1. Know your “WHY”
Many business owners have headed in a direction, usually the path of least resistance, out of convenience and with little thought at all. Whether it was buying a food truck or salon and spa, they did so out of reactive impetus not because it donated to their essential goals pertaining to personal achievement or just making a better life for their families. They did not pause to ask what was the fundamental reason for the purchase of a business, but became content with the feeling of “achievement” that came from a rigorous schedule that’s presented to every new business owner. Consequently, the company begins running them and not the other way around and ultimately leads to professional hardships. However you describe your WHY, it will always serve as a measure to only do what needs to be done and actualize your true intentions.
2. What to expect from your experienced business broker
Business brokers prefer to work with clients that have a good and clear understanding of what they are looking for in a business. The process becomes much simpler to successfully find what someone is looking for when as much detail is given of what the client is in search of. Unlike real estate, it is quite normal for the broker to represent both sides of the transaction. This creates a “dual agency”; there’s no reason for trepidation if you are represented by a just and reputable business broker. Remember, your broker is required to represent the buyer’s best interests when dealing with the seller. Dealing with a good business broker is imperative in the overall success of the transaction, as there are a multitude of mixed emotions experienced on both sides of the deal and it’s the business broker’s responsibility to reach a deal that is mutually gratifying. It is a well known fact that the best businesses are listed with brokers because of all of the perks associated with a professional representative. All Capital Business Brokers conduct thorough evaluations on all listings before excepting personal ties to the businesses in question. In addition to evaluating the company, our brokers go through an extensive packaging process of the business before creating an offer memorandum. Our brokers also include all financials, the inclusion of all intellectual property, training, and a noncompete clause signed by the seller.
3. Stock sale vs. Asset sale
Deciding whether to structure a business sale as an asset sale or a stock sale is complicated because the parties involved benefit from opposing structures. Typically, buyers prefer asset sales, whereas sellers prefer stock sales.
In an asset sale, the seller retains possession of the legal entity and the buyer purchases individual assets of the company, such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales generally do not include cash and the seller typically retains the long-term debt obligations, which is paid off at closing. This is commonly referred to as a cash-free, debt-free transaction. Normalized net working capital is also typically included in a sale. Net working capital often includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses.
Through a stock sale, the buyer purchases the selling shareholders’ stock directly thereby obtaining ownership in the seller’s legal entity. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale. Assets and liabilities not desired by the buyer will be distributed or paid off prior to the sale. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the corporation.
4. Before making an offer
Before making an offer on a business, review the following: the broker’s offering memorandum, review financial (3-5 years Tax Returns, P&L, current balance sheet, AR and A P report), lease, real estate appraisal, meet with the seller/sellers to obtain answers to your questions. Many business brokers attempt to force buyers into making offers to receive information. They do not provide a prospectus on the business, gather financial information, answer the buyers question until the buyer’s offer has been accepted, This is a backwards and lazy approach. It is the broker’s job to provide information in a concise order inform the buyer. We encourage our buyers to gather as much information possible so you are making an offer based upon education not pressure. Your broker should provide you with an indication of what type of books and records are available for your due diligence. Many small businesses do not have proper books and records and if financing is needed, it will be very difficult to receive, so laying that out up front will save a lot of time and effort. Also, many businesses are located at a physical address so there will be lease agreements that will have to be assigned. What improvements might advance the business? What skill sets do you have that might be useful in running the business? What’s going on around the business that might affect it both positively or negatively? These are questions that will help determine not only what the business is doing today but what potential the business will have in the future.
5. How an offer works
Making an offer on a business is like a marriage proposal. You are committing to buy a business but if things do not fair as planned during due diligence then you’ll probably end up with some hard feelings but not much financial ramifications (Re write). After all, the selling agent has presented the business in a certain light and you hope that once you start taking a deeper look at the business it still looks the same way but if it doesn’t then you have the option to get out or resubmit your offer based on the new information that you’ve uncovered. Once the offer is submitted the seller can accept it or counter. Once you have an accepted offer then the real fun begins!
6. Due diligence
When buying a business, it is your responsibility to make sure the company’s affairs are in order before the purchase is finalized. Due diligence normally happens in the 30 to 90 days period prior to buying a business. You conduct due diligence once you and the seller have signed a purchase offer. Usually The seller then agrees to give you access to all business data, but at Capital Business Solutions, the buyer is already provided with the information at the beginning of the buying process. Which is the main reason for Michelle’s 98% closing rate.The company’s organizational documents should include articles of incorporation, bylaws, names of board members, board meeting minutes, names of shareholders, a list of all the states and countries where the company does business and an organization chart. Also included are mortgages, deeds, leases and other assets or liabilities that may affect your decision to buy a business.
7. Account for all physical assets
You want to know the value of all assets so you can determine the appropriate price to pay for the company. Physical assets include: real estate, manufacturing equipment, office equipment and supplies, inventory on the shelf and raw materials, accounts receivable, contracts, etc. It is important to know the status of ownership concerning leans, debts, and quality of merchandise.
8. Examine all personnel records and contracts employees and subcontractors
It is important to be knowledgeable on the employee handbook or term of employment before buying a business. Request a list of current salaries, benefits and bonuses for the last 3 to 5 years. Secure resumes and contracts for top-level employees and board members.
10. Closing, training & concluding the deal
The broker is the glue that holds the deal together. Most deals fall apart at closing due to all of the moving parts and many hands associated with the transaction. At Capital, we control the attorneys, CPAs, lenders, and all other resources involved. Once the escrow closes, the training begins; if the business isn’t that complicated and has employees then usually 4-12 weeks will do it. However, in some cases, the buyer may be very reliant on the seller’s particular skill set that could be taught but requires a prolonged amount of time. In this case an employment contract are made between buyer and seller for the specified time and the buyer must pay the seller for his time, unless it was built into the purchase price. Once the training is over, congratulations you now own your own business!