BUYER/SELLER TIPS

BUYERS INTRODUCTION

Going into business for yourself is a big step, one that can be full of apprehension and even fear. Almost 90 percent of all those who purchase a small business have never owned a business. Most of them bought a business that was different than what they had been looking for. These business buyers had the opportunity to explore the marketplace and subsequently found a business more to their liking. In most cases, the seller financed the sale of his or her business.

As you begin your search for a business, keep in mind that running your own business is more than a job; it is a lifestyle change. In most cases, it is a very big lifestyle change. Usually, you will be working longer hours, you will be making all of the decisions - and, as the expression says, "you will be the chief cook and bottle washer." In other words, you will be doing all of the work from running the business to, in may cases, sweeping the floor and changing the light bulbs. Most buyers are looking for many of the following in considering the purchase of a business:

Pride in the service or the product
Flexibility
Income
Control of your own destiny
Recognition
Security
Privacy
Status
Customer and employee contact

WHAT TO LOOK FOR

1. How long the business has been in business.

A business with a long track record means there are good reasons for that business to be operating. It will be well known in the area, and people will be used to patronizing the business or using its services. The longer it has been in operation, generally, the better the business.

2. How long the present owner has owned the business.

The longer the present owner has been in business, the more likely he or she has been successful. People don't stay in business if they are not making money.

3. Why the present owner is selling.

If the owner of a business has been in business for six months, is 37 years old and wants to retire, you should be suspicious. The more valid the reason for sale, the more realistic the seller will be in considering your offer. However, keep in mind that after five or six years or more, people do get restless or "burn-out" sets in, or people look for new challenges. Why the seller is selling is an important question - get the answer.

4. Why Books and Records are important.

The financial records of the business are a good indication of how well the business has been doing over the years. Keep in mind that tax records are not designed to show the business in the best light: no one likes to pay more taxes than they have to, and owners of businesses are no different. Generally, tax returns are a worst case scenario. You need to be able to look at the expenses and discover which ones are non-cash items, such as depreciation, and business use of home and vehicles. How important was the business trip to Las Vegas? A professional business broker can point these items out to you. When in doubt, however, seek outside assistance.

Keep in mind that financial records are only history. There are no guarantees that they will or can be duplicated or repeated. All of your profits are future. In the final analysis, the financial records of the business are an indicator of what the business has done; what you do with its future is up to you.

5. How to determine if the seller is reporting all income.

The simple answer is - that you can't! Not reporting income is against the law. You should consider only the income that the seller can show you. We all know, of course, especially in cash type businesses, there is the possibility that the seller is not reporting all of his or her income for tax purposes. This "underground economy" has been well-documented and is in the billions of dollars. Many sellers will tell you about how much they are "skimming," but you should ignore their statements, since they have no way of proving these amounts. In determining whether a business is the right one for you, you should base the decision on the figures actually supplied to you by the seller.

THE BOTTOM LINE

Being in business for yourself can be a daunting prospect. There are no guarantees. At some point, after all of your investigation is completed, you will still have to make that "leap of faith" that is necessary to proceed with the purchase of the business. You will have to work hard, perhaps even "tighten your belt" a little and perform many different jobs to be successful in your own business. But, if running your own show, making your own decisions, not having to worry about job security (remember, no one can fire you from your own business), and just being on your own are important - then owning a business is for you. After taking this leap of faith, almost all business owners will tell you that they would never go back to being an employee.

Buyer Types

The strategic buyer is one engaged in a similar or related business to the one being purchased. Generally, the strategic buyer is willing to pay the highest price since it provides a quick entry to a related business. Buying a business is much easier than trying to replicate it.

The competitive buyer offers a lot of synergies that can reduce costs and perhaps increase market share - which also obviously reduces competition. However, this is a less popular type of buyer because sellers are usually reluctant to approach the competition.

The financial buyer brings little, if any, synergy to the deal. However, these buyers do bring financial knowledge and use it to increase the profits of the business. They generally make changes and work to increase the value in order to sell it at a profit in five to seven years. The financial buyer almost always insists on owning 100 percent of the acquired business.

The overseas buyer can be difficult to find, and usually wants to acquire larger companies. This type may look at a smaller firm if they feel that it provides an entry to the U.S. market, and will pay well for such a company.

A customer, vendor or supplier is also a possible acquirer, but vertical integration is not perceived as a viable acquisition strategy today.

Buyers and Sellers - What to Expect from a Business Broker?

Anyone who is considering selling - or - buying a business wants to know the advantages of using the services of a business broker. They also want to know what to expect from using their services.

From the Seller's Viewpoint

Let's look at these questions from the seller side first. In most cases, the business broker is listing the business for sale. In most cases the business broker is representing the seller and is duty-bound to represent the seller honestly and fairly. A business broker is also charged with trying to get the highest possible price - and the best deal - for the seller. However, sellers must understand that, no matter how hard the business broker tries, it is the marketplace that ultimately determines the price and terms - not the business broker or the seller.

The business broker will keep the seller informed, on a regular basis, of the status of the listing and will do everything possible to maintain the confidentiality concerning the sale of the business. However, selling a business is a two-way street and requires cooperation on both sides - seller and business broker. The broker needs to be kept aware of current information regarding the business, such as sales trends, major equipment purchases, inventory fluctuations and the like. The broker and the seller must work together; they are on the same side, and they should work as a team.

In some states, business brokers act as transaction brokers. They do not represent anyone; instead, they work for the transaction - their job is to make the sale work and go together. Despite the fact that they may not represent either buyer or seller, they still must treat both sides honestly and fairly.

Although in most states, the business broker does represent the seller, he or she must still deal honestly and fairly with the buyer.

From the Buyers Viewpoint

The advantages of a buyer in working with a business broker are the many opportunities that can be presented to the buyer. Many buyers may think they want a certain kind of business, but, in fairness, they have no idea of the various businesses that may be available.

No one likes to waste their time, and business brokers can show buyers businesses that fit their pocketbook and still can provide the necessary income to provide for their families. Buyers want candor in the presentation of the business. The business broker is an intermediary - he or she can resolve issues and misunderstandings easily and quickly.

Professional business brokers bring value to the process of buying and selling businesses. They understand the issues and the details involved in the business transaction. They have the knowledge and experience to bring the sale to a successful close. If the buyer and seller are honest with the business broker - a win-win situation will result. In return, business brokers need a seller who is really a seller and a buyer who is really a buyer. Buyers and sellers should have high expectations about what the business broker can offer. At the same time, the business broker has the right to have the same expectations from them.

Almost all businesses include all of the following:

Fixtures and equipment
Inventory (or stock-in-trade)
Goodwill (the reasonable expectation of future profits)
Lease
Leasehold improvements

In addition, it is possible that a business might include one or more of the following:

A franchise
Customer and/or mailing lists
Patents/copyrights
Secret recipes
Proprietary software or other technology

All of these components, and others, may have a positive or negative affect on the asking, and ultimate, selling price of the business.

Buying (or Selling) a Business

The following is some basic information for anyone considering purchasing a business. Is may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become.

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business that he never considered until it was introduced, perhaps by a business broker.

His, or her primary reason for going into business is to get out of his or her present situation, be it unemployment, job disagreement, or dissatisfaction. The potential buyer now wants to do their own thing, be in charge of their own destiny, and they don't want to work for anyone. Money is important but it's not at the top of the list, in fact, it is probably fourth or fifth on their priority list. In order to pursue the dream of owning one's own business, the buyer must be able to make that "leap of faith" necessary to take the plunge. Once that has been made, the buyer should review the following tips.

Importance of Information

Understand that in looking at small businesses, you will have to dig up a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don't overlook a "gem" of a business because you don't or won't take the time it takes to find the information you need to make an informed decision. Try to get a understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.

Negotiating the Deal

Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his "story" may change when it comes time to put his words into action. The seller finances the vast majority of small business transactions. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.

Since you can't expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don't try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure--don't obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.

Furthermore, don't try to push the seller to the wall. You want to have a good relationship with him or her. They will be teaching you the business and acting as a consultant, at least for a while. It's all right to negotiate on areas that are important to you, but don't negotiate over a detail that really isn't key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.

Due Diligence

The responsibility of investigating the business belongs to the buyer. Don't depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn't reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the "leap of faith" necessary to achieve business ownership. Outside professionals normally won't tell you that you should buy the business, nor should you expect them to. They aren't going to go out on a limb and tell you that you should buy a particular business. In fact, if pressed for an answer, they will give you what they consider to be the safest one: no. You will want to get your own answers--an important step for anyone serious about entering the world of independent business ownership.

Call Miles, your business sales expert, at 772-419-8303 and take that important 1st step.

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