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Small business sales fall apart for a multitude of reasons.
Any time you are contending with someone’s life’s work and large amounts of money changing hands, there are bound to be challenges. The problems arise when those challenges are more than the deal can take.
As a business buyer, you may find that some reasons for deals coming undone have little to nothing to do with you, like if a seller suddenly decides they’d rather not sell, but there are some issues that have everything to do with your end.
Sure, buying a business is a huge investment, both of time and money, but a ridiculously over-cautious, inflexible and inexperienced buyer can sink a business transaction as fast as an unwilling seller. The key is balance and understanding.
Before you get anywhere near a closing table, you may need to do a fair bit of introspective thinking. Do you really want to buy a business? Sure, owning your own small business is the American dream, but it is not always the easiest way to earn a living. Entrepreneurs can work long and intense hours, so you need to be sure that you are ready for that part of being your own boss. If you have done the requisite self-reflection, now it is time to go looking for the right business for you.
This may seem like a silly thing to point out, but you should choose a business that is going to suit you in terms of expertise and ability as well as one you actually like. Buyers might think they want to move to a completely different industry from where their experience lies, only to find that they are completely overwhelmed by the prospect of essentially starting from scratch in a business they don’t fully understand. An example would be an ill-prepared entrance into the restaurant industry where a former accountant suddenly decides to buy a bar without ever having worked in one. Avoiding this pitfall is easy, pick something that matches your expertise. This is a great time to employ the services of a business broker to help you figure out what businesses would be right for you in terms of how much you are looking to spend, what kind of hours you are willing to work and what would suit your knowledge base.
Once you have found the right business, make a serious offer. Buyers who lowball sellers just to see how steep of a discount they can get will only end up insulting the seller past the point of no return.
Do your due diligence once you have a business that you are serious about buying, but realize there will be limits as far as what will be available to you. For instance, sometimes buyers ask for the same information over and over again, or buyers demand to meet all of the key employees before it is appropriate to do so. All this does is upset the seller. Lean on the expertise of your business broker to ensure you are getting what you need without unnecessarily overstepping your bounds. .
The moral of the story is you will need to be cautious, and you should be when you are making such a big purchase – but also realize that any business is going to come with a fair bit of risk. Don’t let cold feet get in the way of a great business opportunity.
Are you thinking about buying a business but have questions about the process or what business might be right for you? Leave us a comment or question here and we will be happy to assist you.
Michael Monnot
941.518.7138
Mike@InfinityBusinessBrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907
http://www.InfinityBusinessBrokers.com
I am looking into buying a distribution business in the next year or two but I just can’t get my hands around what the final closing price will be or the total amount of financing/equity I am going to need at closing. Here is my challenge/example. Let’s assume all addbacks and adjustments have been made.
100k in net income/cash flow, after reasonable owner compensation; this is what’s left to grow the business.
200k in the fair market value of the fixed assets.
100k in networking capital.
Assuming a multiple of 2X cash flow, I would expect the closing price on this business to be 500K, 200k for the cash flow, 200k for the fixed assets, and 100k for the networking capital. Is that a true and correct assumption?
On business for sale websites, you see the sales price which is usually a multiple of cash flow but the business is essentially bare, with little to no assets whatsoever. My logic tells me I need those assets (fixed assets and working capital) to operate the business on day one and therefore those assets will be part of the closing price at closing time.
Lou Manzano
Lou,
this is a complicated question to answer without further information but will try to answer the best we can.
Closing price, financing/equity…
Multiples can and will vary depending on the business.
Factors that can affect this are many but to name a few, how old is the business, what are the quality of books/records, what are the owners duties/hours, what are the major opportunities/threats, what shape is the equipment in…
A business that has full tax returns should have a higher multiple than a business with cash, a business is worth more if the owner is managing vs being the business…so there are many variables.
So multiples should be used and applied to each individual business as I have seen distribution businesses in this range sell for around 1 times earnings if it had major issues while others have closed over 5 or 6 times earnings if they were very strong but if you are looking for an average then a bit over 2 times earnings does seem to be the average.
As for the down payment, costs, equity…
If you are going to go through SBA they will require anywhere from 10% down on up. For the most part if you budget 25% down you will be fine, if you need to put less down then it would really depend on how strong the business and financials are as well as your background.
The seller can also participate in seller financing meaning that if SBA required you to put 20% down your could hypothetically put 10% down and the seller could carry a 10% note.
You have to find the right seller to do this with as SBA typically requires a 2 year standby meaning the seller could not receive any payments for 2 years.
Asset values
Typically when purchasing main street businesses, which this would fall under, you are purchasing the business as an asset sale with all necessary assets so when we price out businesses we include all assets in the purchase price in most cases and the multiple of 2 times earnings would be the price.
In most cases, you do not add on for assets
Capital needed
Again this will vary depending on the business you are purchasing. No matter what it is always best to have a nice sum of money just in case, but when you are purchasing an existing business you can typically see the costs associated with the business and work with the seller to find out what is required for that particular business.
And SBA will typically give a line of credit at closing for working capital.
Business for Sale Websites
I am in Florida so businesses may be advertised a bit different than here so perhaps that may be a regional.
Any further questions may require a conversation as there are so many variables so feel free to reach out to me.
Thank you,
Mike