When you’re in the process of buying a business, it’s important to stay logical. No matter how good the opportunity may seem at first glance, be sure to carefully evaluate the business in a step-by-step manner. Regardless of how excited you might be about the prospect of ownership; you’ll want to have your guard up when you go through the due diligence process. Let’s take a look at 5 of the most important questions to ask yourself before signing on the dotted line.
1. Do you have a personal interest in the business?
Needless to say, owners have made businesses successfully thrive even if they lack a personal interest in what is being sold. However, you might want to stop and ask yourself if you do indeed have a passion for the goods or services offered by the business in question. If you are uninterested, you may find it harder to make a long-time commitment.
2. What is the business plan like?
It’s helpful to see the goals of the current owner and evaluate which of these goals have actually been achieved. If there is no business plan, this should give you pause.
3. How does the business perform?
Take a look at the business’s overall performance. Do you get the feeling that the business requires many hours of intensive work from the owner? If so, remember that this owner putting in all of those hours could be you in the near future. Is there a reliable manager to oversee operations in your absence?
4. What are the demographics?
Who are the key customers? Are there several main accounts that the business depends upon or a wide variety of customers and clients? Needless to say, if the business relies on just a few key accounts, this could be problematic if things were to change. Further, do you see a clear way to add new customers in the future? Before you buy a business, you’ll want to feel confident that you can help it thrive and grow.
5. Are you satisfied with the financials?
Once you’ve successfully signed the necessary written agreements, you’ll want to take a deep dive into the business’s financials. Make sure that everything has been provided including:
- Tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
The bottom line is that you will want to be careful when purchasing a business and watch for any red flags. The last thing you want is to make a hasty decision that you regret later on.
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When you’re putting your business on the market, one of the top considerations is your asking price. Once you have a fair price established, let’s take a closer look at how business brokers and M&A advisors work with their clients to back up that price with details concerning why it is justified.
Telling the Story
A key aspect of defending your asking price is telling the story of your business. Your brokerage professional will help you go over the details of the story so it is properly conveyed to prospective buyers. Buyers, of course, will want to understand the story behind the business so that they can understand its history and why it is for sale. You will want to feel prepared to interact with prospective buyers and how to discuss details concerning its value.
Your business broker or M&A advisor will put together written materials about your business. These also help buyers gain clarity on the story of your business and its sales message.
Seeing Your Buyer’s Perspective
It goes without saying that a big part of coming up with your decision of the asking price is that you want something that sounds not only reasonable but also attractive to buyers. We recommend trying to view the entire transaction from the buyer’s perspective. The buyer must be able to see how they will successfully own and potentially operate the business, as this is essential for fostering a completed deal.
Another consideration is, how will they pay for the business? In many cases, it can tremendously benefit a transaction to offer assistance in the way of seller financing. Seller financing can speed up the process, as you will not be so reliant waiting for the bank loan process, which can drag out for months.
The Complexities of Your Asking Price
The process of establishing and then justifying your asking price is not always simple. It is a symphony of moving parts, and it’s important to feel educated and involved in the process. Ultimately justifying the asking price is the launching point of the process, but it is also just the beginning of the journey towards the completion of a successful deal.
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Nothing strikes fear in the heart of a business owner like a legal mistake. The best way to ensure that you will avoid serious legal issues is to work with a trusted and experienced team. Otherwise, it’s easy to accidentally miss necessary steps.
When you’re selling a business, there are a lot of moving pieces, and that means that there are ample opportunities for things to go wrong. It’s always best to be prepared. When mistakes are made, it can not only mean a significant expenditure of your time, but also your money. These kinds of issues can also bring your sales process to a total halt and perhaps derail your deal completely.
There are more than a few sellers who overlooked the importance of working with an attorney. When you are selling a business, it should come as no surprise that there is a great deal of paperwork. Your attorney will guide you to make sure that all necessary preparations have been made from a legal perspective. When your prospective buyer sees that your legal “ducks are in a row,” he or she will feel more confident in your organization and level of professionalism.
One document that often is skipped is the Letter of Intent (LOI). Sellers assume that things will move along more quickly if they forego this document. Keep in mind that the LOI truly has its place in almost any deal. After all, it not only outlines both parties’ expectations in writing, it also works to protect your best interests. Once projective buyers have signed this document, it proves they are serious about the deal. That means it is not so easy for them to walk away without consequences.
What if your deal falls through completely? Will your buyer then reveal to the public that your business was for sale and even the potential terms that were on the table? This could indeed occur if you were not backed up by an NDA. Don’t skip this very important document either. Your business broker or M&A advisor will be very well acquainted with NDAs and guide you in the best way possible.
Warding off these kinds of issues is one great reason to be equipped with a small team of professionals to turn to for advice. This team should include your business broker or M&A advisor, accountant, and attorney.
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Each quarter, the Market Pulse Report reveals important information about market conditions and trends, and is supported by M&A Source and the International Business Brokers Association. The data that is analyzed is based on a comprehensive survey of business brokers and M&A advisors. The report focuses on Main Street businesses (with values up to $2MM) and the lower middle market (values between $2MM and $50MM.)
The research is conducted and then the report is published each quarter to reflect the state of the industry. In this article, we will look at some of the key takeaways of the report and what it reveals about the path ahead for buyers and sellers.
Tracking the Labor Shortage
For the second quarter, the report revealed a variety of interesting information. One massive data point from the report is that the labor shortage continues to be a significant variable for business owners. A staggering 92% of report respondents state that the labor shortage has negatively impacted their business with 54% stating that the shortage has had a “very negative impact” and 35% stating that the impact is “somewhat negative.”
The report further indicated that it is taking about seven months for a business to close. They noted that it takes about six months to a year to sell a well-priced business or a well benchmarked business. The report noted that approximately 60-120 days are spent in the due diligence or execution stage, once the letter of intent has been signed.
The Strongest Industries
In terms of what kinds of businesses are selling, the report points to restaurants making a solid comeback. It is interesting to note that restaurants valued from less than $500K to $1 million are enjoying a particularly strong rebound. Business services, personal services, construction and manufacturing remain steady.
The latest Market Pulse Report is pointing in several directions. Currently, three factors are impacting business owners, namely, the labor shortage, inflation, and supply chain issues. Many businesses have had no choice but to give large raises to employees, and others have been able to pass the costs on to consumers and buyers.
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The buyer loves your business; it’s just what he or she has been looking for. He has reviewed your financial statements and has made an offer contingent on several items. You’ve reviewed the offer and it looks fine, so what’s next? The contingencies in the deal mean that the buyer or his or her advisors have some concerns. In larger deals, this process might be called due diligence. However, in the smaller business sale, the items of concern are usually spelled out as opposed to a general review of everything. The reason for this is that larger businesses or companies have a lot more areas of concern than the typical smaller business.
Most contingencies concern the review of financial statements and/or business tax returns. Others may involve lease issues, the seller staying on for a set period of time, or some very specific issue such as repaving the parking lot, if the landlord won’t or isn’t required to.
Unfortunately, some contingencies may be hiding other ones such as a list of fixtures and equipment included in the sale. Sounds easy on the surface, but the seller forgot that two pieces of equipment currently not in use need repair or the walnut desk in the office belongs to Grandfather Smith and is not included. Or, while reviewing the lease, the buyer discovers that the landlord requires that the business must close by 9:00 PM or some other restriction applies and was not disclosed. Deals have fallen apart over similar issues.
Most contingency problems can be resolved prior to the business being placed on the market. The seller should do all of the following:
- Check the status of all furniture, fixtures and equipment (FF&E). Remove any that are not included in the sale or are inoperable if not in use – or make repairs.
- Review any contract such as the lease, any equipment leases, and contracts that will be assumed by the buyer. Make sure there aren’t “clinkers” in them. If there are, disclose them to a potential buyer out front – and be sure your business intermediary is also aware of them.
- Be prepared to answer questions such as:
- Are there any environmental, governmental or legal issues?
- How long will you be willing to stay and work with a new buyer – at no cost?
- Will the employees stay?
- Why was last year the worst one in years?
- Why was last year the best one in years?
The list could go on and on, but sellers need to be ready. Buyers don’t like surprises. A business broker professional knows the process like a book and can be invaluable in preparing the business for the marketplace.
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