what should i know about buying a business Archives - Page 6 of 29

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

When Your Parent’s Path Isn’t Your Path – An Important Conversation For Entrepreneurial Kids

Published February 27, 2023

Sometimes parents will buy or start a business because they hope to leave their children a legacy; the legacy of multi-generational business ownership. What happens if the children of those parents dread the idea of having to take over their parents’ business? The time for that difficult conversation is always NOW. If you are the child of business owners, ask yourself these questions:

Did you grow up working in the family business, but always dreamed of doing something else?

Would you only take over the family business out of a sense of duty or guilt and not because you really want to?

Have you had this conversation with your folks?

If any of these questions resonate with you, then perhaps it is time for you (and your family) to take a good look at what the future of you, your family, and the business hold.

Some things to consider?

If you would only take over the family business because you feel like you are bound by a sense of duty, then that decision would probably be a mistake. Businesses are a life-encompassing affair, and as the owner your heart really needs to be invested in the success of the business if it is going to continue to succeed the way it did when your folks were running the place. We frequently see small businesses falter when the second (or third) generation takes over without the same amount of drive.

If you have passion in another industry, then instead of sacrificing your goals to step into the family business role the family tradition of entrepreneurship can continue by selling your parent’s business when they are ready to retire, and then take the proceeds to invest in a business venture where you will have the passion and drive to continue the family legacy.

These considerations are important, and the conversation needs to happen sooner rather than later.

If you are the parent in this situation, you need to be honest with your kids about your expectations long before it is time for you to step down as owner. Although you may love your business, your kids might not, and it would be a far more productive legacy for all your hard work if you invested in a business where your children would be willing and able to succeed.

Do you own a family business and are concerned that your kids don’t want to follow the same path? Are you the child of a small business owner who likes the idea of staying within a family of entrepreneurs, just in an industry where you have passion? Talk to us! Leave a comment or question, and we can help you decide what would work best for your family and your legacy.

Michael Monnot

Baby Steps With Your New Business: Why Big Changes Are A Big Mistake

Posted in Become a Business Owner, Buyers Articles

Published February 13, 2023

When you are looking at businesses to buy, it can be very tempting to assume that the reason the business isn’t making record profits is an apathetic seller. What many budding entrepreneurs fail to realize is while it can be the case that a business could do much better with a fresh and motivated owner, running any business on a day-to-day basis is very hard work.

An existing business is open because of the system that the current owner has in place – and in many cases changes that could bring more profits are not made simply because there is no money or time to do them.

What can happen when a buyer is over enthusiastic about “revamping” a business? They walk into a business that is currently functioning and profitable, and (without trying to understand how the business works and what is keeping the doors open) gut the current system and try to implement one of their own. This is an enormous mistake.

As a buyer, you need to take the time to learn the business as it currently exists and give yourself the time to figure out what is currently working and what is not long before you try to implement any changes.

Another typical mistake is to completely renovate a space before you have a clear picture of what really needs to be changed aesthetically and what can remain as-is. By undergoing a major renovation, many new business owners blow through all of their working capital and end up in the hole financially before they even know how to make the business turn a profit.

The message here is don’t be one of these buyers. Don’t fix what isn’t broken! Instead, learn your new system and slowly implement changes only after you are absolutely sure that they are necessary and only when you have more than enough capital to cover them.

Are you a business buyer who wants a business that needs a lot of changes so you can make it all your own? Do you have questions about what kinds of changes are necessary and which ones can wait? Ask us! Please leave us a comment or question here, and we will be happy to help you.

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

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

Posted in Become a Business Owner, Buyers Articles

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