Why should I buy a business rather than start one?
The failure rate in small business is enormous in the start-up phase and the first three years. The existing business has demonstrated that there is a need for that product or service in a particular location. Financial records are available along with other information on the business. Most sellers will stay and train a new owner and most will also supply financing. Finding someone who will teach you the intricacies of running a business and who is also willing to finance the sale can make all the difference.
Why should I go to a Business Broker?
Selecting the right, experienced broker for YOU is of utmost importance. Your broker will carefully study your strengths and shortcomings, experience, needs, likes and dislikes and will provide you with a selection of different and, in many cases, unique businesses, including many that you would not be able to find on your own, that better suit you. Business brokers are also an excellent source of information about businesses and the business buying process. They are familiar with the market and can advise you about trends, pricing and what is happening locally. Your business broker will handle all of the details of the business sale and will do everything possible to guide you in the right direction.
How Are Businesses Valued?
There are literally dozens of formulas used for valuing businesses, but there are three primary components for determining value: (1) Fair Market Value of Assets (inventory, equipment, etc); (2) The ability of a business to generate earnings (often times it is necessary to compare the true earning power of a business by "adjusting" the income statement of the business for discretionary expenses of the seller...we call this revised calculation the "Adjusted Profit"); and (3) Demand (Certain types of businesses such as manufacturing companies will usually command a higher purchase price than retail firms with similar earnings).
Sale The sale of a business showing sales and profit is considered a goodwill sale. The fixtures and equipment are included in the sale unless otherwise specified. The sales and profit of the business must be proven to a buyer by the review of the seller's books and records. This is the seller's responsibility to provide the buyer with the documentation. In a goodwill sale you will see many times that the profit is an adjusted amount. Many business owners will charge personal use items against the financial statement. These are items the seller deducts from the profits, but are not used in the conduct of the business. These items are what is called 'add backs'. They are added to the net profit to show an 'adjusted net profit'. Most goodwill sales are priced at a multiple of the adjusted net. Multiples will vary according to the quality and ongoing track record of the business.
Asset Sale F/F/E (Asset - Furniture, Fixtures, Equipment)
The sale of a business under the caption asset f/f/e is for a business that the seller has put on the market whereas they cannot prove profits - or there is no profit, or it is a break-even. Many of these offerings can be excellent values for a buyer with the vision to change or turn a business around. Many times the asset f/f/e price of the business is substantially less than if you were to go and buy the fixtures & equipment, do the build out and start from scratch. You will also enjoy some ongoing sales from the previous owner. Be advised there is no book and record review. You are buying the business as is.
Books & Records Review
The most critical part of the sale of any business being sold as goodwill is the books & records. The current business owner's responsibility is to prove to a buyer the profit and adjusted profit of the business. This is usually done after an agreed-upon price and terms have been completed between buyer and seller. This is to be sure the buyer will qualify to buy the business under terms and conditions suitable to the seller. Note: no escrow is opened and no buyer's deposit is at risk until the books & records contingency has been removed. The books and records can consist of federal and state tax returns and state sales tax returns. Prepared financial statements - check registers and bank statements referring to the business. Again it is the seller's responsibility to provide the documentation to prove sales and profits, and the buyer's responsibility to perform due diligence to his/her satisfaction. The broker/agent will assist in seeing that the proper documents are provided - but will not participate in the due diligence.
What Happens When There is A Buyer for My Business?
First and foremost continue to run the business in an aggressive, growth-oriented way. Do not let up on business operations during the marketing period. You should make most decisions in the best interest of the long-term objectives of the company. Maintain up to date financial information. Work with your accountant to provide monthly statements with year to date numbers. Real buyers want real data, usually no more than 60 days old. Once an agreement is reached between buyer and seller, buyers generally want to close as soon as possible. It is important to keep all matters pertaining to the sale confidential until the closing so that the business operations are not altered by employees, competitors or clients.
Why is Seller Financing So Important?
In many cases, businesses listed for all cash simply do not sell. A seller demanding all cash can expect offers with discounts of 10 to 30%. With reasonable terms, the chances of a sale increase dramatically. Since very few lenders will finance the sale of a small company, seller financing may be the only way to sell your business. You will also receive interest from the note which can greatly increase the total amount received. Most of all, seller financing tells the buyer emphatically that the seller believes the company can make the payments.
What Can I Do To Help Sell My Business?
We will assist in the preparation of an offer. Our Standard Purchase Contract will spell out the buyer's offer in detail. The offer may contain several contingencies and will specify due diligence the buyer will perform. You can expect to be asked for Tax Returns, Bank Statements, Sales Tax Reports and any other documents necessary to prove the financial performance of the business, usually for at least the past three years. Additionally, the buyer will want to review the lease, franchise agreement or other contracts that will affect the business after the sale. All offers will be presented to you for your consideration. You always have the right to accept an offer, issue a counter proposal or reject the offer. It is important to know that if you don't accept the offer, a buyer can withdraw at any time. Be prepared to do some work at this point in the process. People from all over the world are seeking business opportunities in our area. Different nationalities and cultures approach negotiations in far different ways. You should take the time to consider all offers carefully and seriously. There may be some definite positives in the offer and the negatives may be offset with careful negotiations. Often, the first buyer turns out to be the best.
How are businesses priced?
Although supply and demand will ultimately affect the price of a business, there are "rules of thumb" or formulas used to arrive at the proper market value. Your business broker will explain that a review of financial information will be necessary before a price or range of prices may be suggested. Most sellers have some idea about what their business should sell for - and this is certainly taken into consideration. However, the business broker is familiar with market considerations and, by reviewing the financial information, can make a recommendation of what he or she feels the market will dictate. A range is normally set with a high and low price. Since a large number of business sales are seller-financed, the down payment and terms of the sale are very important. In some cases, how the sale of the business is structured is more important than the actual selling price.