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What An Earn-Out Is And Why It’s Probably Not For You

Posted in Buyers Articles, Sellers Articles

Published January 23, 2023

When you’re in the business-for-sale market, it can take some creative deal making to put together an agreement that makes everyone involved happy – and sometimes that creative deal making involves an earn-out.

What is an earn-out?

This type of arrangement is typical when the value of a business to a seller is much higher than the value to a buyer, usually because of expected future earnings. Here’s an example:

A small boutique clothing manufacturer has recently secured a major contract with a very large retailer, a contract that will significantly raise the value of the business over the course of the next few years. The seller of the business, who has worked long and hard to secure this deal, wants to be paid for the future value of the business. A buyer, on the other hand, only wants to pay for what the business is currently worth – not including any potential future earnings.

One way to bridge this massive valuation gap is the earn-out.

How does it work?

A buyer pays the seller an initial amount, then (as in our above example) as the boutique manufacturer reaches certain milestones with the new large retail contract, the seller gets paid for those milestones. In an earn-out the valuation gap is bridged by paying for the future earnings as they happen instead of paying for the promise that they might.

Is an earn-out for me?

Not likely. As you can see from the above example, an earn out requires a very specific set of circumstances. Most business deals involve seller financing or loans from the SBA (Small Business Administration) instead.

How do I find out if an earn-out would be appropriate for a business I’m selling or considering buying?

Ask your business broker. Any experienced and qualified business broker will be able to advise you on the right type of deal for your business or for any business you are considering.

Have more questions about creative deals? Want to know if an earn-out is for you? Ask us! Please feel free to leave us a comment or question and we would be happy to help.

Michael Monnot

Why “How Long Will This Take?” Is The Wrong Question For Business Buyers

Posted in Buyers Articles

Published January 16, 2023

How long does it take to buy a business?

This is a common initial question as a business buyer begins their search – but it’s not a great question.

First of all, it’s almost impossible to answer. Every small business is unique, and as such no two business purchase transactions happen on the same timeline. It typically takes about six months for a new buyer to enter the market, find and purchase a solid business. Please understand that this six month time span is by no means a hard and fast truth. The length of your transaction will be contingent on many, many factors.

Second, this isn’t the question you should be asking if you are thinking about buying a business.

Ask these instead:

What businesses could I realistically buy with the funds I have available?

Do you have the capital ready and available to buy and run a business? This isn’t anything like buying a house or a car. You can’t walk in with zero funds or only a small percentage down and expect to finance the rest. Not only do you need to have (at the very least) a substantial down payment (if seller financing is an option or if you are looking at third party financing like a loan from the Small Business Administration (SBA)) you also need to have enough funds to retain some working capital that will be needed to pay for things like new inventory, payroll and the like when you first take over.

A note here: You don’t have to have an enormous amount of money to invest in the purchase of a business. There are many very affordable options in the small business market! You just need to be realistic and conservative with the funds you do have in terms of what business you buy.

What kind of businesses meet the goals I have for business ownership?

Many new business owners walk into the business market under the mistaken assumption that anyone can own and run any type of business. Nothing could be farther from the truth. To keep your business profitable, you will need to be able to both navigate and compete in the market you are in. If you have little to no relevant experience in your business, if it’s a business too large for you to handle, if the business has hours or ownership responsibilities that don’t mesh with the personal life you want to have – it’s not going to work.

Don’t make the mistake of asking the wrong questions. Talk with your business broker about what your financial means are and what type of business would best suit the goals you have. Starting with the right questions will make you a more successful business owner in the end.

Are you thinking about buying a business? Do you have questions about seller financing and the best type of business for you? Ask us! Leave us a comment or question here, and we will be happy to help you.

Michael Monnot

Why Would Anyone Sell A Perfectly Good Business?

Posted in Buyers Articles

Published January 9, 2023

If you are someone who is interested in buying a business, you are looking for a profitable business that has a good share of the market and a great location. You are not going to be willing to buy a business that is on the fast track to failure and bankruptcy, so as you begin searching for businesses you may have pondered the question…

Why would anyone sell a perfectly good business?

This question is a very important one to ask as you search for businesses, and it is a question that any business seller should be willing and able to answer. If you are unable to get an answer to this question from a business owner, this is a major red flag. Most reasons for selling a business have very little to do with the business itself. A large percentage of the time a business is on the market because of the personal life of the owner.

Let’s look at some reasons for selling that have more to do with the owner than with the business:

Retirement. This one goes without saying. An owner who is ready for another chapter in life is willing to sell a perfectly good business so they can move on.

Divorce. When husbands and wives are partners in a business, sometimes the business gets sold as part of the divorce.

Partnership disputes. Most partnerships start well, but not all end that way. If there is a breakdown in a partnership where both parties want out, it can mean putting the business on the market.

Medical reasons. If the owner or a member of their family has a medical condition that will take precedence over the business, or will keep the owner from being able to run the business, the business will likely end up on the market.

The kids decided not to follow in the family footsteps. Many small business owners have their children work with them in the business, but when the time comes for mom and/or dad to retire, sometimes the kids want to do something else.

There are many reasons that a perfectly good business ends up on the market, the key is to find out the real reason the owner is looking to sell. If the reason has little to nothing to do with the business itself, then you are looking at a potentially great business acquisition.

Are you looking for a business to buy, but have come across many that seem too good to be true? Do you have questions about how to find out the real reason a business is for sale? Ask us! Leave us a comment or question here, and we look forward to working with you on your road to business ownership.

Michael Monnot

Buyer Patience: Why Instant Gratification Is Impossible In The Business-For-Sale World

Posted in Buyers Articles

Published January 2, 2023

We live in an amazing time. You can order something from your phone and have it almost immediately. If you have any question about anything in the world, the answer is at your fingertips. The sheer speed at which life can happen has turned us into people who are not only used to instant gratification – we expect it. If you are buying a business, the expectation of instant gratification can be a big problem.

Why?

There aren’t many things in the business buying process that can be rushed.

I’m about to spend a ton of money, why do I need to be patient?

There are a lot of reasons. Here’s a few:

A business broker can send you a Non-Disclosure Agreement (NDA), a standard in all business sales, electronically for you to sign on your phone – but you aren’t going to get that NDA from a decent broker until they’ve had a chance to actually talk to you. Signing a NDA for a business that would never work for you is a colossal waste of your time, so any broker worth their salt is going to ask you about your goals for business ownership, the amount of capital you have to invest and your practical experience. They’ll use that information to put together a list of available business listings for you to look over. If there’s one (or more) that catches your eye, then they’ll send you the e-sign NDA.

Once you’ve looked at the marketing package for a business most buyers immediately want to see the physical location. This isn’t a good next step, and it’s also nearly impossible to do an impromptu site visit. Businesses survive the for-sale process because the entire process is kept quiet except for those who need to know and have signed the appropriate non-disclosure documents. A site visit usually requires seeing the business either before or after business hours when no staff or customers are present and also needs to be coordinated between the schedules of the seller, the seller’s broker, the buyer and the buyer’s broker. A better next step is to come up with a list of questions and schedule a conference call or meeting with the seller off-site and see if the business would be the right fit – long before you step foot in the physical location.

If you like the business, then you can put together an offer and submit it to the seller. You probably aren’t going to get an immediate response. Purchase contracts/offers are usually fairly complex and a seller has to be given time to fully review what you’ve submitted and time to come up with a counter-offer if that’s the path they want to take. The back-and-forth of negotiations also needs to pass through the business brokers on both sides to keep the deal on track (by eliminating the possibility of one side taking offence to the other and killing the deal). This takes some time as broker emails and phone calls from one client can’t (and shouldn’t) be answered while in a meeting or on a call with another client.

If you and seller come to an agreement on a purchase contract due diligence can begin. This part of the process involves you requesting to see things like tax returns, contracts, inventory lists and the like. Due diligence doesn’t typically begin until you’ve received all of the documentation you asked for, so you shouldn’t need to worry about the clock starting on the due diligence period you’ve agreed on (typically 2 weeks) if it takes the seller a bit to fulfill your list. Remember that they are still running what you hope will be your new business. You probably don’t want them to take their focus off your future business so they can gather documents when they should be helping customers.

See a theme?

Buying a business isn’t like walking into a car dealership and driving off the lot the same day. Business deals take time, they involve a lot of moving parts and need to accommodate the schedules of many people. To be successful in your business ownership journey you need to come into the process understanding that a good deal of the process is out of your hands – and that a healthy dose of patience will serve you well.

Have you been looking for businesses to buy and have been frustrated by the pace of the process? Do you have questions about what a reasonable timetable should look like? Ask us! Please leave any questions or comments and we would be happy to help.

Michael Monnot

What Is Due Diligence? A Business Buyer’s Guide

Published December 26, 2022

You’ve found a business you like and you’re ready to take the next step – but before you start handing anyone your hard-earned money you want a good look behind the scenes and a thorough look at the books. It’s time for due diligence.

What is due diligence?

For business buyers, due diligence is the step that allows them full access to a business – the financial records, contracts, leases, etc. This period of a business transaction is typically after a letter of intent (LOI) is submitted or after an initial offer is accepted. The length of the due diligence phase is something that can be negotiated, but is typically no longer than a few weeks. In that time frame both you and your advisors (like your business transaction CPA, business transaction attorney and your business broker) will be able to go over the business with a fine-toothed comb and see what you are actually buying.

What should I be looking for in due diligence?

This will very much depend on the individual business you are considering as well as the industry the business is a part of, but for the most part you will be looking for any potential issues or problems that the sellers weren’t forthcoming about. Some examples might include unpaid tax debts, more “handshake agreements” than actual written contracts you can count on, pending legal issues and the like. Use the experience of your advisors to determine if anything you find is a deal killer or simply something that warrants a renegotiation with the seller.

What if I find a “deal killer”?

If you find something during due diligence that makes you completely unwilling to go through with the sale, then you will absolutely have a chance to back out of the deal. Keep in mind that businesses are inherently complex, and there is not a business anywhere that is completely devoid of any issues. Your threshold for issues will depend on what you are comfortable with, what can be negotiated and whether or not the funds are available to fix the problem.

What if I didn’t find anything wrong, but something is making me uncomfortable with proceeding?

Gut feelings about a business deal can both help and hurt your chances of getting a deal done. If you are feeling uneasy even after a thorough due diligence, now is the time to seek the advice of your business broker. Did they get the same uneasy feeling about the deal? Are you just apprehensive about making such a huge financial investment, or do you really have something to be worried about? Separating the reality from your own cold feet can be difficult to do, so asking your intermediary can be very helpful in this situation. A good broker won’t steer you wrong, as it is in their best interest for you to be happy and comfortable with the business you ultimately buy. You will need to sell again one day, and your referrals of other business owners you meet are your broker’s bread and butter.

I know we agreed on an offer, but after due diligence I’ve changed my mind. What now?

If something you found in due diligence warrants a renegotiation of price, then your advisory team will help you decide what the new offer might look like. You should be prepared for at least a bit of back-and-forth, as most sellers will probably be unhappy when you decide to offer less money. Make sure your justification for the new price is backed up by whatever you found during due diligence and the renegotiation shouldn’t kill the deal. If you’ve completely changed your mind and now you definitely don’t want the business, you have the opportunity to walk away.

Are you a business buyer with more questions about the due diligence process? Have you been through this process before and have an experience you’d like to share? Please feel free to leave any comments or questions, we would be happy to help.

Michael Monnot

The Shark Tank Myth: Why You Don’t Need To Be A Shark To Succeed

Published December 19, 2022

We all love a good rags to riches story, so shows like Shark Tank that glorify the millionaire/billionaire investor who came from nothing and became wildly successful are exceedingly popular with most Americans who grew up hearing all about the “American dream.” While we all fancy ourselves capable of starting from scratch on main street and envy the thought of being our own boss, most who haven’t lived a day in an entrepreneur’s shoes have no real idea of what owning your own business is really like.

The vast majority of entrepreneurs have failed – multiple times. To truly succeed in this game you need to have the tenacity to get back up, dust yourself off and try again. If you have that tenacity, then this is the life for you.

Start-ups are extremely risky. You are betting on an unproven model in an unproven location. Less than one in four start-ups make it to their 5th anniversary, so if you want to give business ownership a try (with a bit less risk), buy an existing business instead. Buying existing does not mean guaranteed success, it just means the model, location, operating procedures and staff have been tested. It’s simply a better starting point for the new entrepreneur.

New customers are not going to line up around the block or beat down your door because you tied a banner out front that reads “under new management.” A great entrepreneur is never satisfied with the status quo and is always looking for new ways to grow their business. What if you’re not a marketing guru? Become one. Learn how to take advantage of social media, join networking groups, make your business a part of local community events – the list goes on. Businesses that thrive find new and creative ways to grow, and the best business owners learned what works by trying (and trying again) until something sticks.

The hours are not fun. Business ownership is not going to mean that you only work from 9 to 5, Monday through Friday with four weeks of vacation throughout the year. If that free-time stability is what you want for your life, then stay at your current job. Entrepreneurship means that the buck stops with you and you alone. If something has to be done, if your entire staff comes down with the flu, if it’s peak season and the business will be packed – you have to work. The hours are long, but the trade off is knowing that you are in control of your own life and all of this work doesn’t benefit someone else – it benefits you.

You probably won’t make millions and millions. The Sharks on Shark Tank are like the NFL Hall of Fame of entrepreneurs. You can have a very successful and fulfilling life as a business owner without ever becoming a billionaire investor, so the quicker you set your sights on more realistic financial expectations, the better.

If you have the grit and determination to keep trying, the willingness to learn new ways to grow and the drive to work the hours your business needs – then perhaps business ownership is for you. Start your search for an existing business by talking to an experienced and knowledgeable business broker about your past experience and what your goals for business ownership would be. They will be able to help match you with business opportunities that will get you where you want to go.

Have you considered buying a business, but you aren’t sure that business ownership is for you? Do you have questions about what types of businesses are currently available? Ask us! Leave a comment or a question here and we would be happy to help.

Michael Monnot

Is My Business Broker A “Good” One? What You Shouldn’t Pay For

Posted in Business Broker Why & How, Buyers Articles, Sellers Articles

Published December 12, 2022

Like any industry, there are good business brokers and there are those who should find another way to make a living. Determining if the broker you’ve chosen falls into the “good” category might seem tough, but one way you can decide is by looking at the things your broker is willing to do without you having to pay extra for that service.

Most brokers earn a commission at closing, and the amount is based on a percentage of the sale price. If you are a seller, this percentage will be negotiated at the time of listing and will be a part of the listing agreement.

Beware the broker who will forgo the listing agreement or who will drastically cut their commission percentage just to get your listing. A great broker will stand firm of their typical percentage because they know how much work they are putting into selling your business. A desperate broker who can’t get and keep regular business will be willing to do anything to get you to sign on the bottom line. Also beware of a broker who charges extra fees for something as basic as your marketing package or advertising costs. These basic elements necessary to sell your business come out of the commission your broker makes at the time of the sale, not before.

For buyers, your broker gets a chunk of the money you pay for the business, so technically you are paying them even though you don’t have an agreement. Beware the broker who forces you to pay up front for their services. This shows a lack of confidence in their ability to find you a business and get you all the way through to closing. A great broker is not going to demand a retainer, nor are they going to charge you extra for help with the things every buyer needs – like basic assistance with licensing. If you are getting billed for basic services, then you probably need a different broker.

The key here is to watch for those brokers who put the amount of money they make in front of the reason they do what they do for a living. A great broker likes their job. They like helping the small business community grow, and they live for the chase and the thrill of negotiations. They don’t live to nickel and dime their clients. They get the vast majority of their listings through the referrals by former clients and members of their local small business community. They go to bat for their clients and are willing to help.

If the things we’ve named for a great broker don’t sound anything like the broker you are currently working with – it might be time for a change. When you initially interview brokers – ask about their referral rate, what kinds of fees they charge (there shouldn’t be any besides the commission) and what kind of percentage they take for commissions. The answers to these questions will speak volumes about the motivations of your broker and give you a good idea of where they fall on the great vs. not-so-great broker divide.

Have you had a not-so-great broker experience? Do you have questions about our referral rates and typical commission percentages? Ask us! Leave a comment or question, and we would be happy to help.

Michael Monnot

Why A Business You Can Successfully Run Is More Important Than A Business You “Want”

Published November 28, 2022

If you are new to the world of buying a business, or even if you’re a seasoned entrepreneurial veteran, one of the first decisions you will need to make is what type of business you want to buy.

Notice that we used the word “want” here. Many budding entrepreneurs have a dream business in their minds, but that dream business might be in an industry that would mean a slim chance of success.

What do we mean by that? We’ll use the classic bar example.

An accountant always dreamed of owning their own bar – but since this accountant has never worked so much as a day in the restaurant industry, buying that bar would be a gigantic mistake. Anyone who has work history knows that each industry and each business require their own unique set of skills in order to be successful. Making such a big change without the practical knowledge of what’s ahead can only lead to massive issues.

Drastically changing industries without understanding what you’re in for can be very problematic. An accountant is probably used to working the typical 9 to 5, Monday through Friday gig – so they might have big problems switching to the long hours and long nights required to operate a bar. There are many nuances in each industry. If you don’t have the experience to understand those nuances (like the long hours example) you are setting yourself up for failure.

Another big roadblock for new buyers trying to enter an industry with no experience comes from the c0ommercial landlord. If you have zero restaurant experience, then a commercial landlord/property manager is not going to rent you a space where a working restaurant is bringing them revenue. If the restaurant fails due to your lack of experience, they won’t get any rent. You will have to prove to any landlord that you have the practical knowledge necessary to sustain the business.

But I want to buy my own business because I want to get out of a rut and try something new!

This motivation for purchasing a business is fine, you just need to focus your search on businesses where you have some chance of success. No one wants to buy a business just to drive it into the ground.

But I’ve only ever had just one career!

Practical experience doesn’t necessarily have to come from previous jobs. If you are an accountant who has spent the last 20 years taking art classes and volunteering to help with gallery openings in your spare time, then purchasing an art gallery wouldn’t necessarily be a bad idea.

The point here is to have a serious talk with your business broker about what industries will/won’t work for your both your practical experience and goals – and then listen to their advice. If they tell you buying a bar is a terrible idea, then it probably is.

Your broker wants you to be successful because they hope you will use them again when the time comes to sell, and because a very large part of a good broker’s business comes from referrals from happy clients. You will not be a happy client if your broker doesn’t help you find a business that you can’t maintain.

Think about what you are passionate about, what your goals are and also what types of practical experience you would bring to the table. Then find businesses that fit that mold, and you will be well on your way to entrepreneurial success.

Do you have an “I bought a business I knew nothing about.” horror story? Do you have questions about what industries would be right for you? Share your stories and questions here, and we would be happy to help you find the right business.

Michael Monnot

The Walk-Thru: What Business Buyers Should Know

Published November 21, 2022

If you are in the market to buy a business, then one of the steps you will have in your future is the walk-thru. Much like buying a house, you will want to see the physical location of a business before you make any decisions on moving ahead with a sale.

Unlike a house, there will be a few more steps before you can see a business. It’s far less important to see the physical space when you are buying an existing business, and as such it’s a step that happens much farther along in the process than most new business buyers realize. When you buy a business the most important aspect is cash flow, not the color of the walls or what the machines look like. You will likely see the physical space after you’ve seen the marketing package, after multiple conference calls or meetings with the sellers – often after you’ve made an initial purchase offer.

How do you start? First you will need to sign a confidentiality agreement, most often called a non-disclosure agreement. You will be required to sign this agreement before your walk-thru for a few reasons.

Existing businesses can face terrible consequences if the entire world finds out that they are for sale. There is a powerful misconception that any business for sale is a business moments away from closing its doors for good (although typically nothing could be farther from the truth). If the for-sale status is disclosed the entire staff could quit (taking their regular clients with them), vendors might cancel contracts, customers may decide to shop elsewhere – you get the idea. Non-disclosure/confidentiality agreements protect sellers and their businesses from these potentially disastrous leaks of information.

Once the non-disclosure agreements have been signed, you will not just be able to waltz into the business whenever you please. An appointment will need to be coordinated between you, the seller and the brokers involved. You will likely need to see the business before or after hours (so curious employees can be avoided).

Why do the brokers need to be there? One of the most important roles that a business broker plays is that of a buffer. We have seen too many deals fall apart because initially innocent communications directly between a buyer and a seller devolve into a major issue.

Some sellers (whether appropriate or not) find questions about the legitimacy or profitability of their business offensive. If this happens and your deal begins to unravel, you will want your broker around to smooth things over. Your own broker will also be able to tell you if they think the things that were seen or said during a walk-thru were on the up-and-up. You will want their experienced eyes with you.

You will need to be flexible on meeting times for your walk-thru, especially if the business is one that has more than one or two employees that can be easily avoided. You will likely need to do your tour either before the business opens or after they close to keep the staff (or observant regular customers) from finding out about the for-sale status.

If you really want to see the business during business hours, then you certainly can. You just need to talk to your broker about whether or not it would be appropriate to do so. It would be tough, for instance, to walk in and see a manufacturing floor where the public is never allowed – but if you were considering a café, you could go in and grab a cup of coffee. Have your broker let the seller know that you are planning on dropping in as this is seen as common courtesy to the other side.

If you do grab that cup of coffee, it is important that you keep a low profile. Don’t ask any strange questions of the staff that will make them suspicious or do something like demand to see the manager or owner. You are there purely for observational purposes.

Now that you’ve made the arrangements — like signing the appropriate non-disclosure agreements and making an appointment with the brokers and the sellers – keep your appointment and don’t be late. Getting a walk-thru together requires a lot of moving parts, so buyers who fail to show or fail to show on time show a lack of respect – and sellers may refuse to work with you.

Bring questions with you. This visit is a really great chance to find out about the ins and outs of this particular business – and you don’t want to waste the opportunity.

You should feel free to open doors, examine equipment, etc. – just ask the seller first. It is important to remember that not only does the business still belong to the seller, it is a huge part of their life. Again the message is just to be respectful of the other parties involved.

You should never feel like you have to rush through a walk-thru, but on the same token eating up a ton of everyone’s time because you love to tell long-winded fishing stories isn’t fair to anyone. Stay on point and make the most of this unique opportunity because there are many things about a business you can’t learn from reading a P&L.

Once the visit is complete, have a conversation with your broker about the things you saw, your concerns (especially those you weren’t comfortable bringing up in front of the seller) and ask if they saw anything they think the two of you should discuss further. Use their experience and knowledge to your advantage when using the information you gained via your visit.

Are you considering buying a business, but would like to know more about the walk-thru process? Do you want to know what types of questions you should be asking during a visit? Ask us! Please feel free to leave comments or questions below.

Michael Monnot