Buying (or Selling) a Business

/in /by

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 buyers now want 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 an 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. The seller 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.

Orange County Business for Sale Market

/in /by

LOOK AT THESE FACTS…

The Baby Boomers (about 70,000,000 of them) are poised to make a great impact on the American economy.

  • Retiring Boomer business owners will sell or bequeath $10 trillion worth of assets over the next two decades.
  • These assets are held in more than 12 million privately owned businesses.
  • More than 70 percent of these companies are expected to change hands.
  • The sale of almost 12 million businesses over the next 10 to 15 years represents a significant increase in the annual number of businesses that will be sold.
  • These owners of businesses should have a valuation performed by a business broker, to map out a strategy for selling and structuring the sale of the business.
  • Planning ahead will enable business owners to achieve the best transaction possible during this Boomer-induced wave of business sales.
  • The 12,000,000 businesses likely to change hands over the next 10-15 years might involve a large number of boomer-to-boomer sales.
  • Baby Boomers ages 45 to 64 form businesses at a higher rate than other age groups.
  • 55 to 64 year olds form businesses at the highest rate of any age group.
  • Many of the Baby Boomers are too young to retire; they typically have ample capital through savings, investments or other assets; they have job-related skills accumulated through a lifetime of work; and many have lost faith (and money) as a result of large company layoffs and restructurings; and many will buy their own business in coming years.
  • Many Boomers find themselves unhinged from their traditional employment safety nets. This dislocation has fueled an intense desire and need to have control of their destinies.
  • Ironically, now small business ownership is seen as much more safe and secure than working for a large company.
  • So, in the coming decades, not only are we likely to see millions of Baby Boomers selling businesses they now own, we will also see additional millions of Boomers (who’ve spent their lives working for someone else), buying businesses.
  • The next two decades will see a significant increase in the number of small and mid-sized businesses being bought and sold by Baby Boomers, in addition to the other generations of Americans.

What Companies are Buyers Looking For In Orange County

/in /by

Top Ten Businesses for October 2014:

  1. Restaurants
  2. Convenience Stores
  3. E-Commerce
  4. Bars
  5. Fast Food – Non Franchises
  6. CaféBars
  7. Sandwich Shops & Delivery
  8. Auto Repair, Service & Parts
  9. Liquor Stores/Off Licences/Wine Merchants
  10. Gas/Petrol Service Stations

Top Ten M&A Businesses for October 2014:

  1. Distribution Businesses
  2. Car Wash & Valet
  3. Gas/Petrol Service Stations
  4. Mining Businesses
  5. Fabrication Businesses
  6. Main Contractors
  7. Construction Businesses
  8. Manufacturing Businesses
  9. Wholesale Businesses
  10. Road Haulage & Freight Services

Free Broker Opinion of Value For Qualified Sellers In Orange County

/in /by

M&A and Business Broker activity is very high due to a number of reasons.  The revenues and profits for most business have increased and therefore the valuation for these businesses has moved upward.  Business owners who put off selling their business due to the “great recession” are now contemplating a sale.  Another, even more significant trend, is the Baby Boomer generation who want to retire.  It is estimated of the approximately 700,000 Baby Boomers, about 12 million own privately held businesses.  These 12 million businesses are likely to change hands over the next 10-15 years.

Before a business owner, whether a Baby Boomer or not, sells the business, he or she needs to get an estimate of what the business will bring on the open market.  A formal Valuation can cost between $5,000 and $10,000 depending on the size and complexity of the business.  If a seller wants to know if his perception of the value of his business, he should either do a formal Valuation or ask a Broker to do a Broker Opinion of Value.

Before putting a business on the market, a seller (or a buyer) should get an idea of the worth of the business.  There are several ways to value a business but most are based upon the re-cast cash flow of the business.  One way is to value by “rule of thumb”  which is a shortcut analysis of a business’s value, usually expressed as a multiple of the annual re-cast earnings of the business or Seller’s Discretionary Earnings (SDE).  In general,  a small business with a full-time working owner is worth from 1 to 3 times its annual SDE, with businesses producing SDE under $50,000 falling closer to the “1x” and businesses producing SDE of $100,000 or more valued closer to the “3x.”  The value must be tempered by the risk assessment which can either increase or decrease the valuation.  Another way to value a business is to compare the cash flow of the business to the sales price of other businesses that have sold.  This market comparison approach will reveal the multiples of SDE on past business that have been sold which can then be applied to the business being sold. A good Broker will have sources to access to these “comps”.  The market comparison approach is more likely to yield a more accurate valuation.

Empire Business Solutions is offering a Free Broker Opinion of Value to all qualified business owners.  Empire believes you should have an estimate of the value of your business BEFORE you make the decision to sell.  Call us at 714-374-6430 to discuss the details.

Empire Business Solutions has been a leading Business Broker and M&A Specialist since 2005 in the Orange County and Los Angeles County area.  Empire specializes in representing sellers in Southern California who want to maximize the value of their business.

Which Businesses Get the Most Inquiries?

/in /by

Hot Business List ~ September 2014

 

Below you will find the current “hot” business list courtesy of data from a leading Business For Sale website.  A  monthly ranking of business types based on the number of “hits” on their site. This ranking is not based on the actual sale of businesses.

TOP CATEGORIES BY IMPRESSIONS

Top Ten Businesses for September 2014:

  1. Marketing Businesses
  2. Convenience Stores
  3. Printing & Typesetting Services
  4. Restaurants
  5. E-Commerce Businesses
  6. Fast Food – Non Franchises
  7. Auto Repair, Service & Parts
  8. Liquor Stores/Off Licences/Wine Merchants
  9. Bars
  10. Gas/Petrol Service Stations

The Deal Is Almost Done — Or Is It?

/in /by

The Letter of Intent has been signed by both buyer and seller and everything seems to be moving along just fine. It would seem that the deal is almost done. However, the due diligence process must now be completed. Due diligence is the process in which the buyer really decides to go forward with the deal, or, depending on what is discovered, to renegotiate the price – or even to withdraw from the deal. So, the deal may seem to be almost done, but it really isn’t – yet!

It is important that both sides to the transaction understand just what is going to take place in the due diligence process. The importance of the due diligence process cannot be underestimated. Stanley Foster Reed in his book, The Art of M&A, wrote, “The basic function of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased.”

Prior to the due diligence process, buyers should assemble their experts to assist in this phase. These might include appraisers, accountants, lawyers, environmental experts, marketing personnel, etc. Many buyers fail to add an operational person familiar with the type of business under consideration. The legal and accounting side may be fine, but a good fix on the operations themselves is very important as a part of the due diligence process. After all, this is what the buyer is really buying.

Since the due diligence phase does involve both buyer and seller, here is a brief checklist of some of the main items for both parties to consider.

Industry Structure

Figure the percentage of sales by product line, review pricing policies, consider discount structure and product warranties; and if possible check against industry guidelines.

Human Resources

Review names, positions and responsibilities of the key management staff. Also, check the relationships, if appropriate, with labor, employee turnover, and incentive and bonus arrangements.

Marketing

Get a list of the major customers and arrive at a sales breakdown by region, and country, if exporting. Compare the company’s market share to the competition, if possible.

Operations

Review the current financial statements and compare to the budget. Check the incoming sales, analyze the backlog and the prospects for future sales.

Balance Sheet

Accounts receivables should be checked for aging, who’s paying and who isn’t, bad debt and the reserves. Inventory should be checked for work-in-process, finished goods along with turnover, non-usable inventory and the policy for returns and/or write-offs.

Environmental Issues

This is a new but quite complicated process. Ground contamination, ground water, lead paint and asbestos issues are all reasons for deals not closing, or at best not closing in a timely manner.

Manufacturing

This is where an operational expert can be invaluable. Does the facility work efficiently? How old and serviceable is the machinery and equipment? Is the technology still current? What is it really worth? Other areas, such as the manufacturing time by product, outsourcing in place, key suppliers – all of these should be checked.

Trademarks, Patents & Copyrights

Are these intangible assets transferable, and whose name are they in. If they are in an individual name – can they be transferred to the buyer? In today’s business world where intangible assets may be the backbone of the company, the deal is generally based on the satisfactory transfer of these assets.

Due diligence can determine whether the buyer goes through with the deal or begins a new round of negotiations. By completing the due diligence process, the buyer process insures, as far as possible, that the buyer is getting what he or she bargained for. The executed Letter of Intent is, in many ways, just the beginning.

Buying a Business – Some Key Consideration

  • What’s for sale? What’s not for sale? Is real estate included? Is some of the machinery and/or equipment leased?
  • Is there anything proprietary such as patents, copyrights or trademarks?
  • Are there any barriers of entry? Is it capital, labor, intellectual property, personal relationships, location – or what?
  • What is the company’s competitive advantage – special niche, great marketing, state-of-the-art manufacturing capability, well-known brands, etc.?
  • Are there any assets not generating income and can they be sold?
  • Are agreements in place with key employees and if not – why not?
  • How can the business grow? Or, can it grow?
  • Is the business dependent on the owner? Is there any depth to the management team?
  • How is the financial reporting handled? Is it sufficient for the business? How does management utilize it?

Selling Your Business? Expect the Unexpected!

/in /by

According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:

How much is your time worth?
Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.

How involved do you need to be?
Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.

Are there any other decision makers?
Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.

How important is confidentiality?

This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.

Do You Know Your Customers?

/in /by

It’s always nice, when eating at a nice restaurant, for the owner to come up and ask how everything was. That personal contact goes a long way in keeping customers happy – and returning. It seems that customer service is now handled by making a potential customer or client wait on a telephone for what seems like forever, often forcing them to repeatedly listen to a recording saying that the call will be handled in 10 minutes. Small businesses are usually built around personal customer service. If you are a business owner, when is the last time you “worked the floor” or handled the phone, or had lunch with a good customer? Customers and clients like to do business with the owner. Even a friendly “hello” or “nice to see you again” goes a long way in customer relations and service.

The importance of knowing your customers and/or clients could actually be extended to suppliers, vendors, and others connected with your business. When is the last time you visited with your banker, accountant, or legal advisor? A friendly call to your biggest supplier(s) can go a long way in building relationships. A call to one of these people thanking them for prompt delivery can pay big dividends if and when a problem really develops. With most communication now done online, a handwritten thank you to a long-standing customer, someone whose recommendation resulted in a new customer, or a vendor you appreciate stands out among the bills and junk mail.

Owning and operating your own business is not a “backroom” or “hide behind the business plan” business. It is a “front-room” business. Go out and meet the customers – and anyone else who has an interest in your business.

Three Basic Factors of Earnings

/in , /by

Two businesses for sale could report the same numeric value for “earnings” and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number.

1. Quality of earnings
Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately reflect the true earning power of the company’s operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items.

2. Sustainability of earnings after the acquisition
The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous rate.

3. Verification of information
The concern for the buyer is whether the information is accurate, timely, and relatively unbiased. Has the company allowed for possible product returns or allowed for uncollectable receivables? Is the seller above-board, or are there skeletons in the closet?

A Listing Agreement is More than Just a Piece of Paper

/in /by

In order to sell one’s business using the services of a business broker, a listing agreement is almost always required.

For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family.

For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds.

So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The business broker looks at that piece of paper through the eyes of both the buyer and the seller, working to help both parties progress through the business transaction process into the new phase of their lives.