what paperwork is required to buy a business Archives - Page 2 of 10

Buying Businesses: Why You Shouldn’t Sign A Million NDAs

Posted in Business Broker Why & How, Buyers Articles

Published April 24, 2023

A million NDAs? Yes, that’s a profound exaggeration. It would be nearly impossible and ridiculous to sign a million of anything. The point we’re trying to make is your approach to buying a business will greatly impact your ability to get to a closing table.

How?

The NDA (non-disclosure agreement) is a document you sign before the name, location and any sensitive information about a business for sale can be revealed to you. It is a critical step in the business buying process, so if you’re in the market to buy a business – you’ll be signing NDAs.

What you shouldn’t do is sign a ton of them. Why? It’s an enormous waste of you time and energy.

The NDA should only be signed after you have completed a few other steps. First and foremost you need to figure out your goals for business ownership (a more flexible schedule or greater income potential, for example) and then decide how much money you have to invest in your new venture. The second step would be to have a conversation with an experienced and qualified business broker about your goals, the industries where you have interest/practical experience and your available capital. Your broker should then find you some cursory listings to review. If any of those listings look promising, then and only then would you sign the NDA for that particular listing.

If a business broker is doing their job the only people who are allowed to sign the NDA are people who would not only be a successful buyer of the business (they have enough capital) but also a successful owner of the business (they have the practical experience and passion to keep the business in the red). It serves absolutely no one to randomly send NDAs to people who can’t successfully buy and run that business. All it does is put the business at risk for disclosure of the for-sale status to the wrong person (read why that is bad here).

There are brokers out there who will automatically send NDAs to anyone who shoots them an email, no questions asked – so as a buyer it’s possible to ask for, receive and sign a ton of NDAs. The issue is those NDAs are likely for businesses that you either would be unable to buy or wouldn’t suit the life you’d like to have – so why waste your time?

Talk to the right broker – someone who asks you questions and helps you narrow down business listings. Then sign.

Are you interested in buying a business and have questions about the NDA? Have you signed a ton of NDAs without much success and are looking to try a different approach? Talk to us! Feel free to leave any comments or questions and we would be happy to help.

Michael Monnot

Red Tape For Business Buyers: A Guide

Posted in Become a Business Owner, Business Broker Why & How, Buyers Articles

Published April 17, 2023

You know how everyone always jokes about what a nightmare bureaucracy can be? If you are buying a business, prepare yourself – you are going to have your fair share of red tape. All of it will need to be completed in the correct order and to the correct level of repetition before you can operate your business.

It can be frustrating and might (at times) feel impossible, but every operating business has made it to the end of this process. Consider it an annoying right of passage.

This is a part of the business transaction process where your business broker can be worth their weight in gold. A good broker will have someone who can help you with any and all red tape, or they will be able to help you themselves. Some business buyers choose to have their broker (or a specialized contractor) do all of the licensing, others are able to get it completed with just a few suggestions. How you handle this part of buying your business is up to you.

Want some pointers? Here’s a sample of our best advice, derived from many trips down bureaucracy lane:

DO NOT PROCRASTINATE!!!

Many red tape items are contingent on one agency completing or signing off before another can even begin, so start early and stay on top of it. You can’t get all of your licensing and permitting done the day of (or even the day before) closing.

Gather All Of The Documents Before You Start:

First you will want to try to get together the list of everything your broker and the seller think you will need. Ask the seller for copies of the licenses and permits they hold, as you will need their license and permit numbers to fill out your own.

Go online and print out every application you think you might need, even if you are going to be submitting them online. A printed version will allow you to collect all of the needed numbers/addresses/names/titles/etc. so you don’t end up timed out of the online application process (they pretty much all have a time limit and then they force you to start over).

Once you have assembled your pile of seller information and printed applications keep all of it together and take it everywhere you go. Many applications require signatures from multiple government agencies or departments.

Naming And The IRS:

The very first step is the naming process, even if you are buying an existing business and keeping the business name the same. Why? Your business will technically have two names, the DBA or “Doing Business As” (also called the Fictitious Name) and the legal name which can literally be “Anything You Want, LLC”. You will need to file your DBA with the Division of Corporations in your state, and the legal name will need to be filed through your attorney or an online legal service like LegalZoom. You will also need to get a Federal Employer Identification Number (also called a FEIN or an EIN) from the IRS.

Operational Licenses:

If the seller currently holds a license needed for the operation of the business, like a liquor license, then instead of starting from scratch you will be using applications for transferring that license. A word to the wise here – don’t rely solely on the information you find online about what is required to get the licenses issued or transferred. Get someone – a real, live person on the phone. Better yet, find the local office (instead of the statewide call center), and get a local agent on the phone. The local agents are the ones who will be processing and issuing your license, so they are the ones you need to keep happy. Another caveat? Be really patient with this part of the process. You can call the same call center three different times and get three completely different answers to a single question.

Local Licenses:

You will also need to get yourself a Certificate of Use and your local Business Tax Receipt or BTR (also called the Occupational License). The Certificate of Use gets issued after your building and fire inspections, your BTR after your Certificate of Use goes through. If you are buying an existing business, you may not need an inspection if the business has had one recently, but you will need to call and check. Again, get a living person on the phone to discuss the requirements and process and you will be far better off than trying to divine what you need from a cryptic government website.

Costs:

Did we forget to mention that pretty much all licensing and permitting applications come with a fee? Yes, they all do. While rarely astronomical in price, the costs will be completely dependent on what applications you are filling out, what inspections you need, etc. Be ready with your credit card or checkbook when you start the process.

It Can Be Done, Really.

This is one of the parts of being your own boss that is not very fun, but with a good dose of patience and a bit of organization it will all fall into place. Most of the real, live people you will get on the phone are very helpful, and remember that your broker is always there as well.

Are you thinking about buying a business, or do you already have a business in mind and are wondering about what kinds of licenses or permits you will need? Are you having trouble finding the agencies you need to get your applications going? Ask us! Please feel free to leave us a comment or question here, and we will be happy to help you with navigating the red tape.

Michael Monnot

Upfront And Honest: How Uncomfortable Questions Help You

Posted in Buyers Articles

Published April 3, 2023

Answering personal questions can be tough. No one likes telling strangers where they live or how much money they have – but if you’re going to buy a business know that these uncomfortable questions are coming.

Why? They are critical to your success.

When you first interact with a qualified and experienced business broker they will ask you questions like these, and if you really want to buy a business you need to be upfront and honest with your answers. The bright side? Giving up some information about yourself only helps your broker help you.

Why do you need to know where I live?

Business sales happen under a veil of confidentiality. This secrecy is important for a number of reasons. There is a powerful misconception that a business for sale is a business on the brink of failure. Although the failure scenario is rarely the case, this misconception can cause catastrophic losses for a business (an entire staff can panic and quit en masse or important clients can cancel contracts). Businesses often have proprietary information or financially sensitive information that will need to be disclosed to a potential buyer during the transaction process, in addition to exposing the for-sale status of their business, so a business seller is putting a lot on the line. To be allowed access to such important information you as a buyer must sign a nondisclosure agreement (NDA). When you sign the NDA for a particular business listing you are asked for your legal name and physical home address. This information is used to verify who you are and to identify you as an individual. There might be ten Matt Smiths in a town, but only one Matt Smith lives at his unique home address. When you consider the gravity of the information that is being exchanged, what you give on the NDA is paltry in comparison with what a seller risks by giving you access to their business.

Why do you need to know how much money I have?

We aren’t asking how much money you have in your bank account. We’re asking how much money you currently have to invest when you purchase a business. If you can’t afford a $500,000 business then it’s a colossal waste of your time (and everyone else’s) to look at $500,000 businesses. We also need to know if you are looking to pay all cash up front for a business or if you are looking for financing options. What we do with the information you provide is find businesses that you can successfully afford and/or financing options you would be able to qualify for. Your honest disclosure of the capital you are working with only helps find the right options for you. You are also going to have to prove to your future commercial landlord that you have enough funds to cover your lease expenses. If you’re going to buy a business you are going to have to get comfortable talking honestly about how much money you have available.

The message here is although you might not want to give up information about yourself a business broker isn’t doing their job if they don’t ask these questions. Giving up potentially damaging information to the wrong person could hurt a business that would have been perfect for you. Showing you businesses you could never successfully afford is a waste of your time and energy. Be upfront, be honest and be willing to help your broker help you.

Do you have more questions about what information is required for the NDA? Would you like to know what businesses fit with the funds you have available? Ask us! Leave any questions or comments and we would be happy to help.

Michael Monnot

Get Comfortable With Sharing: Why Business Buyers Need To Divulge Info Too

Posted in Buyers Articles

Published March 29, 2023

No one likes to talk about deeply personal things with strangers – like how much money you make or exactly where you live. Guess what? If you really want to buy a business you are going to have to get comfortable sharing information just like this with the other parties in your business transaction.

What do we mean?

Well, for starters you are going to have to give your real physical address and full name to a business broker before they are going to let you sign a non-disclosure agreement for a particular business listing. They need this information because it ensures that you are who you say you are and you can be individually identified. For instance, there might be 10 John Smiths living in your area, but only one John Smith lives at 123 Marigold Way.

Next, a business broker is likely going to ask for proof of financials to prove to the seller, whoever is financing your transaction (the seller if your deal includes seller financing, the SBA if your loan is through their program, etc.) and your future commercial landlord/property manager that you indeed have the money that you say you do and that you can successfully purchase the business.

That same group might also want to know your work history, education and practical experience. A commercial landlord isn’t likely to let a new tenant sign a long term lease if they have no actual experience in that particular industry. The rent won’t get paid if you don’t know what you’re doing so they want a tenant who is more likely to succeed than fail. A seller also wants to know that they are handing over their business and employees to someone who knows how to keep the business going and keep everyone employed.

See a trend? You are going to have to get comfortable sharing this type of information about yourself. There’s no way around it. When you share your information you gain access to far more from the other side. You get access to confidential, proprietary and potentially damaging information about a business, you get to go through any and all documentation the business has, you get access to tax returns, contracts, employee files – the list is long. What you are given versus what you give is most certainly slanted in a buyer’s favor.

The message here is business deals are complex and a lot of money changes hands. You are going to need to be upfront and forthcoming with information about yourself if you expect the other side to be upfront and forthcoming with the information you need too.

Are you thinking about buying a business and aren’t super comfortable giving up personal information to gain access to listed business information? Would you like to know more about what business brokers, sellers and landlords do with that information? Ask us! Leave any questions or comments and we would be happy to help.

Michael Monnot

Why You Might Be The Reason Your Deal Falls Apart (And How To Keep It From Happening)

Published March 13, 2023

A deal falling apart is the worst, particularly when it happens as you approach the closing table. Deals don’t close for a myriad of reasons, but to prevent it from happening in yours it might help to know what the market currently shows in terms of the reasons why deals fail. The IBBA and M&A Source Market Pulse Survey from the last half of 2022 offers some insight into why deals collapse.

The report shows that for Main Street businesses ($2MM or less) the main reason deals don’t close is poor financials – which doesn’t just mean that your business accounting system consists of a box of crumpled receipts under your desk. It also means you may have misrepresented, not fully understood or embellished your numbers. Misrepresenting your numbers, whether intentional or not, is a bad look and can lead a buyer to mistrust you to the point that they no longer want to continue with the deal.

Across both Main Street and Lower Middle Market ($2MM to $50MM) the overall reason deals don’t close is an unrealistic seller value expectation. You may have a magic number in your head, you may have a figure you’d love to get for your business that is based on what you’ve invested over the years, you may have a written valuation from a professional that specializes in your industry – but in the reality of the business-for-sale market all of those numbers essentially mean nothing. Your business is actually worth what a buyer actually pays you for it.

Another major factor in the death of deals is time. The longer you make a buyer wait, the longer your business is listed, the longer the transaction takes to work it’s way through the process the more likely it is to die. People change their minds, the market fluctuates, life circumstances get in the way. The way to combat time as a killer is to be ready. Have your financials in order, prep (with your business broker’s help) the answers to commonly asked buyer questions and be proactive with buyer requests – handling them the moment they come in.

If you’re a business buyer, know going in that some really great businesses have records that are lackluster (in terms of organization) at best. Also understand that it can be incredibly difficult for a seller to put a number on all their years of hard work and investment. Be patient with your negotiations and ready to possibly dig through a box of receipts.

The moral of this story is although some reasons your deal might fall apart are out of your hands – most reasons are absolutely within your control. Go in ready, with realistic expectations and you’ll have a far better chance of seeing that closing table.

Do you have a Main Street business to sell and want to know what businesses like yours have recently sold for? Would you like to know how to get your financials ready for buyer’s eyes? Do you have questions about how to negotiate with a seller who has their business listed for an unrealistic price? Ask us! Please leave any questions or comments and we would be happy to help.

Michael Monnot

What’s In A Closing? An Explanation For Buyers + Sellers

Published March 6, 2023

When you start the process to buy or sell a business (especially if it’s your first time doing so) you will likely encounter some new lingo that you may or may not be familiar with. For instance, the process of buying and selling a business is referred to as a transaction, the professionals who help guide you through the process are known as business brokers and the end of the transaction is called a closing.

What is a closing exactly?

Put simply, a closing is the goal of every business-for-sale deal. It is the end point of the transaction and occurs when all parties included have signed all necessary documents, when the money has changed hands and the keys to the business are given to the new owner.

In many circumstances, this will all occur at one meeting, sometimes referred to as the closing table. All parties will arrive ready to sign and exchange the necessary funds and keys. The business brokers and business transaction attorneys will be present, and typically the funds for the sale will be in the hands of an escrow agent who will release them once the appropriate papers are signed.

In other transactions, the escrow agent acts as a kind of intermediary for the closing. Each party will receive and sign the necessary documents and then send them to the escrow agent. Once the agent has received everything needed for the closing from both parties, the funds in escrow will be released to the seller and the deal will then be officially closed.

Another aspect of the closing process usually involves a walk-through of the business and an inventory count. This is important because if equipment or inventory has changed, the selling price of the business may need to be adjusted.

The closing type and necessity of a walk-through will depend on the deal that has been reached and the preference of the parties involved. Ask your business broker about which type of closing you will likely see at the end of your specific transaction.

Are you a business buyer or seller with questions about the closing process? Would you like to know more about walk-throughs or inventory counts? Ask us! Please leave us a comment or question here and we will happily get those questions answered.

Michael Monnot

How An Innocent Conversation Can Mean The Destruction Of Your Deal: Buyers, Sellers + Confidentiality

Published January 30, 2023

Confidentiality is a big, big part of business sales.

What is confidentiality? When a business is for sale, the only people who should know that it is on the market are the seller, the business brokers and attorneys involved and qualified buyers who have signed the appropriate non-disclosure agreements. That’s it.

Most people new to the process don’t understand the importance of confidentiality. When you are buying a business, you want to know absolutely everything about the business so you can make an educated decision. When you are selling a business, you want to get the word out there so you can reach the most possible buyers. Confidentiality seems to stand in the way of those two goals, right?

It does, and it doesn’t. Sure, confidentiality makes it a little more difficult to spread the word or gather information, but there is a very big reason why confidentiality needs to be in place. Without it, a business stands to lose – a lot.

What can happen if confidentiality is breached and the for-sale status of a business gets disclosed? We’ve seen an entire staff quit and move to the competition, taking all of their regular customers with them. We’ve seen customers stop frequenting their once-favorite establishments. We’ve seen clients who are under service contracts cancel their contracts in favor of a more stable company. We’ve seen the local competition move in for the kill. Bottom line? It can be a disaster.

I signed the non-disclosure agreements and I’m not going to tell anyone, why is this such a big deal?

Here’s why. Most of the time when a business gets inappropriately disclosed it’s not because someone was shouting from the from the rooftops. A seemingly innocent conversation can derail a deal and hurt a business. Here’s an example:

A client was flying in from out of town to get a first look at a restaurant he was already very interested in buying. He had signed the appropriate non-disclosure agreements and hadn’t told anyone he knew the name of the restaurant or exactly where it was. On the plane, he strikes up a conversation with the woman sitting next to him. She tells him the name of the exclusive gated community where she lives, and he says “Hey! That’s where I’m going too! I’m thinking about buying the restaurant in that community!” She now knows that the restaurant is for sale, so when she gets off the plane a few hours later she casually mentions the conversation to a friend in the same community. “What a small world, right?” Within a few days the entire community knows about the for-sale status of the restaurant, including the restaurant staff who panic and quit en masse. This seemingly innocent conversation between complete strangers caused serious staffing issues and nightmare for both the business seller (who now has to find, hire and train almost an entirely new staff) and the buyer (who now has to take over the business without the experienced employees they were going to depend on).

The most important thing that you can do as both a buyer and a seller is keep the for-sale status of a business to yourself!

Are you a buyer who wants to know more about how you get information on a business without breaching confidentiality? Are you a seller who wants to know how you can keep your business sale a well-guarded secret? Ask us! Please leave a comment or question here, and we will be happy to help.

Michael Monnot

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

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