Why A Realistic (And Fair) Buyer Will Always Win
Posted in Buyers Articles
If you are entering the business-for-sale marketplace, then you may have already come across the phenomena that happens when some small, usually family or individually owned business go up for sale. The prices can seem high, even ridiculous in some cases.
Why are they priced so high?
The owners of these businesses are setting a listing price based on their emotional attachment to the business instead of pricing it to sell. In the business market, there are brokers who will tell an owner what they want to hear, allowing a crazy initial listing price just so they can get the listing.
This is a major disservice to the seller and to any potential buyers who have an interest in the business. By allowing an owner to think they will be able to get whatever amount they want, these brokers shut down any real chance of negotiating for a fair price before negotiations can even begin.
The harsh reality of the business marketplace is that a business is only worth what someone is willing to pay for it. While the tug of war between heartstrings and financial reality is the subject for another article entirely (one for those emotionally-attached business owners), as a buyer you need to tread this path carefully.
First, you are not dealing with a large corporation with a dozen board members, you are probably dealing with one person, a person so personally invested in this business that one wrong move from you can become a deal-killing offense. If you understand this personal investment, and then act accordingly, you will have a far greater chance of getting a deal done.
Should you pay them whatever price they are asking for? Certainly not, but the super-low-ball offer, just to kick a tire and see how low a seller is willing to go is a big mistake.
A low-ball offer tells a seller that you have no regard for all of the time, energy and money they have invested in their business. Anyone (including you) would be offended by such a move. Once a seller is offended, there is usually little chance of getting them to cooperate and agree to work with you on a deal, no matter how much you want the business or how much you are willing to pay.
With that said, use the advice of your business broker when putting together those crucial first offers. You want to open negotiations at a reasonable point. When you start at a fair number, you are saying a great deal about yourself as a buyer – letting the seller know you will treat their business and the deal you are about to negotiate with respect.
Are you a buyer who has questions about what a good initial offer should look like? Would you like to know more about how to negotiate with sellers? Ask us! Please feel free to leave us a question (or comment) here, and we will be happy to get you an answer.
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Business Buyer: What’s In An Offer?
Posted in Become a Business Owner, Buyers Articles
If you’ve found a business you really like, and you are ready for the next step, congratulations!
The next stage in the business transaction process is the initial offer, sometimes called a “purchase contract” or an “offer to purchase”.
Once a buyer makes an offer, the seller decides if they are willing to accept the offer. If they are, then the business transaction heads into a period called due diligence. Just like you can’t do an inspection on a house until you’ve had an accepted offer – in business sales an accepted offer will give a business buyer a chance to look over every aspect of the business and decide if they want to go ahead with the sale.
What goes into an offer?
This document will contain the terms, conditions, non-compete conditions, financing, inventory, transition details like training, warranties and any other aspects of the purchase.
Should I write my own offer?
In most cases, you will want to have a business broker put together an offer to purchase for you, although there are some standardized versions you may be able to use in the most simple of transactions. Business transactions are inherently complex, so having someone who writes these types of contracts all the time to help you will keep you from having issues (like if you unknowingly leave out what could be a crucial part of the contract) down the road. If you really want to write your own, just make sure you have your broker look it over before it gets handed over to the seller.
Is an offer set in stone?
Absolutely not! Your initial offer is contingent upon what you discover in due diligence. If what you uncover during this period makes you unwilling to go ahead with the purchase, you will have the opportunity to back out. If what you find during due diligence isn’t enough to kill the deal, but you discover, for instance, that the business is earning 15% less than was initially stated , you will be able to adjust your offer accordingly.
The moral of the story? An offer is an important part of the business transaction process, so use the experience of your business broker to guide you through this step.
Are you a buyer with your eye on a particular business but you aren’t sure what will need to go into the initial offer? Was your initial offer rejected by the seller and you need to know what to do next? Please leave us a comment or question and we would be happy to help you.
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Why You MUST Have A Great Website: Thoughts For Business Buyers & Sellers
Posted in Buyers Articles, Sellers Articles
We spend a lot of time getting to know businesses inside and out – and for the most part entrepreneurs (both those who are selling and those who have just purchased a new business) are really smart people. They care about marketing their business in such a way that the business is put in the best light possible. The décor is nice, their local advertising is top-notch, etc. Then you look at their website…
This is a digital age, and like it or not, many future customers will come to you (or won’t come to you) based solely on your presence on the web. The first thing a prospective client is going to do when they learn your name or search for a service in your industry is hit an internet search engine. Your website is the face of your business, even more so than your actual physical location, so your web presence needs to be great. Really, really great.
We come across businesses with alarming regularity who have dreadful websites or no websites at all. This is a HUGE mistake.
But I’m not in IT and I don’t know how to write code! Having a website built is expensive!
Neither of these issues should prevent a business from having a nice-looking and informative website. Long gone are the days when you had to know how to write code. There are a plethora of services out there that will help you build a great website – and most of them are free or very affordable. Think drag and drop template services like Squarespace or Wix.
But I’m not creative! I don’t know what to put on a website!
Again, issues that are easily solved. Almost all of the services that will supply you with a free or low-cost website come equipped with templates – all you have to do is pick one, then copy and paste your information in. You should look up your competition and similar businesses in other areas to see what you are up against. Some templates are too simple or look to hokey, and by spending a few minutes researching you will quickly see what is appealing and what isn’t and then apply what you find to your own site.
A note here, have someone proofread your site before you publish it! There are a ton of websites out there that would otherwise be great except they have major spelling or grammatical mistakes. Mistakes like this show a lack of attention to detail and a lack of professionalism. Is that the impression you want to give to prospective clients? Hopefully not.
Another note: make sure you edit the mobile version of your site as well. Most people are looking things up on their phones – and a layout that looks good on a computer screen doesn’t necessarily translate well to a mobile site.
If you are trying to sell your business and don’t already have a great website in place – changing this needs to be a priority. Buyers will absolutely look you up on the web while they are considering buying, so put your business in the best light possible by improving your internet presence.
If you are buying a business with a terrible website or no website at all, creating a great online presence can be a quick and easy change you can implement immediately. This will help to bring in new business by allowing customers to find you online, and can let those customers know what kinds of goods or services you offer.
A professional-looking, visually appealing and informative website can be your very best marketing tool. Don’t sell your business short by ignoring how you are perceived online!
Are you a business seller who needs some advice about improving your web presence? Are you a business buyer who would like to know what to look for when you are looking at the websites of prospective businesses? Ask us! Please leave us a comment or question here, and we will be happy to answer any web presence questions you have.
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Should I Use Multiples? Advice For Business Sellers & Buyers
Posted in Buyers Articles, Sellers Articles
The most important number in the sale of any small business is the price. The listing price is what a seller hopes to get and the purchase price is what someone is actually willing to pay.
Where do these numbers come from?
There are a few ways that business prices come to be. They typically come from an analysis of the financial records of the business, coupled with what the assets and inventory are worth. In some cases, it is appropriate to use the sold price of comparable businesses in the area, in others it comes down to multiples:
What’s a multiple?
In the simplest form a multiple takes the average sale price for businesses in a particular industry and compares that number to what a business earns. For example, the multiple for a restaurant might be two times earnings – meaning you should price a restaurant at twice what it earns in a particular year.
Now that you know what multiples are, how should you use them?
Multiples should really only be used to determine a ball-park figure for the value of a business. Take the restaurant example. Restaurants are very complex businesses, so most restaurants sell for a number very different than an oversimplified two times earnings.
If multiples only give you a ball-park figure, should you use them at all? Yes and no. When you are looking to sell your business, multiples can help you get a starting point for where you might want to set your listing price. It is critically important, however, that you not stick with a simplified number that could cause you to over or under value your business on the market.
If you are a buyer, you can use multiples to help you gauge if the listing price of a business is in line with industry standards – just remember that the justification for a listing price probably includes much, much more than just the multiple.
Are you a business seller who wants help using multiples to set a listing price for your business? Are you a buyer who has questions about how to use multiples when analyzing business prices? Ask us! Please feel free to leave us a comment or question here, and we will be happy to help you with multiples.
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Should I Offer Seller Financing? Thoughts For Business Owners
Posted in Sellers Articles
Are you considering selling your business? In a perfect world every buyer would come to the table with an all-cash full price offer, but in reality we know that’s not going to be the case.
Many small business buyers will qualify for loans like those from the SBA (Small Business Administration), but a far more common practice is seller financing.
Seller financing means a buyer pays a substantial down payment (typically more than half of the purchase price) and then you finance the rest for a specified interest rate and amount of time. If the buyer falters for some reason you get to keep your money and you get your business back.
Seller financing happens in a lot of small business transactions because it can be a very successful way to get a business deal done. From a buyer’s perspective it means the current owner is willing to keep some skin in the game – they know the business is in good shape and has a future (so they can get paid). It also means that a buyer will have the option to buy businesses that would otherwise be unaffordable. From a seller’s perspective seller financing acts as a marketing tool because, as previously mentioned, it means you are willing to bet on the future of the business. It also increases the pool of buyers who can now consider buying your business.
Is it always a good idea to offer seller financing? It depends. If you are someone who just wants out and has no desire to have any attachment to your business after the sale, then maybe seller financing isn’t for you. If you are in a very hot industry that is currently attracting cash buyers then you might get away with not having a seller financing conversation at all. Even if you don’t love the idea of seller financing it’s typically a good idea overall to leave all financing options open when you list your business. You don’t want to miss out on a great buyer and a great return because you decided too soon to refuse a more creative financing deal. Keep that door open!
Have you decided to sell your business but hadn’t yet considered offering seller financing? Did you buy your business using seller financing and have an experience to share? Please feel free to leave us questions or comments.
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