Don’t Be Underfunded: A Big Business Buyer Mistake

You’ve decided to buy a business, congratulations! Entrepreneurship can be one of the most rewarding journeys you can take in life. It can also, however, be your worst nightmare.

 

The difference between success and a nightmare scenario can come down to just two, very basic things – money and reality.

 

 

Let’s look at money first.

 

Guess what? You have to have money if you want to buy a business.

 

Of course you need money to buy a business! This may seem like a silly thing to say, but a fair number of the people who come into the business market are working with little to no capital at all and expecting someone else to pick up the rest. These prospective buyers are relying on funding sources like family members, bank loans, Small Business Administration (SBA) loans and seller financing – but the fact of the matter is the small business world just doesn’t work that way.

 

Family Money

You may have had a conversation or two with your well-off uncle or with your parents at Christmas about helping you get the money together to invest in a business, but we almost never see one of these deals actually go through. Once you start the serious conversations about what dollar amounts you’ll be needing, how long it would realistically take you to pay them back – the checks never get written. If you are depending on a family member footing the bill for your business purchase – you should probably think again.

 

Bank Loans

Even pre-recession it was tough to get a traditional lending institution like a bank to fund the purchase of a small business, but in the wake of all of that financial mess it can be nearly impossible to get a bank to approve a small business loan – even though the economy has improved substantially. 

 

SBA Loans

Yes, it is possible to get funding through the SBA to purchase a small business, but there are some very big hoops that need to be jumped through in order for this to happen. First, you as the buyer need to be approved, and if you don’t have a fair amount of capital to invest already – your chances of that approval are going to be slim to none. If you do manage to get approved, then the business itself will have to be vetted and approved – and like any lending institution post-recession, the SBA is going to be very conservative with how much they are going to lend, who they will lend it to and what businesses will even qualify for that buyer.

 

Seller Financing

Yes, seller financing is very common – but what most first-time buyers don’t understand is that these deals usually mean the buyer is going to pay at least half, if not quite a bit more, of the purchase price up front. No seller is going to take a tiny down payment and hand you the keys, it involves way too much risk on their part.

 

Ok, now let’s look at reality. You have to buy a business you can afford.

 

Again, this might sound silly, but business buyers are usually caught up in the hopes that one of the capital-raising schemes we just mentioned will pan out and therefore look at businesses that are ridiculously out of reach. Think coming to the table with $30,000 and looking at businesses in the $500,000 range. Again – no family member is going to write you a check that big, banks will laugh, the SBA will never approve you or the business in that situation and sellers definitely won’t take you seriously.

 

Even if you could get, say, a family member to loan you the money to buy a business that far out of your current reach – you will  be setting yourself up for failure. What new business buyers leave out of the equation is working capital – that is the money you need to both get the doors open under your ownership and then keep them open long enough to get the business turning a profit long enough to pay back your backers.

 

Just like renting a new apartment or buying a new house, there will be costs at closing that need to be paid – think deposits on a new commercial lease, deposits on utilities, first (and probably last) month’s rent, payroll and inventory starting the moment you take over, transfer fees for licensing, inspection fees – the list goes on and on. 

 

If you only have a small amount of capital to invest in a business, that’s totally acceptable and doesn’t preclude you from business ownership! If you start small, with a $15,000-$20,000 business, you can grow that business into something larger. It just takes some time and some hard work. Many entrepreneurs start small and grow their businesses to a size they initially wanted, or some sell the business after a time for a profit and move up the business ladder that way. Either way, you will have a far better chance at success if you stay within your means. 

 

Don’t make the mistake of starting out underfunded or ignoring reality!

 

Are you a business buyer who doesn’t have a lot of capital to invest? Are you curious about what’s out there in your price range? Ask us! Leave any comments or questions here and we would be happy to help. 

 

 

 

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

www.InfinityBusinessBrokers.com

 

 

 

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Buying A Seasonal Business? Understanding And Surviving The Off-Season

Here in Southwest Florida, we have a very unique business climate, but our lessons about seasonality in the business market translate to just about anywhere that sees a seasonal fluctuation.

 

Our area is known as a fantastic place to retire and also as a family-friendly vacation spot, so throughout the year our local businesses see a fairly regular fluctuation in the amount of business they do month to month. Our beautiful wintertime weather means that from October to April our population swells as retirees from the northern states come down to ride out the bad weather in our sunshine.

 

You can blatantly see this fluctuation if you visit at different times of the year. For instance, going to dinner on a Saturday night during “season” (October to April) means a 2-3 hour wait, go to the same restaurant in July and you will likely be one of only two tables in the whole place.

 

 

What does this mean if you are thinking of buying a business in this area (or in any area with seasonal fluctuation)?

 

It means you will need to be a bit open-minded when looking at the numbers, and compare multiple years of numbers instead of looking at only the last several months. In a place without much seasonal fluctuation the most recent numbers may be sufficient, but in our area or any like it – recent numbers won’t tell you the whole story. For instance, if you are looking at buying a business April, then the numbers from January to April will not be a reflection of the next handful of months in the summer. Likewise, if you are considering a business in September, abysmal numbers here might mean the business is doing just fine – you are only looking at the very slow summer months.

 

How do you figure out how to navigate these types of fluctuations? Find a knowledgeable and experienced local business broker who can help you to understand the seasonal fluctuations and can assist you with determining if a business is dealing with a seasonal slump or is in real trouble overall.

 

Another major seasonal business consideration? Keeping some cash on hand. If you are buying a business in Southwest Florida in the spring, then you had better find out how much capital the sellers have needed in previous years to weather the sparse summer and save some money for getting yourself through the lean times. Once business picks up and then explodes in the fall, you will also need to know what staffing considerations you will have to address (like bringing on new staff or bringing back the former owner’s seasonal workers).

 

Your business broker will be invaluable in helping you ask these pivotal questions of the sellers while you are in the negotiating process, and will also ensure you have a proper training period with the former owners post-sale to cover all of the bases.

 

Do you have more questions about how to look at the numbers of seasonal businesses? Would you like to know what types of seasonal businesses are for sale in this area? Ask us! Please feel free to leave any comments or questions here and we will be happy to help.

 

 

 

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

www.InfinityBusinessBrokers.com

 

 

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Need Capital? Business Buyers & Seller Financing

Seller financing can make small business deals possible, as it allows buyers (who don’t have all the capital necessary or who are unable to raise funds through more traditional lending sources) the opportunity to buy a great business.

 

 

 

Our economy is in much better shape than it was during the recession, and as such the business market has changed. In the midst of the recession nearly all deals came with a fair share of seller financing as traditional lending was essentially nonexistent and any buyers in the market weren’t flush with cash. This was great news for buyers as they could consider businesses that would have otherwise been out of their range.

 

Now that the economy has dramatically improved, the tides of seller financing have turned.

 

First and foremost, the improved economy means there are more cash buyers coming to the table that will directly compete with those who need a seller financed deal. In terms of recently completed deals, seller financing still holds as a close second to cash, but now buyers need to come with at least 50% down if they hope to compete with other buyers and get a deal to closing. There are, of course, exceptions to this rule as every business deal is different – but the days of financing more than half of a transaction are probably gone for good.

 

It is also easier now than it was just a few years ago to get more traditional bank financing or a SBA (Small Business Administration) loan, but many financial institutions are still gun-shy about risky small business deals as the memories of the recession are still relatively fresh in everyone’s mind.

 

What if I can’t get a bank loan and the business that I’m interested in doesn’t qualify for a SBA loan? How can I get seller financing?

 

If you are interested in seller financing, let your business broker know as it will help in narrowing your purchase options. Your broker can look for business sellers who have indicated they would be open to a deal that includes some seller financing. Next, you need to be prepared to offer at least 50%, if not more, of the purchase price up front if you want any seller to take your seriously. No one is going to finance 100% of the deal or anything close to it.

 

Do you have more questions about financing options for the purchase of a small business? Would you like to know what the terms look like for a typical seller financed deal? Contact us today or leave us a comment or question here. We would be happy to help!

 

 

 

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

www.InfinityBusinessBrokers.com

 

 

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Business Broker 101: Making The Right Choice

Our industry sometimes gets a bad rap, but as professionals who deal with other business brokers on a daily basis – we get it.

 

Like any industry, there are great brokers who excel at their job, and then there are those who are not so great. This article is meant as a peek into the business broker world and a quick education of what business brokers (should) do with the hope of helping business buyers and sellers choose a professional who will be a help – not a hindrance.

 

 

For starters, what is a business broker? A business broker is someone who assists business buyers and business sellers with the business transaction process. They (depending on the state) are licensed and insured to do this type of work, and although the business world is very different than the real estate world – they are often licensed as real estate brokers.

 

You can liken what a broker does to the buying and selling of homes, but with some MAJOR differences. First, business brokers aren’t typically selling property. They are selling existing businesses, and most businesses don’t own the property where they are located – they lease it from someone else. Second, the marketing and sales process for a business is very different from the same process for a house. For example, business sales are inherently much more complex and the for-sale status of a business must be kept in the strictest confidentiality (businesses for sale are perceived to be businesses on the verge of failure, which is rarely the case – and without confidentiality the whole staff might quit, clients might cancel contracts, etc.).

 

A business broker is hired by a business seller to list their business on the business market, and also hired by business buyers to help them find and then purchase a business. The commission paid to a broker (or brokers) involved is typically paid as a percentage of the final sale price by the seller.

 

Not all business buyers who come into the market end up buying a business, in fact the rate is probably something like 10% of those who inquire about businesses actually end up buying. For this reason, many buyers find it difficult to get the attention of brokers and sellers until they are forthcoming about their financial information and are ready to make serious offers.

 

Not all businesses that get listed on the market sell, this is also just a fact of the industry. The average rate most brokers hold is somewhere between 20-25% of businesses they list actually sell. If that rate sounds abysmal to you, we agree. Ours is typically closer to 60%, and most good brokers will be in that range. Why don’t businesses sell? Why isn’t the rate higher?

 

There are a litany of reasons why businesses don’t sell. Some businesses are priced way too high right out of the gate, and as such won’t sell because they are far outside the range of what the market will allow. In some cases the sellers refuse to take anything but a full-price, all-cash offer, which almost never happens. Some brokers take listings just to load up on potential calls, but do little to nothing to actually sell all of the businesses they list. We see “marketing packages” that consist of three poorly photocopied pages of old tax returns and nothing else. We deal with brokers (and sometimes sellers too) who rarely, if ever, respond to requests for information. In other cases, a business may not sell because of the time constraints of the sale on the seller’s side. If you have a very niche business, you will need to wait for a very niche buyer. Even if you don’t have a niche business, patience is necessary as most businesses take somewhere between 9 to 12 months to get from listing to closing.

 

Now that you have an idea of how the business of buying and selling businesses works, how do you pick a good broker instead of a bad one? Ask questions. Lots of them. A good broker will have no problem supplying you with answers.

 

If you are a seller, ask to see what a typical marketing package looks like. If you’re a buyer, see how quickly your requests for information and phone calls are returned. Ask any broker what percentage of their clients come from referrals (a high percentage here is a great sign). When you listen to answers to your questions, is the broker being honest with you, or are they just telling you what you want to hear? How important is confidentiality to this broker? How many closings do they typically have a year? Does this broker have their own shop, or are they a part of a much bigger company (and if part of a big company, are the numbers of businesses closed and number of listings just theirs, or are they including the corporate numbers)? Are they properly licensed and insured to do this type of work? Is this person only a business broker, or is this a side job that they don’t focus on?

 

The help of a good business broker can mean the difference between success and failure in the business market, so ask questions. Once you’ve found a good broker you can work with – listen to their advice. A good (or great) broker is there to help you, and by helping you and others like you, help the small business community they depend on.

 

Are you a seller who wants to help your business sell with the right help? Are you a buyer who’s had trouble getting attention from anyone in the business? Do you have more questions about the business buying and selling process? Contact us today or leave us a question or comment. We would be happy to help.

 

 

 

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

www.InfinityBusinessBrokers.com

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You Have Enough Time: Due Diligence For Business Buyers

 

 

If you are looking for businesses to buy, then you are probably frustrated by the paltry amount of information you are initially offered when a business peaks your interest. You sign a non-disclosure agreement and you may get nothing more than a few years of P&L statements and a highly abbreviated tax return.

 

How are you supposed to decide if a business is right for you if you can’t find anything out about the business you want to buy?

 

Due diligence.

 

Due diligence is the period of time after an initial offer is accepted where you as a buyer get to go through the business with a fine-toothed comb. Business sales are conducted this way because unlike other purchases – like a home or car – information about an operating business is often proprietary and needs to be kept strictly confidential in order to protect the business itself throughout the sales process (more information about why confidentiality is important can be found here). During due diligence you will be provided with basic business documentation and will also be given a chance to request other documentation you deem necessary.

 

How long do I have once due diligence starts?

 

The due diligence period is typically two weeks – plenty of time if you are using your time wisely. Two weeks is also plenty of time because due diligence doesn’t officially begin until AFTER all of your requested documentation is provided.

 

Two weeks? Are you serious? That hardly seems like enough time.

 

It absolutely is. By the time you get to the due diligence period, you will have had conference calls with the seller, face-to-face meetings, cursory information and initial questions already answered – the due diligence period is strictly a deep dive. Two weeks will be more than enough, especially if (as often happens) you are given a good chunk of the information you requested and it takes a week or two to get the rest. That will lengthen your due diligence period considerably and give you ample opportunity to decide if the business is right for you.

 

If, during your due diligence period, you decide that you don’t want to buy the business – you can walk away. This is another reason due diligence is relatively short. This period pulls a business off the market, so holding a business this way for an unnecessary length of time isn’t fair to the seller or to other buyers in the market who are also interested.

 

The message here is trying to force a seller to agree to a long due diligence period isn’t going to help you decide if a business is right for you. Using your time wisely during a two week due diligence period absolutely is. Ask your business broker about your concerns, and use their guidance during your due diligence period to get the most out of your time.

 

Are you considering buying a business but still don’t think two weeks is enough time for a proper due diligence? Would you like to know what types of special circumstances would lead to a longer due diligence period? Please ask us! Leave any questions or comments and we would be happy to help.

 

 

 

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

www.InfinityBusinessBrokers.com

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Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com

12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907




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