Buying a business can be a very exciting idea; however, it is critical that prospective buyers don’t lose track of important details. As a buyer, you have no choice but to look beyond the sizzle and work to find the steak. In other words, it’s essential to determine the true worth of a given business. Let’s explore the five most important steps that any buyer needs to take when evaluating a business.
#1 – Evaluate What is Actually Being Sold
No buyer should assume that he or she understands everything that is, or is not, being sold when buying a business. One of the most important tasks for any buyer is to carefully evaluate the business under consideration and invest the time to understand what the business does and what is included in the sale. This is a task that your Business Broker or M&A Advisor will perform as well.
#2 – Understand Business Performance
Understanding the performance of a business can be more complex than it initially appears. On one hand, the numbers don’t lie, and it is possible to quickly evaluate the bottom line.
However, in the process of evaluating the business, you and your Business Broker or M&A Advisor might discover that there are many flexible factors that could quickly alter how well the business performs. For example, you’ll want to take into account the number of hours the current business owner is working and if key employees are contributing enough to the business. These are just two of a wide variety of factors that could influence overall performance.
#3 – Look at the Financials
There is no substitute for understanding the current financials of a business. Perhaps a business has all the potential in the world, and you can easily see that potential. Remember that most buyers must obtain financing and to secure that financing, the business needs strong financials in its current state. Before considering any business, you and your team of professionals need to carefully evaluate profit and loss statements, tax returns, balance sheets, and other important financial documents.
#4 – Evaluate the Business Plan
Understanding the current owner’s goals and what steps they’ve outlined to achieve those goals is a key step. As a new owner, you’ll want to know that there is a path forward for growing your business, and a business plan is essential for achieving that goal. Often, lenders want to see a business plan before making a business loan. (See the GABB blog post on how to write a business plan.)
#5 – Look at the Demographics
One of the best ways to grow your business is to understand your customers. So it’s important that you clearly understand the demographics of the business and why customers should remain loyal. If there are challenges on the horizon, such as an expanding competitor or new competitor entering the arena, then you’ll want to know this information as well.
Evaluating a business is not a simple process. Working closely with a brokerage professional who has years of experience in evaluating all types of businesses is essential. This is an excellent first step towards buying the right business for your needs.
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Eventually every business owner will have to turn over control of their business to someone else. Among the many options are selling the business to a prospective buyer, selling to a competitor, or turning your business over to a family member. To ensure the smoothest transition, a business owner should start thinking about these options years before they end up in a situation where they actually have to sell.
Working with a Business Broker or M&A Advisor is one way to determine what sales options are optimal for you based on your specific situation. Let’s explore some of the variables you’ll want to consider when you decide to transfer your business to a family member such as a son, a daughter, a nephew, a niece or another relative.
Transferring your business to a family member has some significant advantages. Topping the list of advantages is that the transfer can be considered a gift, which will reduce the real estate taxes you owe. Depending upon how the agreement is written, you also may be able to maintain some control over the business. For many business owners, this factor can be a big advantage.
Seller financing is a common practice when it comes to buying and selling businesses in general. This type of financing is even more common where transfers to relatives are concerned.
Seller financing opens up the versatile option of implementing a private annuity. A private annuity can spread payments out across a long period of time. This could be a win-win situation for both you and your relative. You would receive a long-term stream of income as a result of ongoing payments. Additionally, this decision may very well make ownership more financially realistic for your relative.
If you sell your business to a relative, you still need a formal buy-sell agreement. Even when you are dealing with your most trusted family members, legal agreements must be firmly in place. A buy-sell agreement protects everyone involved.
This contract clearly outlines all aspects of the arrangement. Your buy-sell agreement should include such key information as the value of the business, amount being paid, which employees will be retained, the current business owner’s level of future involvement, and other critical details about future business operations.
Working with Professionals
Ultimately, there are a range of potentially powerful benefits associated with transferring a business to a relative. While you can expect the IRS to closely evaluate the sale, this should not dissuade you from considering this option. Business Brokers and M&A Advisors are experts at buying and selling businesses, and they understand the specifics of transferring businesses to relatives. Working with professionals early in the selling process can help you gain tremendous insight into the best way to proceed.
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After decades of hard work, selling your business can be an exciting and rewarding time. Yet, many business owners overlook some important legal matters associated with sales. In this article, we’ll explore three of the most significant legal mistakes sellers make when selling a business.
1. Use an NDA
The first critical mistake that business owners make is skipping a non-disclosure agreement. Before disclosing to any buyers that a business is on the market, a business owner should always make sure that a non-disclosure agreement is in place.
NDAs restrict who does and does not know your business is for sale. If competitors or employees learn confidential information about the business for sale, it could hurt the sale and possibly lower the selling price of the business.
2. Hire an Attorney
It may be tempting to skip working with an attorney, but you shouldn’t. If you are selling a business or anything of significant value, you need to work with a lawyer experienced in the area of sales.
Business owners become accustomed to doing a great many things themselves and learning on the job, a personality trait that has served them well over the years. When selling your business, however, there is zero room for “on the job training” or relying on your own instincts. One of the best ways that you as a business owner can protect your future is to work with a lawyer when selling your business. In fact, a Business Broker or M&A Advisor can be a vital resource for helping you to find a proven lawyer with a background in the buying and selling of businesses.
3. Get a Letter of Intent
A third significant mistake that business owners frequently make when selling their business is that they fail to get a letter of intent. Much like an NDA, a letter of intent is a key legal document in the process of selling a business. All too often business owners will skip requesting a letter of intent out of fear of slowing down the process and potentially disrupting a deal.
The letter of intent is designed to clearly spell out expectations while simultaneously protecting your interests as a business owner. When buyers sign a letter of intent, it indicates that they are taking the process seriously. This will protect you from wasting your time.
Selling a business is a process with its own unique challenges. Whether dealing with human psychology, organizing your books, thinking about what information prospective buyers are likely to want to see, or addressing a wide array of legal issues, selling a business is a complex and time-consuming process. Working closely with a Business Broker or M&A Advisor is one of the fastest ways that you can increase your chances of a successful sale.
The post How to Circumvent Three Legal Mistakes Sellers Make appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
You understand the finer points and potential of your business better than anyone; however, that doesn’t mean that prospective buyers will instantly see your business’s various strengths. When you are looking to sell your business, you have two very important jobs. The first is to get your business ready to be sold. A second essential job is to showcase your business’s greatest strengths. At the end of the day, you must be the one to articulate why your business is worth buying. This effort, of course, will be supported by your Business Broker or M&A Advisor.
Understand Who Will Buy Your Business
Most people have never sold a business before and don’t fully understand what is involved in positioning one’s business for sale. The bottom line is that not every business is a good fit for every buyer. Finding the right buyer for your business will greatly expedite the process. This is yet another reason why it is critically important to work with experienced professionals. Business Brokers and M&A Advisors not only know what buyers are looking for, but also what sellers need to do to get their business ready to sell.
How to Navigate Roadblocks
Selling a business, especially if you attempt to do so without professional help, is a very time-consuming and often draining process. Successfully running a business requires attention to detail and focus. Unfortunately, these can both suffer when owners attempt to put on yet another hat and handle the sale of their business.
While you are attempting to sell your business, it is critically important that you maintain normal operations. The last thing you want is to weaken the finances of your business while you are waiting to find a buyer. Remember that it takes months, a year, or even longer to find a buyer for the typical business. Don’t let your business suffer damage in the interim.
Think Like a Buyer
Preparing your business to be sold isn’t as simple as making a few cosmetic changes and calling it day. Instead, you’ll want to think like a buyer.
What would you want to see if you were buying a business? You would want to know a great deal about that business and how it operates, who its key employees are, how likely those key employees are to stay, who the main customers and suppliers are, and the strength of the business location and competitors. Of course, you would also want a very detailed picture of the business’s financial situation.
In short, you would want to clearly understand what the business does and what it’s really worth, how financially healthy it has been in the past, what the business’ prospects are moving forward and, in general, how much effort the business will take to operate. These are exactly the kind of key facts that any serious buyer will want to know. It’s only to be expected that a buyer would expect to learn this information before making a decision.
At the end of the day, working with a Business Broker or M&A Advisor is one of the easiest ways to streamline the sales process. Thanks to years of experience, they already understand the pitfalls that you may experience as well as what is needed to position your business so that you can find the right buyer quickly and receive the best price possible.
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Forecaster Says Virus Variant Will Delay but Not Diminish Economic Growth Prospects
ATLANTA-The impact of COVID-19’s delta variant will delay but not diminish growth prospects, and a current surge in inflation will recede in 2022, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“The pause in growth is due to a decrease in consumption of contact-heavy service-sector products, such as hospitality, travel and elective healthcare because of the current surge in coronavirus illnesses and hospitalizations,” Dhawan said. “Once public health measures arrest the surge, consumer sentiment will improve, the service sector will reignite and growth will resume.”
The forecaster posited that three temporary factors are fueling inflation: the reopening of the hospitality and retail trade sectors, idiosyncratic supply chain disruptions and “super-sized stock market gains” leading to “spectacular home price growth.”
Dhawan said, “Hotel room rates have spiked, with a 10 percent increase in each quarter of 2021, as occupancy rose sharply after a long period of inactivity. And this was mostly leisure travel (meeting friends and family and taking summer vacations), which shows up in data as a rise in the consumer price index (CPI). But this is temporary. Another round of double-digit price increases would only happen if people began taking vacations not only in the summer, but also in the fall, and then again in winter – an absurdity, as it violates social calendar norms.”
Anomalous supply chain events (accidents at chip production plants in Taiwan) roiled U.S. car sales when chip shortages reduced new vehicle inventory and led to upward pressure on used-car prices.
“This was a one-time price increase that is already leveling off,” Dhawan said.
Dhawan acknowledged the seeming paradox of falling interest rates for 10-year treasury bonds given the high fiscal deficit and rising inflation.
“Why has the 10-year bond yield fallen for the last three months after peaking at 1.6 percent in March? And does this drop signal diminished growth prospects in 2022?” Dhawan asked. “Let me start by answering the second question. Growth prospects are undiminished but will be delayed.” – more –
Dhawan attributed the drop in 10-year yields to an influx of funds triggered by the arrival of delta variant cases of COVID-19 and an uptick in geopolitical worries.
“Companies pause capital expenditures (investments) during times of uncertainty and park their money in the safest assets in the world – U.S. treasury bonds,” he said.
The forecaster asserted the flight to safety would be temporary, pointing to the widely held perception of statements by Federal Reserve Chair Jerome Powell as credible.
Dhawan’s final inflation factor is the heated residential real estate market, spurred by “dramatic” stock market performance since the lows of March 2020, which has fueled “spectacular” home price gains over the last 12 months.
“The pandemic triggered a demand shock – a change in housing taste and location preference – that has not abated during subsequent waves of the virus,” he said. “People are moving from crowded in-town areas to single-family homes farther out or farther away.”
The hot market for residential real estate will ultimately normalize, Dhawan said.
“Once everyone has moved, the demand shock will abate. Affordability depends on price and interest rates. Although the Fed will not raise rates until well into 2023 (as tapering of bond purchases won’t begin until mid-2022),” he said. “Sustained high domestic fiscal deficits and eventual global recovery will push up long-bond yields, causing mortgage rates to reach 4.0 percent by late 2022.”
Dhawan said 2021 has averaged 617,000 new jobs per month from January to July, with almost 50 percent growth in the hospitality and retail trade sectors. The corporate sector, home to premium jobs, is not producing consistent job growth.
“Corporate job growth is at 52,000 new positions per month,” Dhawan said. “That’s only 8 percent of total job growth for a sector whose share of jobs is 14 percent. Further boosts for this sector will hinge on the global economy, which still hasn’t picked up speed because of vaccine scarcity.”
Highlights from Rajeev Dhawan’s National Economic Forecast
- Gross domestic product (GDP) growth will be 5.0 percent in the third quarter of 2021, moderate to less than 3.0 percent in the subsequent two quarters before rebounding to 4.9 percent in the second quarter of 2022 and will be 4.2 percent in the third quarter of 2022.
- Overall GDP growth will be 5.7 percent in 2021, 3.9 percent in 2022 and 2.7 percent in 2023. • Housing starts will average 1.560 million in 2021, 1.433 million in 2022 and 1.363 million in 2023. Vehicle sales will average 16.3 million in 2021, 16.9 million in 2022 and 18.1 million in 2023. • CPI inflation will be 4.3 percent in 2021, moderate to 3.1 percent in 2022 and further moderate to 2.4 percent in 2023. The 10-year bond rate will average 1.4 percent in 2021, 2.1 percent in 2022 and 2.5 percent in 2023.