what paperwork is required to buy a business Archives - Page 3 of 10

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

Posted in Buyers Articles, Sellers Articles

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

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

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

A Business Buyer’s Options For Corporate Structures – Which Is Best For You?

Posted in Buyers Articles

Published August 8, 2022

There are a lot of important decisions to make when you are buying a business, but one you may not have considered is choosing the corporate structure. You will need a corporate structure in place before you do many of the licensing/permitting applications that will be necessary for you to officially take over the reins. Your corporate structure also defines who owns the business and how the business will be taxed.

What are my options?

Corporation

Probably the most frequently used and preferred type of structure for forming a company is the corporation. By presenting the Articles of Corporation to the Secretary of State, you can form a corporation fairly quickly. If you are forming the company in Florida, then the registered office is also in Florida and the corporate structures are governed by the laws of the state of Florida. A corporation formed in Florida can carry out business in every state, although all of the states require a registration. Foreign nationals can also form a corporation in Florida. A registered agent (a person headquartered in Florida) has to be named to receive and deliver documents.

Limited Liability Company (LLC)

The Limited Liability Company is not accepted in all states, but it is in Florida. The shareholders are personally liable for taxation and the accountability is limited to the assets of the business. Just like the corporation, an LLC requires the filing documents to be registered with the Secretary of State. In most cases at least two shareholders are required for a Limited Liability Company.

Sole Proprietorship

If the business is privately owned, it is a Sole Proprietorship. In the majority of cases a single person is the owner of the business. This type of corporate structure does have some downsides. The owner is liable with all of their personal assets and the owner is also liable for taxation.

General Partnership

In this type of corporate structure, the partners lead the business together and all of the partners are absolutely liable for accounts payable. This setup usually requires more administrative effort and can be more cost-intensive.

Limited Partnership

The Limited Partnership consists at least of 2 people, a General and a Limited Partner. The Limited Partner has a supervisory role, both available and limited. He or she can’t be part of the management and acts as an investor. The General Partner leads and is liable for the business. A shareholder contract has to be prepared for the forming of the business. With this type of corporate structure, you have to request a Certificate of Limited Partnership from the Secretary of State.

Before you make a decision it is important to contact a certified public accountant familiar with corporate structures and small businesses, a business attorney or a business broker because they will be able to advise you about what type of structure would be right for the business you want to purchase. Are you a business buyer or budding entrepreneur who would like help? Please feel free to contact us or leave a question here and we will be happy to help or refer you to one of our partners.

Michael Monnot

Business Buyer: What’s In An Offer?

Published July 18, 2022

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.

Michael Monnot

Don’t Download – Why You Need To Make Up Your Own Questions

Published June 6, 2022

You’ve found a business or two that you really like. You’ve filled out the NDAs and have the marketing packages in front of you. You’ve scheduled a conference call or a meeting with the sellers and the brokers, and your broker has asked you to come up with a list of questions.

So, what do you want to know?

It can be tempting in this situation to just Google “lists of questions for business buyers” and then bring that list of questions with you. Don’t do that. If you need to look up a list of questions to ask it’s likely that you haven’t done any research on your side.

Here’s what we mean:

Have you thoroughly read the marketing package you received once you signed the NDA? This one becomes blatantly obvious once you start asking boiler-plate questions that were clearly answered in the material you were already given. This tells the seller that you don’t really care about details and are willing to waste everyone’s time. If you were selling a business that was your blood, sweat and tears would you be willing to give the keys to someone who can’t be bothered? Probably not.

Have you researched the local market, the industry in general, the area where the business is located, etc.? If you are serious about buying a business you should want to know everything about not only the business but the industry and local area as well. Again it will show your lack of dedication to the process if you go into that first meeting and ask something a simple internet search could have told you or that you probably should already know if this is the business you’re hoping to buy.

Have you read the list of questions you’re going to ask? This one might sound crazy but it happens with frankly alarming regularity. People will either ask or send a list of questions to be answered that are from a completely different arena. Like a person looking at a small café who asks about the stock options available to investors. Once again this shows everyone involved that you probably don’t care.

See the recurring theme? Your meetings and calls with a seller are critically important opportunities to gather the information you need to make an informed decision about whether this business will be right for you. These interactions are also pivotal in terms of showing a seller that you’re a serious buyer and someone capable of taking over the business that they care about. Don’t waste your own time by not taking the opportunities to ask great questions.

Are you looking at businesses to buy and aren’t sure what types of questions you should ask? Do you want to know what kinds of information you would need for a particular industry? Ask an experienced and qualified business broker for help! You may also leave any questions or comments here and we would be happy to help.

Michael Monnot

How Your Military Career Primed You For Business Ownership

Published May 9, 2022

Are you a veteran? Your military career trained you to be a leader, taught you discipline and gave you the mental endurance to put in the hours it takes to get something done. Guess what? Those are the skills and qualities great entrepreneurs need.

I’ve never owned a business before. I wouldn’t know where to begin.

We’ve got good news – you don’t have to start from scratch. There are a myriad of small businesses for sale, and there’s a good chance that you’ll be able to find one that fits your goals and one in an industry where you have some practical experience. Buying a business means you don’t have to start from zero. You get a fully operating business, complete with employees, equipment, inventory, operating procedures, vendor contracts – you get the idea. You can walk in on day one and be the owner of a business instead of starting with nothing more than an empty space.

Am I qualified to own a business?

Yes, absolutely! Many of the training programs and careers within the military transfer very well into the entrepreneurial sphere. The experience and practical knowledge you gained during your service are exactly what you need to successfully operate a small business.

The type of business and industry sector that will be right for you will depend a lot on what jobs you did both before and during your time in the military as well as what you hope to get out of business ownership. Love working on cars in your spare time and spent your military career as an aircraft mechanic? Maybe an auto shop is for you. Looking to spend as much time as possible with your family? A bar or restaurant that will need your attention 7 days a week probably isn’t the best choice. Talk to a business broker about your goals and your experience – you might be surprised by the businesses that would meet both.

I don’t have a lot of money, how much money does it take to buy a business?

It depends. There are very small businesses that won’t cost much and larger businesses that run in the millions. The good news is that as a veteran you have special access to programs from the U.S. Small Business Administration (SBA) that can help you get the funding you need to buy a business (click here to visit the Office of Veterans Business Development). Talk to your business broker about what SBA programs you might qualify for and what businesses might qualify for SBA lending. If SBA financing is out of the question, many sellers will offer seller financing to the right buyer with a decent down payment.

The message here is if you have always wanted to own your own business – your military service can help make that possible. Talk to a business broker today to explore your options for the path to entrepreneurship!

Are you a veteran and have questions about what SBA programs you would qualify for? Would you like to know what types of businesses would suit your goals and experience? Ask us! Please leave questions or comments here and we would be happy to help. Thank you for your service!

Michael Monnot

Buying A Business And Legal Advice: When To Take It With A Grain Of Salt

Published April 21, 2022

Buying a business is a huge deal. Businesses are complicated, there’s a lot of money changing hands, contracts can be long and need to be carefully negotiated. As a buyer you should absolutely have legal council and they should absolutely go over anything and everything you sign.

So why are we saying you might want to take legal advice with a grain of salt?

First and foremost, business ownership is inherently risky. Entrepreneurship can be rough and there’s no guarantee that the contract you put together for the purchase of a business is going to ensure that you as the new owner will be successful. Purchase contracts are also heavily negotiated, meaning one party (you) will not get everything you want. There will be concessions with the seller if you want a business transaction to happen.

Think about the job you’ve hired your attorney to do. Their job is to protect you from any and all risk. Their job is to make sure you get everything you want. See where the problem is?

Here’s another issue. There will be some documents that you need to sign that are industry standards, like the non-disclosure agreements necessary to receive most information on businesses for sale. These industry standard documents can’t be changed, so if your attorney asks to make changes the answer is likely going to be no. You will have to sign the agreement as-is or not get the information you’ve requested.

It’s also important to remember that there are many, many specialties in the legal field. Your family attorney who helped you with your uncle’s estate and the probate process isn’t likely to know very much about the legalities of a business transaction. It’s why you don’t go to your kid’s pediatrician if you have arthritis in your knee. You would be better suited hiring an attorney who works in the business transaction arena as they will know how to best protect you without hampering your ability to buy a business.

We aren’t saying you shouldn’t take your attorney’s advice. You definitely should. What we are saying that you need to take that advice as it is meant – to completely and totally protect you. You also need to be sure you are hiring the right type of attorney to give you the best advice possible.

Are you considering business ownership and hadn’t thought about finding a business transaction attorney? Would you like to know more about the documents that you’ll need your attorney to review as part of the business buying process? Leave us any questions or comments, we would be happy to help.

Michael Monnot