Buying a business is a challenging but highly rewarding experience. Buying a business will not only affect a buyer financially but also, and perhaps more important, it is a lifestyle decision. How one lives their life is shaped and influenced by what they do for a living. If you know someone who has owned their business for a period of time, he or she could be a valuable resource in answering questions about what it is like to be in small business and how small business really works.
Should a buyer purchase an existing business or start a new one?
An existing business has a track record and has demonstrated that there is a need for that product or service in a particular market. Financial records are available along with other information on the business, its market and competitors. Additionally most sellers will not only stay and train a new owner but will also supply some financing. These last two factors are very important considerations. Having a knowledgeable person teach a new owner the intricacies of a particular business and who is also willing to finance a portion of the sale can make all the difference between success and failure. On the other hand, failures of start-up businesses occur largely during the first three years of their existence.
Why should a buyer use a business broker?
A professional business broker can be helpful in many ways. Brokers can provide a selection of different and, in many cases, unique businesses, including many that buyers would not be able to find on their own. Many buyers end up with a business completely different from the business that they first inquired about.
Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise buyers about trends, pricing and what is happening locally. Business brokers can handle many of the details of the business purchase and will assist buyers during the process, including, if necessary, recommending other professionals.
What does a business broker do?
In an initial meeting the buyer and Broker establish the buyer’s criteria for a business and his or her financial qualifications and business background. The prospective buyer then completes a Buyer Services/Non-Disclosure Agreement so confidential seller information can be revealed to the buyer. Potential acquisition candidates from the brokers’s listings are then identified based on the buyer’s criteria. If a listing is available that meets the buyer’s criteria, pertinent details of the listing are provided to the buyer. If the buyer elects to pursue the opportunity the Broker arranges a meeting.
During this initial meeting a buyer should be prepared to ask the seller about all aspects of the business to include a request for any additional financial information that may be required. If after this initial meeting the buyer wishes to pursue the opportunity with an offer, the buyer then submits a purchase offer to the seller. A purchase offer should be pursued only after the buyer has made a complete inspection of the business and has determined that this is the business that he or she wants to purchase. The Broker works as an intermediary in negotiating the purchase contract between the buyer and seller.
During the period where the buyer examines the seller’s business and financial information in detail, the “due diligence period” as provided by the asset purchase contract, The Broker works with the seller in helping provide the buyer with the needed information. Due diligence includes not only an examination of the books and records of the business but also all of the other aspects of the business and market factors that may affect the business.
KKBA brokers can also assist buyers in obtaining financing as we have many lenders who we can recommend for business acquisitions. We can also recommend good sources for business insurance. KKBA helps take the mystery out of the business buying process and offers buyers assistance and guidance every step of the way.
What is the real reason people go into business for themselves?
There have been many surveys taken in an attempt to answer this question. Most surveys reveal the same responses in almost the same identical order of priority. Here are the results of a typical survey, listed in order of importance.
- To do my own thing or to control my own destiny.
- Don’t want to work for someone else.
- To better utilize my skills and abilities.
- To make money.
How are businesses priced?
Since most business sales have some portion of the purchase price seller-financed, the down payment and other terms of the sale are very important. In many cases, how the sale of the business is structured is more important than the actual selling price. Too many buyers make the mistake of being overly concerned about the full price when the terms of the sale are generally the difference between success and failure. An oft-quoted question may better illustrate this point: If you could buy a business with a relatively small down payment and the business would provide you with more net cash flow than you thought possible, would you really care what the full price of the business is?
What should a buyer look for in a business?
Obviously, a buyer should consider only those businesses that they would feel comfortable owning and operating. “Pride of ownership” is an important ingredient for success. And obviously a buyer should consider only those businesses that can be purchased with the cash they have at their disposal. In addition the business must be able to supply enough cash flow—after making payments on it—to maintain the owner’s lifestyle.
Buyers should always look at a business with an eye toward what they can do to improve it and make it more productive and profitable. There is an old adage advising a person not to buy a business unless they feel that they can run the business better than the present owner does. Everyone has seen examples of businesses that need improvement in order to thrive, and a new owner comes in and does just that. Conversely, there are also some cases where a new owner takes over a successful business and not soon after, it either closes or is sold. It all depends on the new owner…
What does it take to be successful?
First, a buyer needs adequate capital to buy the business and make the desired improvements while maintaining adequate working capital reserves to weather any slow periods. A buyer needs to be willing to work hard and, in most cases, to put in long hours. Smaller businesses are much different from larger businesses with trained support staff available to handle important tasks. In a small business a business owner may have to be the president, the janitor, errand boy, employee, salesperson, computer expert and accountant. Some buyers think they can buy a business and then just sit behind a desk and work on their business plans. Owners of small businesses, however, must be “doers.”
What happens when you find a business you want to buy?
When one of KKBA’s listings interests a buyer one of our brokers will either be able to answer your questions immediately or will research them for you. Once a buyer gets his or her preliminary questions answered, typically the next step is for the broker to help the potential buyer prepare an offer based on the price and terms the buyer designates. The offer will generally be conditioned upon a review and approval of the actual books and records supporting the financial information that have been supplied. The offer is then presented to the seller, who can approve it, reject it, or counter it with his or her own offer. The main purpose of the offer is to determine if the seller is willing to accept the offered price and terms.
What happens when I make a purchase offer?
A purchase contract generally includes:
- details of the price to be paid for the business;
- assets that are included in the purchase;
- training to be provided to the buyer;
- the time period and area to be covered by any non-compete agreement;
- and, if there is to be financing by the seller, the details of the financing.
If the buyer and seller agree on the price and terms, the next step is for the buyer to perform their “due diligence.” Due diligence is the examination and evaluation of risks affecting a business transaction that a prudent person might be expected to exercise. The burden is on the buyer—no one else. A buyer may choose to bring in other outside advisors to help or may do it on their own—the choice is solely up to the buyer. Once due diligence has been completed the closing documents can be prepared and the purchase of the business can be closed.
What is done during the “due diligence period?”
The due diligence period is used by the buyer to review all aspects of the business—not only the financial aspects of the target business, but competition, changes in market dynamics, available financing, and all other issues that should be considered in purchasing a business. The buyer’s accountant and attorney should review the financial and legal aspects of the purchase.
Upon the completion of the due diligence period, the buyer and seller are ready for the closing of the sale. The person that handles the closing is responsible for filing the required paperwork, and ensuring that all licenses and leases are properly handled for the buyer and seller.
KKBA works with the buyer in securing the approval of financing, the transfer of licenses, the assignment of lease and franchise rights, and the performance of due diligence for the target business. If required KKBA can assist with the preparation of a business plan to include financial projections that will generally be required by outside lenders.
Do I need an attorney?
An experienced attorney can be of invaluable assistance in making sure that all of the legal aspects of the transaction are properly handled. Business brokers are not qualified to give legal advice; however, many attorneys are not qualified to give business advice. A buyer’s attorney will be, and should be, looking after their client’s best interests. However, a buyer must remember that the seller’s interests must also be considered. The transaction must be fair for all parties. If an attorney goes too far in trying to protect a buyer’s interests, the seller’s attorney may well instruct his or her client not to proceed.
It is also important that the attorney be familiar with the business buying process and has the time available to handle the paperwork on a timely basis. If an attorney does not have experience in handling business sales, a buyer may well be paying for the “attorney’s education.” KKBA can provide you with names of attorneys who have proven to be familiar with the business purchase and sale process.
Was this helpful? If not, then contact K&K for further assistance.