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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

Interested Buying A Franchise? Let’s Talk New Vs. Existing

Posted in Become a Business Owner, Buyers Articles

Published March 27, 2023

Buying into a franchise can be a great option for those who are looking to start their own business from the ground up. Starting your entrepreneurial journey with a franchise does not necessarily mean an easier path, it just means you walk in with an established brand and structure already in place. In terms of the time and money you will ultimately spend, buying into and starting a franchise will be just as much work as starting a business on your own.

What are the major expenses involved in starting a franchise?

The first cost you will incur will likely be the franchise fee. Franchises charge this upfront fee as a way of recouping the costs of training, branding and the support they will provide. The average franchise fee is somewhere in the neighborhood of $30,000, but they can range from less than $10,000 to over $100,000. The franchise fee will depend on the size of the franchise you are buying into, and each individual franchise will have specific requirements to become part of the brand.

There may also be costs related to setting up a location. You may have rent payments and may have to pay for things like landscaping. You may need to have signs made, install new equipment and fixtures, buy new furnishings, and build-out a space.

Any new business will also need to bring in an initial inventory and purchase supplies. There may also be operational needs like advertising and payroll, so you will need to be certain that after all of your starting costs are covered, there is still enough capital left to cover your additional expenses until you are able to turn a profit.

How can you be sure that you have enough to get your franchise up and running and keep it running until a profit starts coming in? Ask questions, lots of questions, during the buying process. You will need to have at least a general idea of how much time per week you will need to work, and how much income you can expect to bring in if all goes well.

Does starting your own franchise location sound a little daunting?

If you are looking for the benefits of owning a franchise without the risk of creating an unproven location, then perhaps buying an existing franchise location is for you. Like with the purchase of other existing businesses you will be getting a turn-key, currently operating business with everything from build-out, staff and operating procedures already in place. The difference with a franchise location is you will need to pay a franchise fee to join the brand – but if you are looking for a business with instant name recognition and a well defined structure already in place this might be the path for you. Ask your business broker about the costs versus benefits of buying an existing franchise location or starting one from scratch.

Does buying a franchise seem like the right path for you, but you have additional questions? Would you like to know what franchise locations are currently for sale in your target area? Ask us! Leave a question or comment here and we will be happy to help.

Michael Monnot

Can You Really Run A Business From The Beach? Thoughts For Buyers

Posted in Become a Business Owner, Buyers Articles

Published March 20, 2023

It’s an entrepreneurial dream. Owning a business run by a trusted management team that allows you to spend your days sipping drinks in a beach chair. It would be nice, right?

The problems come when a prospective business buyer thinks this goal could be realistic with any business or that all you have to do is pay for a business and then sit back, relax and let the checks come in. Nothing could be further from the truth.

While it is possible to get your new business to a point where you can be a semi-absentee owner, you will never be able to completely abandon your responsibility and it will take a while to get there.

What if you buy a business that is currently run as an absentee-owner business? Can’t you just walk in the door and take over this already existing arrangement? The short answer is no.

There are a few reasons. First, the seller’s trusted management system is theirs, not yours. Although it is sometimes possible to maintain management loyalty when a business passes to a new owner – it is not guaranteed that the management in place will have the same amount of loyalty to you.

This can also be a precarious position for a new owner. If you don’t understand the ins and outs of the business, the details of the business that are needed to keep it profitable can go unchecked because you may not know they are (or aren’t) happening. Let this go on for too long and what you will be left with is no business at all.

Is it possible to have an absentee-owner business? Yes, but you have to realize two things.

One, you will never be able to completely ignore your business. Two, there are a few things that need to happen before you can move to an absentee-situation.

First you need to find a good business to buy, and you need to run it yourself for a while (like at least a year) so you know all of the ins and outs. Then you will need to find a good management team (or a single manager if it is a small business) that you are able to trust. Have this management team work alongside you for about the next 6 months so you can be sure they are properly trained. As you begin to relinquish power and responsibilities to your management team, it is incredibly important that you enable this management team to do their job by giving them the power to hire and fire, the power to change inventory, etc. If you’re going to trust them to handle the reins, you have to give them the power to do so. You will also need to come up with a system that will keep you informed of everything going on within the business. Lastly, keep a close eye on your business, even if you aren’t there everyday. Make frequent unannounced visits, go over the financial records regularly, etc.

While it is possible to be an absentee owner in some types of businesses, the majority of business situations are going to require a much larger time commitment from you.

If absentee-ownership is your ultimate goal, bring this up in your initial discussion with your business broker so they can help you to find businesses where this system has the potential to work.

Have you ever considered owning a business, but would ultimately like to be fairly hands-off with the day-to-day operations? Do you have questions about the types of businesses that can be run successfully this way? Ask us! Please feel free to leave us a comment or question here, and we would be happy to help you find a business that fits your goals.

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

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