A Step by Step Overview of the First Time Buyer Process
A recent article on Businessbroker.net entitled, First Time Buyer Processes by business broker Pat Jones explores the process of buying a business in a precise step-by-step fashion. Jones notes that there are many reasons that people buy businesses including the desire to be one’s own boss. However, he is also quick to point out that buyers should refrain from buying a business that they simply don’t like. In the quest for profits, many prospective owners may opt to do this, but it could ultimately lead to failure.
Step One – Information Gathering
For Jones, there are seven steps in the business buying process. At the top of the list is to gather information on businesses so that one has an idea of what kind of businesses are appealing.
Step Two – Your Broker
The second key step is to begin working with a business broker. This point makes tremendous sense; after all, those new to the business buying process will benefit greatly from working with a guide with so much experience. Business brokers can gain access to information that prospective business owners simply cannot.
Step Three – Confidentiality and Questions
The third step in the process is to sign a confidentiality agreement so that you can learn more about a business that you find interesting. Once you have the businesses marketing package, you’ll want to have your broker schedule an appointment with the seller. It is vitally important that you prepare a list of questions on a range of topics. There is much more to buying a business than the final price tag. By asking the right questions, you’ll be able to learn more about the business and its long-term potential.
Step Four – Evaluation
In the fourth step of the business buying process, you’ll want to evaluate all the information that you have received from the seller. Once again, a business broker can be simply invaluable, thanks to years of hands-on experience, he or she will know how to evaluate a seller’s information.
Step Five – The Decision
In the fifth step, you’ll need to decide whether or not you are making an offer. If you are making an offer, you will, of course, want it to be written and include contingencies.
If your offer is accepted, then the process of due diligence begins. During due diligence, you and your business broker will look at everything from financial statements to tax returns. You will evaluate the company’s assets. Again business brokers are experts at the due diligence process.
Buying a business is an enormous commitment. Making certain that you’ve selected the right business for you is one of the most critical decisions of your life. Having as much competent and experienced help as possible is of paramount importance.
What Should You Evaluate When Buying a Business?
Buying a business can be an exciting prospect. For many prospective business owners, owning a business is the fulfillment of a decades long dream. With all of that excitement comes considerable emotion. For this reason, it is essential to step back and carefully evaluate several key factors to help you decide whether or not you are making the best financial and life decision for you. In this article, we’ll examine five key factors you should consider before buying a business.
What is Being Sold?
If you hate the idea of owning a clothing store, then why buy one? The bottom line is that you have to have a degree of enthusiasm about what you are buying otherwise you’ll experience burnout and lose interest in the business.
How Good is the Business Plan?
Before getting too excited about owning a business, you’ll want to take a look at the business plan. You’ll want to know the current business owner’s goals and how they plan on going about achieving those goals. If they’ve not been able to formulate a coherent business plan then that could be a red flag.
You need to see how a business can be grown in the future, and that means you need a business plan. Additionally, a business plan will outline how products and services are marketed and how the business compares to other companies.
How is Overall Performance?
A key question to have answered before signing on the bottom line is “How well is a business performing overall?” Wrapped up in this question are factors such as how many hours the owner has to work, whether or not a manager is used to oversee operations, how many employees are paid overtime, whether or not employees are living up to their potential and other factors. Answering these questions will give you a better idea of what to expect if you buy the business.
What Do the Financials Look Like?
Clearly, it is essential to understand the financials of the business. You’ll want to see everything from profit and loss statements and balance sheets to income tax returns and more. In short, don’t leave any rock unturned. Importantly, if you are not provided accurate financial information don’t hesitate, run the other way!
What are the Demographics?
Understanding your prospective customers is essential to understanding your business. If the current owner doesn’t understand the business, that is a key problem. It should be clear who the customers are, why they keep coming back and how you can potentially add and retain current customers in the future. After all, at the end of the day, the customer is what your business is all about.
Don’t rush into buying a business. Instead, carefully evaluate every aspect of the business and how owning the business will impact both your life and your long-term financial prospects.
What is the Value of Your Business? It All Depends.
The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered.
- Does an owner need to know for estate purposes?
- Does the bank want to know for lending purposes?
- Is the owner entertaining bringing in a partner or partners?
- Is the owner thinking of selling?
- Is a divorce or partnership dispute occurring?
- Is a valuation needed for a buy-sell agreement?
There are many other reasons why knowing the value of the business may be important.
Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, if a business partner is selling half of his business to the other partner, the departing partner would want as high a value as possible.
In the case of a business loan, a lender values the business based on what he could sell the business for in order to recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate or other similar assets.
In most cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value, normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.
It is interesting that in the most common definition of value, it starts off with, “The price…” Most business owners, when using the term value, really mean price. They basically want to know, “How much can I get for it if I decide to sell?” Of course, if there are legal issues, a valuation is also likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells, there really isn’t a price.
The International Business Brokers Association (IBBA) defines price as; “The total of all consideration passed at any time between the buyer and the seller for an ownership interest in a business enterprise and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment, and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options or stock redemptions, real estate, leases, royalties, earn-outs, and future considerations.”
In short, value is something that may have to be defended, and something on which not everyone may agree. Price is very simple – it is what something sold for. It may have been negotiated; it may be the seller’s or buyer’s perception of value and the point at which their perceptions coincided (at least enough for a closing to take place) or a court may have decided.
The moral here is for a business owner to be careful what he or she asks for. Do you need a valuation, or do you just want to know what someone thinks your business will sell for?
Business brokers can be a big help in establishing value or price.
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Do I need an attorney?
It may be advisable to have an attorney review the legal documents. It is important, however, that the attorney you hire is familiar with the business buying process and has the time available to handle the paperwork on a timely basis. If the attorney does not have experience in handling business sales, you may be paying for the attorney’s education. Most business brokers have lists of attorneys who are familiar with the business buying process. An experienced attorney can be of real assistance in making sure that all of the details are handled properly. Business brokers are not qualified to give legal advice.
However, keep in mind that many attorneys are not qualified to give business advice. Your attorney will be, and should be, looking after your interests; however, you need to remember that the seller’s interests must also be considered. If the attorney goes too far in trying to protect your interests, the seller’s attorney will instruct his or her client not to proceed. The transaction must be fair for all parties. The attorney works for you, and you must have a say in how everything is done.
If you know someone who has owned their own business for a period of time, he or she may also be a valuable resource in answering your questions about how small business really works.
You have to make the final decision; that “leap of faith” between looking and actually being in business for yourself is a decision that only you can make!
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Why should I go to a business broker?
A professional business broker can be helpful in many ways. They can provide you with a selection of different and, in many cases, unique businesses, including many that you would not be able to find on your own. Approximately 90 percent of those who buy businesses end up with something completely different from the business that they first inquired about. Business brokers can offer you a wide variety of businesses to look at and consider.
Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise you about trends, pricing and what is happening locally. Your business broker will handle all of the details of the business sale and will do everything possible to guide you in the right direction, including, if necessary, consulting other professionals who may be able to assist you.
Your local professional business broker is the best person to talk to about your business needs and requirements.
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