Buying
Make a Buying a Business Checklist
After consulting with California business buyers for over eighteen years I highly encourage them to have a “buying a business checklist”, an important tool if they are serious about purchasing a company and not wasting a lot of time looking. Only 20% of all potential business buyers within California actually end up purchasing a small business. I have found that the failure to buy a business can be chalked up to not following the proven suggestions listed below.
The main items that should go into that checklist are:
1. Getting personally prepared: This includes putting together a buyer profile, including financial statement, description of what you want, and a resume summarizing your work experience. These documents demonstrate you are a “real” buyer, deserving of cooperation from sellers, business brokers, and agents. The information is personal, of course, and should only be shown to sellers who have a business you might want, or brokers whom you believe are honest and professional. Willingness to be upfront about your interests and capabilities will immediately separate you from the majority of people searching for business opportunities but, for one reason or another, will never complete a purchase. Another preparation strategy is to apply for an SBA-backed loan pre-qualification. Buyers who do this find out how much money they will have to work with, and can gain a competitive advantage over buyers who look for a business first, and go searching for money second.
2. Organizing a team: The purchaser who has a lawyer and accountant listed on his or her buying a business checklist will be in a position to move quickly once an interesting business is found. This means of course that the professionals are ready to be of service–the lawyer helping with language in the contracts and protecting you from problems, the accountant to help value a business and conduct due diligence. While other buyers interested in a particular business are trying to find the professional help they’ll need to proceed, the entrepreneur who has taken care of that step will be able to move more quickly than competing purchasers.
3. Cast a wide net. The more businesses you’re aware of, the better the chances of encountering just the right offering in a short period of time. That means working with more than one broker, answering for sale by owner ads, even posting a business wanted to buy request.
4. Respect the sellers’ requests for confidentiality. And be ready to sign a non-disclosure agreement. Showing that you are honest and “above board” will earn the cooperation of sellers. And without that, it’s nearly impossible to buy a business.5. Try for a win-win in negotiations with someone whose business you’d like to buy. The purchaser who wants to beat a seller in the price and terms aspects of a deal, might find he’s taken “round one” but then when extra help is needed–a bit longer to pay off the note or advice about some confusing aspect of running the company–the seller will be unwilling to accommodate.
6. Pay attention to the details when a transaction is in escrow. After all the work and excitement as you come to the end of the buying a business checklist, it’s a shame to lose a deal over some issue that might have been avoided had you noticed a developing problem and taken action right away. Make certain the escrow holder is competent and is doing everything that was promised.
Buying a small business is not rocket science, but it can be rather complicated and detailed. Make sure to be fully prepared, and that includes making up a buying a business checklist before you answer the first business for sale ad!
Find More Buying A Business Articles
What do I need to know when I am Buying a Business?
I often wonder if business owners who are looking at purchasing a business take the same sort of outlook as when they are buying something in the stock market.
Let’s take some thoughts from the way Warrant Buffet looks at a company and determine if we could be using those same successful strategies.
Those strategies tend to be summed up in a very concise manner -> make sure you understand what you are buying, ensure the industry prospects are favorable, and if management is going to stay on in some capacity make sure they know what they are doing!
Many owners I meet look to buy into businesses, or franchises for that matter, in an industry they don’t understand. We would say that if you can’t positively feel good about knowing the real sales potential, how expenses occur, what is the cash flow cycle of the business then you should not by look to purchase that business. Naturally many business owners will often get a strong sense of missing a major opportunity – the business owners forgets that Buffett once said ‘ above average results… are often produced by doing ordinary things ‘.
Many business owners like to focus on buying a turn around business, a business that has been either abandoned or poorly managed by its previous owners. While there are clearly some great turn around stories out there, more often than not these transactions become large challenges and financial nightmares. More simply speaking: The business was cheap to buy for a reason!
In a perfect world, (and we realize it’s not!) it is optimal to consider purchasing a business that has a solid product and reputation.
The people aspect of purchasing any business is also important, and great investors such as Buffet place a large emphasis on management. Obviously the business purchaser has the focus of either keeping management or replacing management. Naturally management that has a focus on the bottom line and on long term growth are to be very valued.
At a certain point it gets down to ‘price ‘. Business acquirers should focus as much on return on equity as just net income. That is one the key areas in a Buffett type purchase decision. A huge mistake is to also focus on volume as opposed to profit margins. Most business acquisitions involve the buyer assuming or generating debt. The overall focus, it goes without saying is to minimize debt.
Getting back to our legendary investor, Buffett creates a formula for what he calls owner earnings – which formula is as follows:
Net profit + deprecation – Capital assets needed to be acquired
We would agree that this is a great way to look at profit potential in any business being acquired.
Buffett modeled his career on one book, a famous finance book entitled ‘The Intelligent Investor ‘, by a fellow named Ben Graham. As dry and out of date this huge text might seem to today’s business person, we could still all use a little ‘ intelligent investing’ assistance when make a major decision to buy a business.
The Business Ownership Checklist; What You Must Know Before Buying The Business
Before signing a contract to buy a business it is important for any buyer to do thorough due diligence, so that there are no unpleasant surprises later.
Buying a business is a huge commitment and should not be taken lightly. Business ventures involve time and money and both of these can be wasted (in large amounts), if the correct decisions are not made from day one. Also, it is not always easy to exit, or sell, a business at short notice, so the wrong decisions can have major consequences on family life and personal finances.
If you are thinking of buying a business, then get to know it inside and out, before you sign any purchase agreement. Here is where to start.
You might want to make some discreet inquiries before contacting the seller or broker representing the seller. But, do be careful who you talk to and what you say. You might want to ask questions of suppliers, competitors, neighboring business owners, customers, employees and even the owners of similar businesses in other cities. As I said be careful, because talking with employees and others could uncover some vital information.
It would pay to visit the business for you to judge the location and presentation – both inside and outside. This is a first (but not the last) visual inspection. You could do this openly, or anonymously, by pretending to be a customer. If the business is the type that does not lend itself to a visit, you might have to declare your hand and make an appointment with the seller (or broker) to inspect the business.
Nothing compares to seeing the business first-hand. The visit could save you a lot of wasted time and effort depending on what you uncover. You will be spending a lot of time in the business so you want to be comfortable owning it.
The following is a checklist you could use (or adapt) to record your initial reactions and impressions when visiting the premises for the first time. It is easy to be overwhelmed by what you see and go away thinking you have taken it all in, only to find you have forgotten critical things. Write down:
Time of visit Date of visit Length of visit Business Name Business Address Initial reaction to business Reason for sale How long the has business been going How long the current owner has been operating it Asking price and terms Asking price breakdown Inventory estimated value Method of calculation Initial reaction to price and terms Monthly sales Annual sales Monthly cash-flow (if available) Aspects you MOST LIKED about the business Aspects you LEAST LIKED about the business Changes you might make as owner Other comments
These questions are just a start to your due diligence process – but a good start.
All the best with your business venture. I wish you every success.
Find More Buy A Business Articles
Franchise Fitness: 3 Steps To Buying One
Many people dream of becoming their own boss some day. One way to gain entry as an entrepreneur is to buy a franchise. Today, even in this ever challenging economy, there are thousands of franchise opportunities and franchises for sale. According to the International Franchise Association (IFA), a report conducted by PricewaterhouseCoopers found that franchised businesses generate a significant amount of economic activity in the United States, and stimulate still more activity in non-franchised businesses.
This article presents four steps in buying a franchise and, within this context, recognizes two popular categories: restaurants for sale and gas stations for sale.
Step 1: You must be prepared to pay a franchise fee for the operation, and with this you will get a “formula” or system that has already been developed by the franchisor-company. You will have rights to use the franchisor’s name and also benefit from their assistance in the form of: finding a location, receiving a standard operating manual and training, and advisement on marketing and management. Other support may come from a corporate website, newsletters, or periodic workshops, franchisee meetings and brainstorming sessions. For certain, reduced risk comes with buying an established company, yet the franchise fee can be substantial ranging from several thousand dollars to hundreds of thousands of dollars. Other costs include rent, equipment, start-up inventory, operating licensing fee, insurance and possibly a grand opening fee to help promote your business. You may also have to pay royalties to the franchisor based on a percentage of weekly or monthly income. Also, in addition to your own local advertising effort, you may have to pay into the franchisor’s advertising budget.
Step 2: Before you invest, you have to select the franchise that is right for you. Considerations include: investment monies on hand, additional financing funds and the source of that money, desirability and capability to run a specific type of business. For instance, it is quite different if you’re buying a restaurant or buying a gas station as different skill-sets are required. You also have to be good (no, great) at goal setting such as projecting/expecting a specific annual income and committing the hours you are willing to work. The restaurant business can be a daunting labor of love given the fact that you are dealing delicately with food and service, but the hours-not the labor-may be slightly more favorable than running a 24/7 filling station. There are definite pros and cons in both models.
Step 3: The demand for your business and the competition within your category of buying a franchise are as important as your capabilities in running it. Restaurant competition is fierce but also rewarding as most restaurateurs are in this business because they love to please people (sometimes a very hard thing to do). There is a certain temperament and personality-usually A type-that is a “given” in the restaurant biz. In contrast, the 24/7 gas station can almost run itself (not entirely, it needs you!) once fully supplied on the outside with gasoline and fully stocked on the inside with all the extra staple items that people need on the road or on the run when other stores have already put up their closed sign. Whatever direction you take in franchise opportunities the common bond or mantra in sustainability is: “Open for business.”
Franchise Fitness: 3 Steps To Buying One
Many people dream of becoming their own boss some day. One way to gain entry as an entrepreneur is to buy a franchise. Today, even in this ever challenging economy, there are thousands of franchise opportunities and franchises for sale. According to the International Franchise Association (IFA), a report conducted by PricewaterhouseCoopers found that franchised businesses generate a significant amount of economic activity in the United States, and stimulate still more activity in non-franchised businesses.
This article presents four steps in buying a franchise and, within this context, recognizes two popular categories: restaurants for sale and gas stations for sale.
Step 1: You must be prepared to pay a franchise fee for the operation, and with this you will get a “formula” or system that has already been developed by the franchisor-company. You will have rights to use the franchisor’s name and also benefit from their assistance in the form of: finding a location, receiving a standard operating manual and training, and advisement on marketing and management. Other support may come from a corporate website, newsletters, or periodic workshops, franchisee meetings and brainstorming sessions. For certain, reduced risk comes with buying an established company, yet the franchise fee can be substantial ranging from several thousand dollars to hundreds of thousands of dollars. Other costs include rent, equipment, start-up inventory, operating licensing fee, insurance and possibly a grand opening fee to help promote your business. You may also have to pay royalties to the franchisor based on a percentage of weekly or monthly income. Also, in addition to your own local advertising effort, you may have to pay into the franchisor’s advertising budget.
Step 2: Before you invest, you have to select the franchise that is right for you. Considerations include: investment monies on hand, additional financing funds and the source of that money, desirability and capability to run a specific type of business. For instance, it is quite different if you’re buying a restaurant or buying a gas station as different skill-sets are required. You also have to be good (no, great) at goal setting such as projecting/expecting a specific annual income and committing the hours you are willing to work. The restaurant business can be a daunting labor of love given the fact that you are dealing delicately with food and service, but the hours—not the labor—may be slightly more favorable than running a 24/7 filling station. There are definite pros and cons in both models.
Step 3: The demand for your business and the competition within your category of buying a franchise are as important as your capabilities in running it. Restaurant competition is fierce but also rewarding as most restaurateurs are in this business because they love to please people (sometimes a very hard thing to do). There is a certain temperament and personality—usually A type—that is a “given” in the restaurant biz. In contrast, the 24/7 gas station can almost run itself (not entirely, it needs you!) once fully supplied on the outside with gasoline and fully stocked on the inside with all the extra staple items that people need on the road or on the run when other stores have already put up their closed sign. Whatever direction you take in franchise opportunities the common bond or mantra in sustainability is: “Open for business.”
Tips for Buying Businesses for Sale
Having a business of our own not only fetches all the profits raised through it but also gives us all the powers to run the business according to our own rules and regulations, so always consider buying the businesses for sale. A person in a job not only works under pressure of deadlines but also the fear of bosses that they may punish you in case you commit a mistake. Also in jobs, one gets only a portion of the total income generated through his own work. Running your own business makes you the boss, though you still need to work on set priorities and deliver the work by deadline, you need not to answer to anyone apart from your clients and customers. In business, you take all the money generated through your work rather than only getting a portion of it.
In today’s scenario, countries are facing economic crisis affecting the world economy, so it is a better idea to purchase businesses for sale from various vendors, as it not only takes too much of capital requirement but also takes years to properly establish a whole new business from scratch. With already established businesses it becomes easier to start earning higher profits rather than earn on small opportunities which is mostly the case with newly started businesses.
Before you consider buying businesses for sale, do proper home work. Research all the options available to you as it’s a big decision and even one small mistake may cause you big money. Many people before purchasing the businesses for sale doubt the credibility of the seller and often question as to why the seller wants to sell the business if it is for fetching a handsome amount of money, then it may indicate the business is having financial profitability issues. There may be many reasons why entrepreneurs decide to list businesses for sale. One could be the lack of heir to continue the business further, another may be the owner wants to retire, or maybe they are moving, etc. The reason could be anything, whether it is financial or otherwise, it should not let the prospective buyer debar from purchasing it only because of a doubt. It is advisable to correctly know the genuine reason behind a seller listing businesses for sale. It’s also advisable to have the business for sale appraised and make the final decision after getting an appraisal on the business for sale.
Buying a business can turn out to be a turning point of your life. You just need to follow the right path and emerge as a successful businessman taking care of all the necessary business dealings to stay on track and continue researching while executing the right business plan.
What to look for when buying a Business?
In the past year or so several good businesses faced downturn due to economic conditions and turmoil in the financial and credit markets. Even though the underlying business model may be strong, due to several uncontrolled circumstances related to the owner’s and partner’s personal finances or credit leverage, these businesses may be for sale. As in every crisis, this has created some very good opportunities to buy good businesses at very low prices.
Businesses that have a sound business and financial model are likely to flourish and grow as the economic activity picks up. This may be the perfect time for investors and entrepreneurs with good credit and access to investment funds to benefit by buying these successful businesses at a relatively lower price and set up a new small business. But before you jump in and invest your hard earned savings into your dream business, you may want to conduct a thorough due diligence to make sure the business is right for you.
Examine a Business before buying
Here are the top 5 things you must do before buying any business. The time and effort you will spend upfront in the due diligence process will go a long way to determine your future success.
#1: Analyze the Business Environment
Once you have narrowed your choice of business that you want to buy, conduct a thorough analysis of the business and its surrounding environment. Look into every aspect of the business including its suppliers; marketing material; list of competitors; location competitiveness in case of a retail outlet; leases and contracts; bank loans, collateral and covenant obligations. Make sure your due diligence discovers all obligations that the business may have entered into during the course of its existence.
#2: Hire Professional Help
A qualified attorney and an accountant will be your best allies as you evaluate the legal and financial condition of the business you are about to purchase.
You will require help from an attorney to review several legal documents including existing lease agreements; contracts with customers and suppliers; and also prepare documents that will legally transfer the ownership of the business or its assets in your name.
At K&M Accounting and Tax Services we help clients review the business financial statements and tax returns to determine the profitability of the business. Structuring the actual transaction also has several tax benefits for the purchaser and the seller. These can become important leverage points during price negotiations.
#3: Cross Examine the Financial Statements
If the business has been in existence for a long time, make sure you review financial statements for at least 3 to 5 years. Don’t accept a simple financial review by the seller. Validate the records by looking at the sales and payroll tax reports, supplier invoices and levels of inventory carried throughout the year.
The true value of the business is the free cash flow that it can generate over the next 3 to 5 years. A thorough cash flow forecast will enable you to determine the true value of the business. For more on business evaluation and information on setting up new businesses in Charlotte and Carolinas visit www.kmaccountant.com.
#4: Comparison with Industry Benchmark
Every industry has a bench mark study of the financial and business performance ratios that can be used to compare your business against other similar businesses in the industry. If you are buying a franchised business, you may be able to request a benchmark report that compares the business against other franchise locations from the broker representing the seller.
This is perhaps the most valuable data point that can help you analyze and discover turnaround opportunities. You will be able to find out what may be wrong with the business, where can you make improvements and turn the business around.
#5: Management Difference
Before you sign up for the business, take a hard look at your own management skills and expertise. Many businesses require special skills and years of industry experience to be successful. If you are a software programmer venturing into a retail fast food business for the first time, perhaps you may want to consider taking someone with the relevant skills and experience in the industry as your partner.
Being an entrepreneur requires one to wear multiple hats managing marketing, production, delivery, vendor purchases, customer service, financing, legal and tax issues all at the same time. This can sometimes prove to be a difficult move from the comforts of a corporate job although those that are able to make the shift successfully reap huge benefits.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for Independent Tax Advice provided by a Tax Accountant or a Tax Attorney familiar with your case.
Buying a Business is No More Building a Castle in Air!
Established business is bought and sold slightly differently in market. You need to have a thorough survey, perfect calculations, advises of knowledgeable persons in the same field. You need to consult for business valuations also. Surely returns are high and challenges and risks are higher in buying a business. First you need to set up your priority. whether you want to be an entrepreneur really? Because you need to know many things before a big plunge! Few points have been discussed here to boost your morale in selling or buying a business. You need to comprehend these key factors.
First dilemma is whether you should go for buying a business for sale or start a new one on your own. Both are equally good and have their own defined scope. But ready business is always better as it has its foothold already in the market. Buying a business plays safe always rather than starting from a scratch, as it goes ‘known devils are better than the unknown ones!’ Existing business has overcome bearing these teething troubles in the beginning already. So it is good buying a business which has a proven record already. It is quite well established in the market.
The products and services of that firm are already floated in the market interwoven with price system even. There will be a pool of experienced employees in the business for sale. This is the fundamental move and also a plus point in buying a business. These experienced employees will help giving advice in running the business which would prove invaluable in the long run. These points favour in buying a business which is already in the market. If you have decided to buy a business for sale, you ought to know something more about them. So buying business seems easier than starting from a scratch for sure.
Then you need to start looking business for sale. You need to calculate what do expect from this business establishment. A buyer has to see on profits line. Secondly once you bought the business for sale, you need to find out a way how to take it to the next step immediately. This newly bought business should be able to generate revenue as much as it was with the last employer. The gradually it can bring the expected results. The person who is buying a business surely looks for the more profits or returns if this is the only source of income.
Huge cash flow is there in buying a business or business for sale. The person who is buying a business may find more luring and attractive business opportunities. Buying a business definitely needs a huge amount of money. Mostly first installment is given and the rest of the amount will be given in different installments. Whether you buy or sell a business you need to have the fundamentals very clearly. If you a mediocre financially with fire in belly ‘to do something in businesses’ then such opportunities are the best! Mostly half or one third should be enough for the final seal in such deal.
What Are the Advantages of Buying a Business for Sale Owner?
There are many existing businesses today that are being put up for sale by their owners. Some prefer the services offered by a business broker. Hiring a business broker can save you a lot of time and effort. A business broker is no different than a realtor in the housing industry; they are paid by commission for handling a business transaction. Sellers usually gain a certain advantage in businesses for sale by owner (also known as FSBO as sort of business shorthand) but buyers can get even more if they know what to look for in buying a FSBO business.
Advantages of Buying Businesses for Sale by Owner
If you are interested to buy a business for sale by owner, the following are the benefits you can expect based on the different aspects of FSBO:
Regarding the selling price – FSBO cases generally arise when the seller wants to avoid paying commissions to a business broker, and there is usually a wiggle room in the negotiation phase. Note that actual market value already has a sales commission. Take this for example – ABC Company is offered for sale at 0,000 with a 10 percent commission for the business broker. As such, the seller only sees 5,000 from that sale. While it is unlikely for the buyer to convince the seller to give in at that lowered price, he might actually ask the seller to split the difference. In the end, the buyer may just get lucky with a ,500 savings, which is not bad at all.
Regarding the equipment – A business for sale by owner often includes equipment and other important tools necessary for operation. It can be a big hassle for the buyer to spend additional money on replacing computers, printers, fixtures, and furniture. Since these items were purchased by the business owner probably at the start of the business years ago, the buyer can ask for lower residual value compared to the rates a business broker might indicate. In an FSBO transaction, the seller will most likely include all equipment in the deal, while the broker will insist that the buyer should pay for the fair-market price of every item included in a business for sale.
Regarding the inventory – FSBO businesses present buyers an opportunity to acquire existing equipment and items in inventory that are far below their current resale value while the owner, meanwhile, is just eager to dispose of them as soon as possible for retirement purposes.
Regarding financing – Very few buyers are financially capable of buying a business outright. If your resources are not enough to buy a business, you will probably have to secure financing assistance. Financial assistance for purchasing a business usually comes from a credit union or from a bank. You may also use your retirement fund, borrow money from your relatives and friends, or look for a suitable business partner or co-investors. In the case of buying small businesses for sale by owner, you won’t have to go through the options mentioned above, because the best financial assistance provider you have is the seller of the business. Almost all FSBO businesses involve seller financing, which is usually below the rates existing in the market. The length of term in purchasing a small business for sale by owner is also more agreeable to compared to what a lending institution or a bank usually offers.
Regarding expertise – Business owners have complete knowledge of their company, their clients, and the industry. When they decide to sell their business, they are oftentimes eager to stay and help the buyer learn the process and management of the company. Do not be afraid to ask for advice because there are people who actually love to give it. Of course, who else is a better person to ask regarding an FSBO business than the seller himself, right? As the buyer, the sellers’ guidance and advice can truly help you in the process of buying a business for sale by owner.
Buying A Business Requires Attentive Care
Quite often buying a business can be an easier way gaining a foothold in a specific market place, as compared to that of starting afresh. Some of the key areas that many people overlook are contained within the peripherals of the process of buying a business, within the support structure that one establishes around oneself. This includes the likes of your attorney, your accountant and any other relevant staffing and support required in this process.
Naturally most people when buying a business have sufficient experience within the business will conduct issues such as due diligence investigations and so forth, whilst audited financial statements can further serve this process of investigation and analysis; the actual team that will be responsible for the transfer of interest and ownership of the company that had been purchased in a show that this process not only runs smoothly and correctly. The advisers that will partner with you will make the difference between both a successful acquisition and transfer of the going concern.
Unfortunately one does not encounter a suitable support structure at every street corner, and quite often it is rather desirable to work with those that you have developed a sound and solid working relationship when looking at buying a business. Trust being one of the most important elements in many business deals, both within your own ranks and that of the seller of the business’ ranks, cannot be gained overnight but is rather developed over years.
In the event that you do not have an existing support structure such as that described above, the only way you will find a suitable team of advisers and professionals is by meticulously confirming their experience via their provided referrals and references. This is most definitely not something that can be avoided these advisers literally hold your future and the success of the business itself in their hands. The professionals may come at somewhat of a premium, which is exactly the point in that these people are performing at the top of their game.
Before entering into any agreements with your professional team of advisers, and as stated your due diligence investigation must be complete and thorough in order to avoid any nasty surprises, although at times certain undisclosed items may come to light. This may well be in error that one would do well to heed the warning of such non disclosure. You should furthermore ensure that the price being requested is in accordance with an accurate business value estimate, which you can conduct yourself or with your team of advisers. If you have any doubts when buying a business, albeit in your own judgement capabilities, the best route to follow would be via your selected team. These people would furthermore be able to make objective decisions and investigations, where you might be subjective when buying a business.
