Top Tips from Sunbelt Business Brokers on Buying a Small Business!
Topics we will cover on this page:
Why buy an existing business?
Fundamentals of buying an existing business
When you buy a business, just exactly what do you buy?
How to find a business
Utilizing the services of a Sunbelt Business Broker
Let’s Get Started!!!
WHY BUY AN EXISTING BUSINESS?
The business brokerage profession generally holds that 20% of businesses are for sale at any one time and of those, 20% will eventually sell. Using our numbers, that means that there are 1,100,000 businesses for sale and of those, 220,000 will sell. With this many businesses for sale, there must be a right business for you!
1. Get another job.
2. Start a business.
3. Buy an existing business.
Obviously, we think the third alternative is the best. Let's consider each alternative.
Get Another Job
If you have the necessary skills, and you are not too old (not politically correct, but true), you might be able to get another job. You might even find one that will provide an income sufficient for your family. However, there seems to be no end to the downsizing trend. Even if you find a job, you may very well be back in your current situation in a very short time. Job security is definitely a thing of the past!
Start a Business
This is scary, and it should be! Once again, there are many different statistics regarding business start- ups, but everyone agrees that over 50% of new businesses fail within the first year. Why take such a chance with your future and the future of your family? There are many unknowns in a start up. How much capital will be required? How long will it take to open for business? Where will you find employees? Can you get the necessary permits? Can you find the proper space for your business? How long will it take to get the income up to a point where you can start taking a salary? Etc., Etc., Etc.
We have a solution to the dilemmas:
Buy an Existing Business
There are eight significant advantages to buying an existing business versus starting a business.
1. You can review actual operating results rather than projections. If a business has been owned and operated by the same owner for a number of years and if that business has been the source of income for his family, you can be reasonably sure that the business is profitable and viable.
2. Immediate cash flow. No expensive advertising to lure customers - the cash register starts ringing the first day you take over, just like it did the day before for the seller of the business.
3. Trained employees in place. When you take over the business, you will have a complete crew of trained employees to run the business. No down time for training and no customer dissatisfaction with untrained employees.
4. Established suppliers and credit. For the most part, the existing vendors will continue to do business with you without missing a beat. Remember that they have been supplying the business for a while and they know it is a good business. They don't want to lose your business, they want you to succeed and buy more goods and services from them!
5. Established customers and referral business. Your customer base is already in place and it will, through referrals, continue to grow - unless you drive them away.
6. Existing licenses and permits. In many cases, all you have to do is transfer the licenses and permits to your name. In those cases where you have to re-apply for a license or permit, you have the comfort of knowing that the business, in its current location, was approved for the license or permit (for example, a liquor license for a restaurant).
7. Training by the seller. In addition to the trained employees, you will receive training from the seller in how to operate the business. You will be introduced to customers and suppliers and will get the benefit of the seller's extensive experience in running the business. You will not have to make the same mistakes the seller made!
8. The availability of owner financing. Many of the businesses sold by Sunbelt Business Brokers are financed by the seller of the business. For reasons we will discuss in more detail through outt the buying process, this may be the single most important advantage of buying an existing business. The seller who finances your purchase of his business has a vested interest in your success.
Clearly, the best solution to finding a way to provide for you and your family is the purchase of an existing business. Another good avenue is the purchase of a franchise. However, franchises are generally more capital intensive that the purchase of an existing business. Most existing businesses are purchased with a cash down payment ranging from 15% to 50% of the total purchase price. In start-ups and franchise purchases, the cash requirement can reach up to 100%. Even when financing is available in these situations, the terms and conditions of the third party financing are generally much more stringent than the terms offered by the sellers of privately owned businesses.
FUNDAMENTALS OF BUYING AN EXISTING BUSINESS
Buy a business you like.
Don't expect "traditional" financial information from the owner of a privately owned business.
Tax returns of a privately owned business are prepared to show as little income for tax purposes as possible. You and the owner of the business should like each other.
Commercial banks may or may not lend you the money to purchase a privately owned business.
The owner of the business might finance the purchase.
Don't take yourself out of cash you will need reserves.
You should make an "offer" before you have seen all of the financial and other business records of the business you are interested in buying as this will be covered in the due diligence period.
Financial Information of a Small Business This is may be the hardest part for potential buyer to understand. As stated above the financials of a small business are done for one purpose to pay no tax. Owners take every tax advantage they can that one of the greatest benefits of owning a small business. Now what does this mean? The financials of a small business don’t tell you much about the business except whether the owner has a good accountant or a bad accountant. Most of the time sales are understated and expenses are overstated. So what I am saying is almost every number is wrong. This goes for 98% of small businesses! If you are in the market to buy a business and you plan on basing your decision to buy off of the financials of the business you never buy a business. You are wasting your time. Most of the income of a small business isn’t even in the financials or can even be traced for that matter (ie cash). Don’t get me wrong I am not saying that financials are not important but in no way should they be the focus. As sure as I am typing this you will never be able to prove the exact amount of income in a small business. Once you have found a business you like make an offer on the business and the owner will do their best to prove what they make. You must convince yourself of this its the truth!!
Buy a Business You Like
Many business buyers think the most important quality in a business is profitability. Certainly, you want a business that will have sufficient earnings to provide for you and your family. BUT, you will risk making a terrible mistake if you do not BUY A BUSINESS YOU LIKE.
Suppose you find a septic tank cleaning business that makes lots of money and can be purchased for a reasonable price with great terms. Unless you want to pump septic tanks, the fact that the business makes lots of money is of no importance at all. If you bought this business because of the income, you will spend long, miserable days in the business and will end up neglecting the business and selling it later at a loss.
When you think about buying a business, think about what you like and don't like. If you fix on a particular type of business, visualize yourself running the business. Visualize taking your friends and relatives to see your business. Do you like what you see? Will you be proud to own the business? If not, or if you are not sure, don't buy that type of business.
Be Flexible
You will have to be flexible in finding a business. If you lock onto only one type of business, it will take you much longer to find a business to buy. We like to start a buyer thinking about what they like and don't like using the following broad categories of businesses. First decide if there are any categories that you absolutely do not want to be in. Then focus on the remaining categories and review the characteristics of these categories as presented below.
RETAIL SERVICE MANUFACTURING DISTRIBUTION RESTAURANT LOUNGE COIN OPERATED BUSINESSES
As stated, this is a very broad classification of business. It is, however, a good starting point. Review
these personality characteristics for each classification and see how you fit:
Retail
Deal with the public (outgoing personality required)
Long hours
Open six or seven days a week
No break for holidays
Service
Deal with the public (outgoing personality required)
Must maintain quality
May need special training
May need to keep "emergency' hours
Manufacturing
Don't deal directly with public
Deal with many employees
May need special training
Shorter hours
Distribution
Don't deal directly with public
Deal with many employees
Shorter hours
Restaurant
Deal directly with public
Long hours
Must be a taskmaster (manage and supervise closely)
May have to handle difficult customer problems (drinking too much!)
Lounge
Deal directly with the public
Long hours
Must be a taskmaster (manage and supervise closely)
Will have to handle difficult customer problems (drinking too much!)
Coin-Operated Businesses
Normal hours
Will have to handle difficult customer problems (loitering and vandalism are potential problems)
Few employees
Lots of cash on hand
In addition to personality characteristics, you need to consider the work abilities required for each
category:
Retail
Sales
Merchandizing (selection and presentation of merchandise)
Advertising
Service
May require special technical skills
Advertising
Manufacturing
Good with numbers (control costs)
May require special technical skills
Distribution
May require technical knowledge of products
Sales
Restaurant
Food preparation and service
Sales
Advertising
Lounge
Drink and possibly food preparation and service
Advertising
Promotion
Coin-Operated Businesses
Helps to have ability to fix machinery
Once you have selected a primary category, you can begin to look for a business in earnest. You will find many different businesses within each category that share the primary characteristics of the broad category. You will then have to "fine tune" your selection. For example, within the retail category, we have clothing stores, shoe stores, boutiques of all types, bicycle shops, etc. Within the restaurant category, you can choose from full service restaurants to ice cream stores. JUST BE SURE YOU LIKE IT BEFORE YOU BUY IT!
WHEN YOU BUY A BUSINESS, JUST WHAT EXACTLY DO YOU BUY?
In almost every situation you encounter, you will be (and should be) purchasing the assets of the business.
There may be instances where the seller wants you to buy the stock of the company he owns, which in turn owns the business. The primary reason for the seller's desire to sell stock is TAXES, DREADED TAXES!
Most privately owned businesses are owned as sole-proprietorships and some are Limited Companys and partnerships. Some larger businesses may be owned in what is known as a PLC (Public Limited Company). Simply put, sole-proprietorships and partnerships are taxed as if the income went directly to the owner. Whatever income the business has is divided up among the owners and the owners file a personal tax return and report their share of the income on their personal tax return.
In a Limited Company or PLC, the company itself is taxed and then, if the owner(s) take out money in salary or dividends, they are also taxed. Tax is paid by the company, AND by the owner(s). If the owner(s) of the business has the business owned by a Limited Company or PLC, the company will pay taxes on the gain on the sale and then, when the money is taken out by the shareholder(s), they will be taxed again. The sale of the assets of a company results in double taxation of the gain. If the owner sells his shares to you, only the gain on the sale of shares is taxed - single taxation.
For many reasons, you may not want to purchase a business by buying the shares of the company that owns the business. First, the company is an entity unto itself and it may have liabilities that you are not aware of. If you buy the shares, you are also buying these liabilities. Second, you will not be able to depreciate your purchase price. Substantially all of your purchase price will be allocated to basis in the shares and you will have to wait until you sell the shares to deduct the cost of the business.
You will seldom run into the share sale scenario when purchasing a business with sales of less than £1,000,000.
So, if you are buying assets, exactly what assets are you buying?
You will be purchasing the inventory, furniture, fixtures and equipment, goodwill, trademarks and tradenames of the business. Unless you specifically agree otherwise, you will be buying these assets "free and clear" of any liens and mortgages. Although you may agree to assume an existing debt as part of your purchase, you will generally not be assuming any of the existing liabilities of the business.
What about the cash and the accounts receivable? Put yourself in the shoes of the owner of the business.
The cash and the receivables were the result of sales made by the owner before you purchased the business. The owner thinks, and rightly so, that the cash and the receivables belong to him. Also, the owner has to pay the existing accounts payable and other current liabilities and the cash and the owner has to pay the existing accounts payable and other current liabilities and the cash and the receivables will probably be used for this purpose.
HOW TO FIND A BUSINESS
You know that you want to buy an existing business, you understand what you are going to be buying and you understand what to expect in the way of financial information about the business. But, how do you go about finding a business to buy?
There are four primary ways to locate a business to buy: 1. Call and Visit one of our Offices.
2. Read the Sunday classified advertisements for business opportunities and businesses for sale.
3. Visit our site regularly to check for new listings at www.sunbeltnetwork.co.uk
4. Referrals from business owners.
UTILIZING THE SERVICES OF A SUNBELT BUSINESS BROKER
Why use a broker?
Maintain confidentiality.
Educate you and walk you through the entire purchase process.
Offer advice and consultation.
Helps arrange finacing (owner and bank)
Saves you time & money.
Present the facts to you regarding your opportunities.
Professionally handle negotiations.
Coordinate the transfer process.
Provide escrow protection.
Offer large number and variety of businesses.
Provide experience.
Bridge the gap between you and the seller.
It is a FREE SERVICE why wouldn’t you!!!
Call Us Today for a free and confidential consultation!
If you ever have any questions or comments please feel free to contact us at anytime at 0845 094 3041.
We are here to help you though the buying and selling process. Good Luck in your Search!! |