Why is This Still A good Time to Buy a Solid Business?

Although there is rarely a true time where the business buy/sell marketing is a seller’s market, the ebb and flow based on the economy is either a stable market or a buyer’s market. Right now, we are still in a buyer’s market and it will be, in my opinion, for at least another year as far as the economy is concerned.

BUT, more importantly, when the economy clears then you will see a good 3 years or so of the market being flooded with decent to great businesses for sale from the baby boomers ready to take their opportunity to get out. Lots of businesses for sale means buyer power.

That doesn’t mean some rare sellers won’t see some sweetheart deals here and there, but for the most part it means that most items surrounding an impending deal are leaning heavily towards the advantage of the buyer.

So are you thinking “if no loans are available still, how can this be a buyer’s market?” Glad you asked.

The truth of the matter is, banks rarely play a huge role in any deals under $500k, which makes up the majority of sales involving privately owned business. Most of these sales are centered around down payment money from a buyer and a note held by the seller and/or some kind of an earn out deal for the rest of the money. If a bank did get involved, it would be for a small portion of the deal value. You need to understand that it is extremely rare for a bank to be involved and the seller does not have to hold a note as well as play second fiddle to the bank as far as payments go.

Any seller not in a position to, not willing to, have a good chunk of skin in the game is sadly delusional and as a buyer you should steer clear of that kind of a deal structure. Know ahead of time you will need a decent down payment and that getting a bank loan is out of the question. The seller ALWAYS needs to have skin in the game and right now, more skin than in a better economy.

Keep in mind that although a buyer may be able to get a business for a SLIGHTY undervalued price right now, that is not where the buyer power really exists. Many of the sellers are trying to dump a dying business before it completely fizzles out so they are low value plays to begin with.

Since many sellers of solid businesses are deciding to hold on to their business while the economy is still leveling off to make them better and increase their value, there are not as many good business out there as you may think so the price tags should be lower (but some delusion buyers don’t understand that and those are another group to avoid).

The real deal power is that you won’t need to put as much down now as you would be required to in a better economy and you can get much more favorable seller notes including the interest rates they bear and the length of time to repay. Same goes with an earn out situation.

The bottom line… as always preparation is the key. Know how much down payment money you have to play with, have a solid understanding of the type of business and industry you want to buy into, and have some scenarios ready to put together a payment plan should you find a business to make on offer on. If you can find a good business for sale, this is still a great time to do it. Just don’t go into it thinking you will be putting down peanuts and going for a bank loan. No matter the economy, it’s just not that simple.

Super bottom line…. Get help. Seriously. It only takes a tiny mistake in a deal to turn a venture into a quick disaster and not knowing what you are doing can make EVER pulling the trigger an impossibility.

For a measly investment you can learn a lot about the process and get professional tools with this business buying package. Or take it one step further and actually hire someone (you know where to find me) to help you in some or all phases of the process. You will most likely save on the deal 2 to 5 times the money you invest in that help.



Best of luck in your business buying success-

The Business Buying Guru

What to do after you have an initial valuation for a potential business to buy

If you followed along in correct process fashion, you should have a few solid potential businesses to continue pursuing and have placed an initial valuation on them.

Why? Because you will need that figure to put in an initial offer so that you can perform a due diligence on the company to get the real, full scoop on it so you can continue with the purchase, modify your offer or drop the deal.

For this post, we'll assume you have made an initial valuation and an offer range that seems acceptable based on the valuation (see this post for a refresher) Theoretically, you have come up with an offer range you can live with and it makes sense, so go for it. The seller just might take it. If the seller balks all the way up to the top of your range, then you move on.

The decision by the seller will tell you if he/she is unreasonable or not and if they are someone you don’t want to deal with anyway. Maybe the seller's mind will change before you find another suitable deal. Or maybe he will come up with a counter offer. You will never know if you don’t put it out there. Don’t make assumptions.

The actual offer is usually made verbally through a broker and will lead to a written Letter of Intent (LOI) if the offer is deemed reasonable by the seller. If you are dealing directly with a seller, then you will begin negotiations with the seller at this point verbally and hopefully agree on a price that will lead to a written LOI.

The LOI is a non-binding agreement that allows you to start a due diligence period in which you will have the chance to "prove" the claims of the seller by getting more financial info and seeing the business in action from behind the scenes. With this additional info from due diligence, you should perform more valuations for buying this business to see if you need to adjust your offer.

For more information on the next step in the buying process, go to the Letter of Intent page of this man business-buying-help.com site.



Best of luck in your business buying success-

The Business Buying Guru

Valuations for Buying a Small Business- An Example

So once you have the knowledge necessary to perform an initial valuation on a small business you're looking to buy, what do you do with it? Let's go over an example.

Here is a typical example on valuations for buying a small business. PLEASE BE AWARE that this is very simplified and I go over it and many more tricks of the trade in the full ebook and the toolkit:

A deli business is on the market for $300,000 and it was attractive enough for you to get to the point of coming up with an appraisal price range. The owner's discretionary cash flow (ODCF) is $135,000.

You perform your valuation using a rule of thumb ODCF multiplier of 2 (this is just an example multiplier and may not be accurate currently for this type of business).

The price seems to make sense at a max of $270,000. Let’s say you determined there are factors in your research that lower the value of the business such as the need to replace some of the equipment at $10,000.

Now you think a max offer of $260,000 would make more sense. In this case, you decide that a low end of $245,000 is not out of the question and is a good starting point.



Now What Do You Do with Your Offer Range?

Well, now you have a reasonable offer with your valid reasons behind it.

Theoretically, you have come up with an offer range you can live with and it makes sense, so go for it. The seller just might take it. If the seller balks all the way up to the top of your range, then you move on.

The decision by the seller will tell you if he/she is unreasonable or not and if they are someone you don’t want to deal with anyway. Maybe the seller's mind will change before you find another suitable deal. Or maybe he will come up with a counter offer.

You will never know if you don’t put it out there. Don’t make assumptions.



Best of luck in your business buying success-

The Business Buying Guru