Buying a Small Business Blog By Business-Buying-Help.com

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

2010-07-08T15:14:00.002-04:00

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

2010-02-23T14:24:00.002-05:00

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

Initial Valuations for Buying a Business- What Information Do I Need?

2009-12-24T16:12:00.004-05:00

When you conducted your review of the business while in the Finding a Business stage, you gathered enough information to at least perform preliminary appraisals for buying a business.

Ultimately, 3 years worth of Profit & Loss (P&L) reports would be ideal, but that will be rare at this stage. If you happened to get it during your initial review of the business, that's great. But if not, a general P&L from the previous year or the last 12 months will do. This is the typical information you will get from a business profile that goes along with the business listing.

Further information from the review that will be of use are things such as:

•how long the business has been operating,
•how long the current owner has been operating the business,
•how important the seller is to the business,
•how difficult it is to enter this type of business,
•is there a lot of competition in the area,
•are customers often repeat/contract based or one shot deals,
•are hard assets (equipment) in good working order,
•what reasons are the owner selling for, etc.

Now all you need to do is to find the proper mulipliers to do the initial valuation.

I recommend using the rules of thumb that involve owner discretionary cash flow (ODCF) multipliers. They are the most accurate value indicators for most, but not all, small businesses and provide different multipliers for different industries.

In general the multipliers will be in the range of 1.75 to 3.5 times the ODCF. Most won't be less but some can be more depending on the industry and other positive factors such as location, time in business and so on.

This will at least get you an idea of what the business is really worth. I would recommend getting help with this as it is a very important piece to the puzzle. You can find do it yourself resources here or get some consulting help here.

Best of luck in your business buying success-

The Business Buying Guru

Business Buying Secrets Revealed

2009-09-02T18:55:00.003-04:00

Just a quick post to let you all know that I have completed a new webinar entitled Business Buying Secrets Revealed.

I made a recording of it and have posted on the business-buying-help.com site.

In it I cover the basics of what you need to know plus insider secrets on hot topics like valuations and negotiating some very critical points to keep you in the driver's seat and and get an excellent price for the business you are pursuing.

I also talk about signs of a bad deals and time wasting business for sale listings.

Of course at the end of the webinar you'll have the chance to get your hands on some exclusive tools to go with what you have learned.

Here's the link to see the webinar recording:

http://www.business-buying-help.com/businessbuyingsecrets.html

Most people only get to do this once in a lifetime so let's make sure you do it right by knowing many of the things you will be up against and how to handle them as well a few inside tips on getting a great deal on a good business.

Buying a business is not an easy venture. If it was, everyone would be able to successfully accomplish it instead of only 10% of those that attempt it. You'd be surprised at how many of that 10% who pulled the trigger went ahead and made very costly mistakes in their business purchase.

So why not find out how to avoid most of the problems and be handle the many other issues that will come about during your business buying venture?

Hope you take me up on my offer as this is totally free and you are welcome to ask me questions about the recorded webinar once you see it.

http://www.business-buying-help.com/businessbuyingsecrets.html

The Business Buying Guru

Finding a Business to Buy- Review & Seller Meetings

2009-08-21T18:06:00.003-04:00

To continue on from 2 posts ago, once you have gathered all of the information possible from the broker or a seller in a FSBO situation, It's time to review the information and put together viable questions to ask the seller.

So, once you have the vital information you need you must really review it. This is the time to ask questions. However, it is not the time to start negotiating.

If you are getting into a business that you are not very familiar with regarding the technical aspects, get some help with good questions to ask. Believe it or not, asking irrelevant questions will not be received kindly by either the Seller or the Broker representing the listing.

There is nothing wrong with going into a fairly unfamiliar business, but asking the right questions with help from a Business Advisor or Broker will become essential in this type of circumstance.

Asking nothing at all, whether you know the industry or not, is also not a good idea.

When you have done your review and things still look interesting, this is the time to request a viewing of the business and/or a meeting with the Seller.

A meeting with the Seller will not be made to negotiate price when dealing with a Broker. This is neither the time nor the place. Doing this separately with the Broker in the middle of the Seller and you is crucial. Most smart Brokers will also have you conduct a visit as a customer in situations such as in a retail business before allowing a Broker-mediated meeting with the Seller.

If a Broker is not involved, this meeting will probably end up being the start of negotiations between you and the Seller. But I do not recommend it if avoidable. Take the additional information you have now that you have seen the business and review it again along with the previous information you received. Do this after the meeting without the Seller present.

Again, it often ends up not being pretty when negotiating directly with the Seller unless you are going to offer very close to the asking price. This is why I do not recommend dealing with FSBO businesses.

At this point you should be in a position to make a preliminary valuation of the business and an offer. More on that in another post.

To Your Business Buying Success-

The Business Buying Guru

Still a Buyer's Market for Purchasing a Small Business

2009-06-24T01:00:00.004-04:00

Yes the economy still kind of stinks. And yes the banks aren't giving out money. But this is a good thing...

If you are in the market for buying a small business.

I'll be quick and to the point on this. If you are truly ready to buy a small business, now is the time to do it. Business owners are more running scared than actually doing poorly. When they are running, they aren't looking for opportunity to keep growing. And you can easily see that with proper due diligence. That's a business buyer's market.

Many business sellers are in the baby boomer category and are looking to continue on with retirement plans. When they have that mindset, they do not want to wait another few years to see what may happen to their solid business. They want out now. And that means a business buyer's market.

Bank's are tight on lending and seller's want to sell. When that happens, the best type of financing for all parties becomes much more clear and acceptable. And that would be seller financing. Sure you still have to come up with a down payment and most likely more than a bank would ask for (in normal times). But who cares? Now you can get a business worth $500k for $400K plus not go through the lengthy process of dealing with a bank. It's a business buyer's market

Look if don't have some kind of liquid money you can't and shouldn't be buying a business anyway. So why not find the many gems, mostly owned by baby boomers, that are waitng to get picked off. Discounts galore and no slow banks processes. You can't ask for more. All you need is that down payment and a solid foundation of the business buying process.

Did I mention it's a business buyer's market?

To Your Business Buying Success-

The Business Buying Guru

Finding a Business to Buy- Information Gathering

2009-06-15T14:20:00.004-04:00

Finding a Business to Buy- Information Gathering

To continue on in sequence with my previous finding a business to buy post, we need to look at information gathering for a business you want to further look into.

Once you have signed the non-disclosure and asked for further information, you will receive a packet of vital business buying information. In most cases you are not going to get 3 years worth of tax documents or even P&L reports for that matter. You can ask for it, but the odds are slim on getting it. That’s too much information at this point to give to a semi-committed Buyer.

What you will get is a profile which will give the latest 12 months of revenues, expenses and cash flow information. Other provided information may be whether inventory is included in addition to its value, the value of furniture, fixtures and equipment (FFE), an extended business description, and lease or property purchase information.

At this point the address and name of the company may be given to you, but often that is done after you have reviewed the information and request to see the business. Again, this avoids giving tire-kickers vital information and the location when they are really not serious Buyers. This may disrupt the business or waste the Seller’s time.

Click this link for a short video on information gathering in regards to buying a business.
http://www.youtube.com/watch?v=YNu_3oyLfAA

Once you watch the video, click here to grab the rest of the tools you will need to successfully purchase a business.

To Your Business Buying Success-

The Business Buying Guru

Finding a Business to Buy- Taking Action

2009-05-05T09:14:00.002-04:00

Just some quick words today on what to do once you have found a listing of a business you would like to consider possibly buying.

If you see something you like, take the next step in getting more info from the Seller or Broker. You will most likely need to sign a non-disclosure form. If a Brokerage gives you this form, you will only have to sign it once and it will carry over to every listing they show you.

Respect this short but very legally binding document. It should basically state that you will be receiving confidential information and you agree to keep it confidential. Confidentiality will also mean not exposing the for sale status to any employees, vendors, customers, etc.

Lastly, if this form comes from a Broker, it will have a circumvention clause that states if you try to pull a fast one and go around the Broker after you have this vital information, you will be caught (believe me you will). When that happens you, as well as the Seller, will owe money to the Brokerage company. It’s shady and not right so just don’t do it.

Remember that this is not a house or piece of property you are looking at. These are necessary measures taken to protect the livelihood of the person that owns the business as well as their employees. Understand the complexity and seriousness of purchasing a business and the rest of the process will go very smooth.

To Your Business Buying Success-

The Business Buying Guru

Finding a Business to Buy- Shopping Around

2009-04-16T23:22:00.002-04:00

There are many places to look for businesses for sale and there are ways to go about buying unadvertised businesses. This second way is a little complicated and too much for this page so we will stay with advertised businesses for sale.

As far as looking for advertised businesses are concerned, the Internet is a great place to look. The newspaper is the worst place to look and in a moment I will tell you why.

You will find two types of businesses in your hunt: those for sale by the owner and those for sale through a Broker. You are much better off sticking with Broker based sales. These can be found on Business Broker websites and they also occupy 95% of the listings on general business for sale sites.

I recommended staying away from newspapers because most of those ads are for sale by owner (FSBO) businesses. On top of that, they do not give you enough information to warrant truly looking into the business.

Concerning dealing directly with Sellers in a FSBO sale, it is a rare instance that this is ever a good experience. The pricing is normally way off and the information is very often inaccurate. If you get past that, then the negotiating will often be very unpleasant.

By the way, when I say use a Broker, I mean a BUSINESS BROKER. Do not waste your time with any listings you find with a Real Estate Broker. The majority have conned a not-so-savvy business owner into thinking that they know how to price and sell a business just to lock them into a 6 month contract and hope a sucker comes by to purchase the business.

Don’t be that sucker. Again, this is not like selling or buying a house so stick to a Business Broker. And while you're at it, use my e-book, checklists, templates and tools to know how to find a good business, where to look and what you do once you find it.

To Your Business Buying Success-

The Business Buying Guru

Tip on Buying a Business- What Can I Afford?

2009-03-31T00:03:00.003-04:00

Tip on Buying a Business- What Can I Afford?

Usually the cash flow of the business is the best indicator to use for valuing a business. It's also a good way to determine what you can afford when combined with how you will fund the business.

The business cash flow is what you will be using to pay off a loan or return your personal money used for the purchase back into your pocket. For instance, say a business has a $100k cash flow and you buy it for $200K with 50k down. That means you have a note for $150k. Say that the note has a 2 year time frame with no interest from the seller. That means you will be paying out $75k a year for two years.

Take this tip on buying a business: Can you survive personally on $25k or less a year for 2 years? Don’t forget that things will probably slip a little when you take over and that you may need additional capital as is often the case. Do you have enough in the bank to handle this for 2 years?

Determine how much excess capital you may need upfront and not when the problems arise. Yes, buying a business gives you a running start, but it’s very likely that you won’t be running on a smooth track for the first few months after the transition from the seller.

It takes money to make money, but it also takes money to buy a business that makes money. If it took $50k to buy a business with a $200k cash flow, then everyone would and could find a way to make this happen.

Don't kid yourself like I see so many first time business buyers do. If the business you are looking at is doing well and you have no down payment money equal to at least 20% of the asking price (more like 50% for a seller note situation) as well as limited business owning experience, YOU ARE NOT IN THE DRIVER'S SEAT since you can't afford the business. So acting like you know what you're doing is just going to get you in trouble or most likely told to take a hike, to use my usual blunt terms.

Be prepared and know what you can afford so that you'll have a much better and less drawn out buying experience. That's my tip on buying a business for today.

To Your Business Buying Success-

The Business Buying Guru

Tips on Buying a Business- How Am I Going to Pay for This?

2009-03-18T21:40:00.003-04:00

This is a huge business buying tip for you...

Please don’t make the mistake of thinking that because you are buying an existing business that a bank is just going to hand over the money. Even if the business is doing extremely well, this most likely will not happen.

It is true that buying a solid business with strong cash flow will help, but the business type, collateral, length of time in business and your background are very significant. Of course, the down payment you can provide is also a factor.

And no, you can’t just apply for an SBA loan. These are not easy to get and yes you do have to pay them back. The government isn’t that nice. Again, business type, your personal collateral and a lot of other factors determine this loan process. Normally, this is not the fastest way to get a loan either.

The most likely ways you will fund a purchase are with your own money (including property equity, savings, etc.), non-traditional lenders (investment banks/brokers specializing in business loans) and/or seller financing (this is the best by far).

In addition to paying for the business, you need to determine how much excess capital you may need. You will most likely need some cushion money. Yes, buying a business gives you a running start, but it’s very likely that you won’t be running on a smooth track for the first few months after the transition from the seller.

Knowing how you will pay for a purchase, especially how much you will have for a down payment out of pocket (or through friends and family) will be a huge factor into determining businesses you can afford. If you can't afford it, it's a waste of time for you, brokers and sellers to bother talking about it.

Once you know you can cover a 20 to 50% down payment (and it can be that high especially for a seller holding a note but it's worth it), you can seek out approval for a bank loan if that's the avenue you really want to take.

So what can you afford? That's for next time...

To Your Business Buying Success-

The Business Buying Guru

Tips on Buying a Business- What Kind of Buyer Am I?

2009-03-02T12:10:00.003-05:00

Here's another tip on buying a business.

In my experience, there are three main types of true buyers: those that look only for high cash flow, those that look for decent positive cash flow with the thought of using their experience to grow the business, and those I like to call bottom feeders.

Bottom feeders like to look for sellers in a really bad position such as fighting partners or negative cash flow due to an inexperienced owner. These are perfect to scoop up for next to nothing because the sellers not only want to get out, but they need to get out.

Knowing which type of buyer you are will narrow down your focus later on in the process when you are actually looking for a business to buy. It will also start to paint a picture of how much money you will need to make a purchase that is suitable to your "buyer type".

I should point out that if these are “true” buyers, then there are also “false” buyers. These people are either the unprepared and uncommitted buyer that I am trying to not let you be or they are just looking for information.

Be a prepared buyer. Know what to look for and how to find it along with the tools needed to flesh out, price and negotiate a favorable deal. Get it all here in the toolkit.

More tips on buying a business to come...

To Your Business Buying Success-

The Business Buying Guru

Is it Better to Buy or Start a Business in this Economy

2009-02-24T13:24:00.002-05:00

Well, this is a bit of a tough question to answer but it has come up to me numerous times lately. Some of the answer has to do with you personally and some has to do with the economies of buying versus starting.

First off, if you have little experience in sales and marketing, buying a business is probably your best bet. In this case you can have a business that already has established sales channels and people taking care of it. Or at least you can be taught about it in a situation that has already been proven to work.

On another personal type issue, having the ability to put in a down payment and have some side working capital is the question. Will it cost more to buy than to start? That often depends on the type of business. Services are usually cheaper to start from scratch and retail based is usually harder. But it's not etched in stone to be that way.

So here's my take if you have the notion to get into business for yourself this year and some money to work with: Buy a business that's already making a profit and use the seller as the note holder after your down payment.

It's a buyer's market in terms of sale price and getting the seller to hold a note. It's never a good idea to involve a bank and right now it will be a very rare instance that they will get involved.

Here's the other reason to buy versus start right now:
The advantage of momentum.

It’s all about a running start. This is the plus you get when your decision is to buy rather than make a business. Even if you buy a business that is barely making a profit, there is momentum. That momentum gives you the time to determine what you need to change in order to make the business work better. If it is already doing well, it allows you time to figure out how to keep it that way.

As long as the profits cover the payments on the note and put enough money in your pocket, then it's a good idea.

When you start from scratch, you will most likely spend less money upfront but possibly more money over time. You will also be starting out with no physical structure (office, store, etc.) and probably very little business operations knowledge. But more importantly you will have NO CUSTOMERS! It could be weeks, but most likely months, before you have any revenue at all. But even so, the bills still must be paid.

A purchased business has both structure and customers. This allows you a much better chance to learn some business operations skills and truly see where you can improve the business and run it your way. That, my friend, is MOMENTUM.

To Your Business Buying Success-

The Business Buying Guru

Tips on Buying a Business- Do I Need a Partner?

2009-01-28T11:15:00.004-05:00

To partner or not to partner: That is ALWAYS a big question when buying or even starting a business. Let me give you a little insight on this subject- After you start or buy a business with partners, you will have your personal answer to that question if you ever think about doing it again.

Partners are necessary for two things. Either they will supply you with capital you don't have or they will provide you with skills you may not have. The latter is a better reason for a partner and a combination may work as long as you are going in with an even money 50-50 deal or better yet, you own a majority.

Whenever a partner is your "money person" (read as they supplied all or most of the needed funding), it doesn't matter what they say or who owns a majority, they hold the cards and will put their 2 cents into the operation more than you would care for.

That's why I don’t recommend picking a partner based on their bank account. You will most likely have major problems within 12-18 months. Trust me, I’ve been there.

Regardless, if a partner is needed, you have to get a partner agreement made up before buying the business. If not, when the partnership sours, you will have no way out or no way to get rid of your partner. Now you are dealing with dead weight dragging you and the business down.

Have a backup team in place! This group or individual should be available to help you out if the business does not come with the right employees to cover your weak points. This individual or team is best to be a business advisor or a small group of small business savvy people to be your brain trust while you are getting your bearings. Backup people will save you the embarrassment of taking a great business purchase and tanking it very quickly.

To sum up my personal opinion from experience of having partners more than once in my last 6+ ventures: Partners Stink... unless you have a way to easily get rif of them as soon as you don't need them anymore.

My past has told me that one way or another, what could possibly blow up in your face will. And even if it doesn't get that bad, I promise you will always encounter at least a bothersome amount of annoyance that you will need to gt off of your chest on a regular basis. Even if your partner is your spouse, sibling, best friend or a parent.

Usually these types of people just mentioned are also very bad choices for partners as your special trust in them will cloud your judgment on your business relationship with them. But this subject is an entirely different blog post.

Bottom line- don't pick up a partner unless you need to (profit sharing with an employee or "consultant" is better), always keep controlling interest in the deal (with legal paperwork), always spell out responsibilities (with legal paperwork knwn as a partner or member agreement), and don't assume partners will ever hold your best interest before theirs.

If you're ready to make a move on buying a business this year, do yourself a favor and have all the tools and knowledge you need such as the information about. Grab the e-book/toolkit you don't want to be without for this important, life-changing purchase you wish to make with this link.

To Your Business Buying Success
The Business Buying Guru

Tips on Buying a Business- What Kind of Business Should I Buy?

2009-01-14T17:03:00.003-05:00

When you're ready to go out and buy a business for yourself, you need to decide what kind of business you want to be in. At least whittle it down to two types as part of your strategy on buying a business.

If you don’t, a few things will happen.

First, you will be looking for a long time in a very wide circle. It's hard to get a grasp on a good business opportunity when you have no idea where you want to be. If you are all over the place, you are not ready to buy a business. In turn, nobody will want to deal with you including lawyers, accountants, advisors, brokers and even sellers.

So here's a quick tip. Focus on what you do well.

If making food is your strength, then you want to find a business that allows you to do that.

If you know retail, then stick to that.

If you know business operations like sales, marketing, finances, etc, then you can pretty much pick any industry as long as you already have employees and partners lined up that know a particular industry. Some of the best business people in the world constantly buy, operate then sell businesses they have never been in because they are excellent "business operations" people and can surround themselves with industry insiders.

The bottom line is, especially if you've never owned a business, that you can't know everything and you can't do everything well. If you get too involved in things you do not do well or just too many things in general, the business will suffer and in turn, so will you.

So that means pick an industry or two that you have the personal experience in to operate, that you will enjoy being a part of, and that you have the resources to fill in the gaps.

Following this tip, by the way, will also help out with any kind of funding to purchase the business. Whether that's a bank, private lender, or even the seller. They all want to know you have a passion for this business and the experience (from you and other resources) to keep it pumping.

To Your Business Buying Success-

The Business Buying Guru

Start a Business or Buy One?

2009-01-05T19:29:00.004-05:00

The make or buy business decision is very important to a budding entrepreneur. Do you go from ground zero or buy a business that already has a track record? Even if that means buying a business with a track record that isn’t all that good.

You need to ask yourself if you want to go through the hassles of starting with absolutely nothing and working your way up or taking over where someone else left off.

Some businesses may be better off starting from scratch if the costs of entry into the market are low as it is with businesses like consulting. As another example, very often it’s better to buy a retail-based business where a build-out of a location would be very expensive and time consuming.

Any potential business buyer needs to know and understand the typical odds they are facing once they have decided to be their own boss. Although this information seems discouraging, there of course is hope.

Believe it or not, there is more on the pro side than the con side in buying a business instead of starting from nothing.

To see more on the subject of buying a business versus starting one, click here.

If you're ready to learn all there you need to know when buying a small business, get the knowledge and tools by clicking here.

To Your Business Buying Success

The Business Buying Guru

Fed cuts interest rate: What does it mean to Business Buyers?

2008-12-17T12:38:00.003-05:00

So the Fed has cut interest rates again. How does this affect someone looking to buy a business? Well, not all too much.

It's still a great time to buy a business since the best way is to have a seller carry the note and not a bank. But the interest rate cut may only help you with your down payment.

Those lucky enough to have liquid accounts available for a down payment should use them. Many though, take money from equity in property. The rate cut may loosen the banks a bit to make it easier to get that equity money.

It seems ridiculous that you can't get YOUR money out of YOUR house but that's the way it works.

If you are really ready to buy a business and you have done your preparation and homework (hopefully with the help of my book and toolkit), then you will probably be able to convince friends and family to help you out instead of trying to tap house equity.

If you are taking the home equity route to get the deposit for buying a business, make sure you get approval before you bother a seller/broker. They will probably require it anyway.

The good news is that while money is tough to get from some sources, it makes sellers that are really ready to sell very willing to take a less money overall for the business and/or a much smaller deposit with a larger note.

Just be careful and make sure that if the business ran exactly how it does now but with you at the helm, it can cover the loan as well as your personal financial needs. Also take into account that the cash flow will probably dip a bit as you take over.

Those are my words to the wise this week when considering buying a business. Bargains on great opportunities are out there, but there is no point in looking if you have not prepared yourself yet to make this business buying venture one based on the strength of being a good and knowledgeable business buyer.

To Your Business Buying Success-

The Business Buying Guru

Letter of Intent- What is an LOI anyway?

2008-12-02T12:25:00.003-05:00

Letter of Intent? LOI? What?

The paperwork that goes along with buying a business is a mystery to any new business buyer as well as those that have bought several businesses.

Often the first exchange of paperwork between buyer and seller is the letter of intent or LOI for short. There are LOIs for many business and personal transactions but in my opinion, none are more important than than the LOI for buying a business.

Is it a legal document? Well, not really but it sure looks like one and it can be drafted or looked over by an attorney but it's often a large waste of money to drag in a lawyer at this point.

What the letter of intent basically does is say "I would like to buy your business for an asking price of $XXXX with contingency stipulations A, B, and C but first I want to take a closer look at your business".

Technically, a business purchase letter of intent is really a non-binding agreement, which is why you don't need an attorney. But is does set the tone for what will be needed and how the due diligence will be conducted. It also structures what will end up being the purchase agreement (this should save you some legal fees if done correctly).

The LOI comes into play when you are ready to make an offer based on what you currently know about the business. Usually after looking at a profile, making a visit, taking a walk through and asking the seller/broker about operational questions.

In the LOI, right up front, is where you will make your initial offer based on this current knowledge. It will also spell out things like deposits, notes details and contingency items that must happen. Contingencies meaning things like the lease being transferred or a license being transferred/obtained or passing of some sort of necessary official inspection.

Don't think that you will hand in a 2 page LOI and roil right into due diligence either.

First off, the seller has to agree to everything including your offer. This may go back and forth a few times (which is why a broker and/or advisor representing both parties is highly recommended) before it gets agreed upon.

Keep in mind that signing this agreement means the seller is obligated to hold off on entertaining any other potential offers (it should be stated in the LOI of course). With that said, at this point the seller has every right to do a little background check on you that usually, at a minimum will have them asking you for proof of funds.

If you don't have the money you are suggesting as a deposit (used to secure the LOI and is refundable) and down payment (made when agreed to make the purchase agreement), there is no point for you or them to go any further.

There is obviously more to a letter of intent to buy a business but I can't write about everything here. For more information I would seriously suggest grabbing my e-book/toolkit on successfully buying a good business.

If you just want a template to use for the LOI (with a due diligence checklist bonus) you can grab the LOI Toolkit from the business-buying-help.com site. It contains the same templates I use for my own business purchases/sales as well as for my clients.

This agreement starts the true negotiations and nitty-gritty stuff when buying a business and really should not be taken lightly or you will find sellers not wanting to deal with you or find yourself on the wrong end of a bad deal.

To Your Business Buying Success-

The Business Buying Guru

Earn outs as a method of paying for a business

2008-11-18T18:31:00.003-05:00

Although I would never recommend buying a business is that revolves solely around the current owner (unless of course you want a main street retail business specifically to run as an owner operator), some businesses have a solid enough track record to consider if this is the case.

Earn outs can be employed as a means to pay for a service/consulting based business regardless of the structure of the company but it's a must if the current owner holds the keys to everything. Especially if that includes being the main client manager or consultant.

An earn out basically says that a small amount will be paid to the seller up front with the rest over time, just like with a note. The difference is that in this case, the buyer holds the power and the seller needs to perform to get his/her money.

For example, let's say you're buying an IT consulting business. The details are that it's a 4 person shop including the owner and the owner makes the deals and keeps up with the clients. One other person is an admin and the 2 others are technicians. They have 50 clients.

If the business is valued at $250,000 a typical scenario would be that you will put down $100k to $125k and the rest will be on an earn out over the next 3 years. Let's go with a down payment of $100k.

There are many ways to do it but in this example we'll say the seller is responsible for making sure that you lose no more than 10% of the clients each year over that 3 year period. After each year you will give the seller $50k as long as 10% or less of those clients have left (there could also be a stipulation that the biggest clients can't be lost at all). If more than 10% is lost, you start taking money away.

All of this needs to be clearly spelled out, but it is typical. Keep in mind that a seller that has built a nice base of customers in a service type of business that has mostly repeat/contracted clients is a very good buy. Even if the seller is the main cog in the wheel.

If the seller has too much involvement, there is more risk on your end, which is why you set up the earn out to protect yourself. But an overly involved seller also puts you in a position to get this business for a much lower price valuation. They don't have a leg to stand on in an argument. For some, this is the perfect situation if you have limited funds but the right background to take over the business.

Just remember, avoid banks when you can, especially in this economy. The more you have a broker or other intermediary help you out with using seller funding such as notes and earnouts, the better position you will always be in as a buyer.

Your comments and questions are always welcome.

To Your Business Buying Success-

The Business Buying Guru

There's a new Sheriff coming to town...

2008-11-05T14:13:00.003-05:00

... but don't wait on him to clean things up if you're looking to buy a business.

Like I often preach, if you're looking to buy a small business, the banks are not your best source of funding. That means waiting until the banking mess is cleaned up is a bad idea and honestly doesn't even effect your ability to buy a business as long as you have a source of down payment funds.

If a business is on the market, the seller already knows that. They also know they have no choice but to hold a note. At this point, it will probably be a much bigger note than the traditional 30 to 50%. you may actually get away with only putting down 30 to 40% with a 60 to 70% note.

Good businesses with boomers looking to retire are out there for sale. Waiting a few years to buy a business is not going to make things better. When the credit issues are clearing up, sale prices will be on the rise.

Besides, the best way to control your own destiny in tough economic times is to get yourself into a business where the effects of the economy are minimal. People still have to buy things and things still need to be made.

Businesses still need to keep their doors open. And they will.

The question is... will you be one of those business owners?

To Your Business Buying Success-

The Business Buying Guru

What exactly is due diligence for buying a business?

2008-10-27T15:49:00.004-04:00

Simply put, performing your due diligence means taking a highly scrutinizing look at the business you are considering purchasing regarding

financial performance,
inventory and assets,
employees,
how the business actually operates,
who their customers are,
how they get their customers
supplier relationships and
competition information.

Beyond just proving that the seller's financial information is accurate, this process allows you to dig into the company and find out how it works, where its strengths lie, what weaknesses it has and how you can or can't make a difference as the new owner.

Is due diligence the same for any business?

You will find out very quickly that how you conduct your due diligence for buying a particular type of business really depends on the industry the business is in.

For example, performing due diligence for buying a restaurant is not even close to due diligence for buying a laundromat. You will be laughed out the door if you ask for the wrong kind of documentation. Especially documentation that has no bearing on the particular business you are looking at.

Or worse, you will rely on information given to you that will almost certainly be inaccurate and cause you to completely botch the due diligence. This could lead to missing out on a great opportunity.

Do you need an attorney to perform due diligence?

Attorneys are expensive. They are also unnecessary for a majority of the due diligence process. Normally you would leave them out of the loop until the due diligence is over and you are ready to go to contract.

Sometimes though, when you suspect the business may have had some recent legal trouble or it is a complicated deal involving a lot of license transfers, you may want to get your lawyer in to do some legal research for you.

So what's next then?

Once you have completed your due diligence, it is time to decide to go through to the closing phase. This is otherwise known as "going to contract".

Sometimes this involves adjusting your asking price down if you have very valid reasons to do so such as assets that will need to be replaced or the seller has not significantly "proved" his numbers. This counter offer may end up shutting the whole deal down or the seller may make some kind of concession.

If the seller and you have a green light, it's off to the closing phase.

To Your Business Buying Success-

The Business Buying Guru

Don't Be Joe the Plumber- Naive is No Way to Buy a Business

2008-10-22T10:14:00.002-04:00

Joe the Plumber- is he famous now, or infamous. Actually the question I have is whether or not he's actually even a plumber. For that matter, rumor has it that his boss isn't even a licensed plumber.

Anyway, the real reason for this post is to show you how NOT to go about buying a business whether or not it's your boss's business you want to buy from him/her or an entirely different one.

This Joe the Plumber guy probably thinks he can actually get a loan to buy the business. Not going to happen for several reasons including the odds are his boss keeps very bad records and the fact that Joe isn't even a licensed plumber trying to buyout his boss to become a 1 man show. Even with a plumbing license, he is immediately hindering his income because he will now be a 1 man show. Odds are he will end up over paying.

What's the point of doing that?

That said, at least he understands that he doesn't know enough about the business side to actually buy this business at this time. According to various interviews, he knows that being a plumber and operating the business are 2 different skills he needs unless he brings in a partner that is an actual business operations person. This is extremely important for any business buyer to grasp.

The bottom line is that Joe the Plumber and you have 1 thing in common: You both need to be completely prepared to buy a business from all angles before you even start looking.

To help you out, at least visit the business-buying-help.com site and go through each page. It's a great start. Then get on the tips list if you haven't done so already. Lastly, get the whole slew of easy to understand and use tools in the toolkit to have in your arsenal as you tackle your business buying endeavors.

To Your Business Buying Success-

The Business Buying Guru

Picking an Attorney to Help You Buy a Business

2008-10-13T20:29:00.003-04:00

I was speaking at a conference last week and one of the main topics was buying and selling a business. While I was attending the speech of a fellow speaker, his guest speaker was explaining soup to nuts how the transaction started and ended.

One of the things brought up was the legal help and documentation he used. This is a very sore spot for me as someone that has been on both sides of a business purchase transaction for myself as well as for clients.

Unfortunately, the guest explaining how his business was purchased did exactly what I encourage people not to do. He was rather lucky in the end but only because it was a relatively simple transaction.

To see how others that do what I do feel about attorney roles and hiring one, I posed the question to the 2 speakers and to the guest as to their opinions regarding how to pick out an attorney for when the time comes to talk legalities.

The guest picked out a trusted friend that knew real estate deals and some basics on contracts. Wrong answer. The speakers, on the other hand, went along with my thought process, which is to find an attorney actually familiar with business purchase transactions and better yet transactions within your industry.

As I do, they felt that going to a trusted attorney or other business owner to find an experience lawyer in this field is a good idea, but even a simple transaction can turn into a nightmare when a less experienced lawyer starts to protect themselves more than protect you since they are diving into unknown waters.

As do I, they also feel that using an intermediary for both sides or an advisor/broker on both sides is the safest way to make sure any other person in the transaction (banks, lawyers, accountants) don't lose focus at the subject at hand. Namely, you want to buy the business and the seller wants to sell it to you. End of story.

The bottom line is this; this is a big and important transaction. Most entrepreneurs only buy and sell 1 business in their lifetime. Do you really want to go into it without professional help? Are you really going to try and save a few thousand dollars on something that if not done right can cost you tens or hundreds of thousands of dollars in loss?

Let's be serious here. A business buying transaction is best done with an educated buyer and the right professional help including attorneys, accountants and advisors/brokers. be a good buyer and buy a great business.

To Your Business Buying Success

The Business Buying Guru

Bad Economy... Good Time to Buy a Business

2008-09-29T18:10:00.003-04:00

OK, so the banking world is running scared and people are afraid the sky is falling on our US economy. I'm not saying things are good, but they aren't quite as bad as you think.

People still need to live. Things are still made, bought and sold. People still need to get from place to place. Luxury item demand will be weaker, but the US will not come to a grinding halt.

With that said, people are scared. Including the owners of some businesses. Especially those with solid businesses that are ready to retire (remember all of those baby boomers?). They want to get their hard earned money out of the business they built.

So what does that mean to the savvy business buyer? It means you can pick up a good business in a safe industry and you won't need to worry about getting a bank loan. Most importantly, you can get it with less money down, less interest and at a very favorable price.

Now is the time to look into buying a business so get yourself prepared and get moving so you can start out 2009 with a great investment into your future. It's the best place to put your money and the only place you can truly control your ROI.

To Your Business Buying Success
The Business Buying Guru

Pitfalls of Buying a Business Directly from a Seller

2008-09-23T16:31:00.005-04:00

Here we are with the last video on this series. Although I will obviously keep posting blogs about buying a business, for now this will be the last video before the launch of the best business buying toolkit you can get your hands on.

Preparation, funding, finding, valuations, offers, due diligence, paperwork/forms, closing the deal. You name and I cover it as well as give you the tools and sample documentation you need to get this transaction done right.

I decided that I wanted to make the last question answered via video about the dangers of buying a business directly through a Seller. Many transactions are done Buyer to Seller but in these cases, the Buyer almost never is working on a level playing field.

Without some kind of intermediary involved, things get out of control and the Buyer, who is usually not familiar with any of the business buying process, is very often in an awkward and dangerous position.

Watch the video to get a better understanding of why not having a buffer that knows the business buying process (and I am not referring to an attorney here) between you and a Seller is a bad idea.

Keep your eyes open to your email. We're counting down to launch time. Only 2 days before you can grab the toolkit that will protect the major investment you are getting ready to make by making sure you are prepared before, during, and after the transaction.

To Your Business Buying Success

The Business Buying Guru