsel from an Attorney, Certified Public Accountant, and any other parties necessary to make an informed decision regarding the purchase of this business. It is understood that all information pertaining to the business, financial or otherwise, provided by VBB to the buyer, are exclusively representations of the Seller, and VBB shall not be held liable for their content or accuracy. Buyer and Seller jointly agree to hold VBB and/or its agents harmless for any misrepresentations or omissions made by the Seller.
8.
Purchase/Sale Agreement: The parties hereto will agree to execute a formal Purchase/Sale Agreement containing the terms found in this letter and any other usual and customary representations, warranties and indemnifications contained in agreements of this nature.
9.
Contract: This transaction shall go to contract no later than ten (10) business days following the completion of Due Diligence.
10. Closing: The closing of this transaction will take place as soon as possible – Estimated date: 11. Brokerage Fees: The Seller shall be responsible for the payment of any and all fees due to VBB as a result of the consummation of this transaction payable in certified funds to Vested Business Brokers, Ltd. at closing. (Seller see addendum) 12. Non-Circumvention: Buyer agrees NOT to circumvent, in any manner, the terms agreed to in his/her Buyer Registration Agreement with Vested Business Brokers, Ltd. 13. It is agreed to that Seller will not entertain directly, or indirectly, solicit or encourage, any inquiries or proposals from, or participate in any discussions or negotiations with, or provide any information to any third party with respect to a potential sale, transfer, merger involving the businesses to be purchased, or any associated property or assets until the earlier of satisfactory completion of contract or expiration date: Notwithstanding anything herein to the contrary, paragraphs 12, 13 & 14 above shall be deemed binding and legally enforceable between the parties and Vested Business Brokers, Ltd.. An executed facsimile copy of this agreement shall have the same force and effect as an original. Agreed to on this
day of
, 20
By and Between: Seller Signature
Buyer Signature
Seller (print)
Seller (print)
Represented by
(Attorney Name)
Represented by
Address
Address
City/State/Zip
City/State/Zip
Phone
Phone
Fax
Fax
1(877) 735-5224
|
50 Karl Ave Suite 3 Smithtown, NY 11787
(Attorney Name)
|
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