Buying a Business

There are an untold number of businesses going up for sale. Why?  Those in the burgeoning Baby Boomer population are wanting to retire.  For those that have built and managed a business, they want to cash out.  There are multitudes of other businesses that will be listed for sale, too.  These will range from recent startups to long-lived legacy businesses.

Whatever the case, business owners will become business sellers.  These businesses, not unlike cars or homes, will be listed for sale.  Some will be listed “For Sale by Owner.”  Others will be listed through a certified business broker.

Buying a Business – to the Buyers!

So, if you are thinking about buying a business: brace yourself.  We’re going to give it to you straight.  If you are planning to buy a business, you need to seek advice from skilled and trustworthy 3rd party professionals.  This would include but not be limited to an attorney, a certified business broker, etc.  Plain.  Simple.  Period.

The Main Reason

The main reason why you want to hire a 3rd party professional is because he/she is in the business of helping people buy and sell businesses.  Let’s face it: unless you are Warren Buffet, you probably won’t buy a lot of businesses during your lifetime.  Get help!  Additionally, a professional will utilize an independent escrow agent and due diligence process – similar to the thousands upon thousands of homes that are sold every year.  A skilled professional will help you buy at the right price.  A proper escrow will help you get what you bought – just like buying a home.

The Main Objection – by the Sellers!

We’ll give you the #1 objection you will face.  And, it will probably be the only objection you will hear.  Business sellers may not want to use a business broker under the guise of saving you (and themselves) money.  The reason? It is the seller’s responsibility to pay the commission on the business sale – just like it is on the sale of a home.

The Reasons Why – for the Buyers!

As the saying goes, “None of us know what we don’t know.”  And, here are a variety of items that need to be considered.  For the illustration, let’s assume you are looking at buying a business that grosses $100,000 per year in revenue.  For that matter, we could use $1,000,000 or $10,000,000 in revenue.  As the other saying goes, “It’s just zeros.”

1. Sales price.  Sometimes the sales price will be expressed in terms of a percentage of revenue (e.g., 40% of revenue).  In our example, the sales price could be $40,000 (e.g., $100,000 x 40%).  A sales price could also be expressed in terms of EBITDA (e.g., 2.5 times EBITDA).  It could be expressed in terms of SDE (e.g., 3.0 times SDE).  Still, others utilize what’s known as a cap rate as a function of the above.  Whatever the case, professionals will know a good market range for your target company.  Don’t know EBITDA, SDE, multiples, and cap rates?  All the more reason to consult a professional.
2. Sellers sell.  Why is the seller selling?  Is it because the business is going great and the seller has set up a turnkey business worth a lot of money?  Or is the seller selling because the business is struggling and he/she wants to grab some cash on the way out?  Engaging a professional can help you ascertain the reason(s) for the sale.
3. What are you buying?  Are you buying assets?  Are you buying revenue?  When you buy a company, you need to know what you are getting.  Let’s say the business is in a great location with expensive leasehold improvements necessary to produce revenue.  Is the lease assumable?  Will the assets stay in place after the sale?  If not, you might not be getting what you think you are getting.  A professional should help ensure you get free and clear title to all assets.  A professional can also help you determine if you can assume business-critical services.
4. Know your customers.  Who are your customers?  If the seller is offering the company at $30,000 (e.g., $100,000 x 30%), this looks good (e.g., vs. $40,000 = $100,000 x 40%).  But, let’s say 50% of the revenue comes from the seller’s family and/or friends (e.g., $50,000 = $100,000 x 50%).  If the seller is no longer associated with the business, let’s assume 50% of the revenue disappears.  Now, the $30,000 doesn’t look as good [e.g., $30,000 = 60% x ($100,000 – $50,000)].  A professional will help you analyze revenue and any concentrations of credit risk.
5. Know your seller.  Will the seller open up a competing business down the street in an even better location?  Will customers follow the seller to this new business?  Will the seller continue in the business for a period of time to help you get up and running?  Will the seller’s presence be helpful or disruptive?  A professional will help you make these assessments and consult you on a proper non-compete and transition.
6. Even sellers don’t know what they don’t know.  Sometimes you have an opportunity to buy a business from a friend.  If you buy a business from a friend – and 6 months later you become aware that the seller’s business owed someone $25,000 (and the seller didn’t know it or disclose it) – you are now the owner of that $25,000 liability.  So, if you paid $30,000 for a business worth $40,000 (e.g., $100,000 x 40%) – thinking it was a good deal – you actually paid $55,000 ($30,000 sales price + $25,000 liability) – not so good of a deal.  Using a skilled and trustworthy professional will help you avoid what is termed “successor liability.”
7. Sales price formula.  In the preceding examples, we spoke in terms of sales price in terms of a percentage of gross revenue.  Remember EBITDA and SDE?  In our example, a business that grossed $100,000 was worth $40,000 (e.g., $100,000 x 40%).  What if you later found out that the business didn’t make any money (e.g., $100,000 in revenue less $100,000 in expenses).  How do you feel about your purchase now?  A professional will help you look at price using a variety of methods.
8. Get help.  Most people that buy a car will have a mechanic look at it.  Mechanics look at hundreds of cars.  They can spot problems from a mile away.  The same holds true of professionals who help people buy and sell businesses.  These professionals are in the business of buying and selling businesses.  Get expert help!
9. More ways than one.  There are so many ways to buy a business.  All cash.  Some cash with a seller’s note or carry-back.  Bank financing.  SBA financing.  A professional can help you negotiate a win-win scenario for you and the seller.
10. Keep it friendly.  It may be counter-intuitive, but engaging a professional can help put a buffer between you and the seller.  This enables you to maintain a great relationship without paying too much for a business.

Summary

Most people wouldn’t think about buying/selling a home without using agents, an escrow, etc.  Home sales can be complicated.  But in business transactions, there are many more moving parts.  These are just some of the reasons to hire an experienced professional.

In the end, you want to buy a nice business at a fair price: no surprises.  You also want to have and keep a good relationship with the seller.  A skilled and trustworthy professional may even be able to show you other similar businesses (at more attractive prices).

Just Because It’s Lonely at the Top – You Don’t Have to Go it Alone!

At Blue Elevator™, we love helping people build businesses.  We love helping people sell businesses. We love helping people buy businesses.  And we love helping people operate their newly-acquired businesses.  We always recommend that our clients utilize a skilled and trusted 3rd party professional.  And, we’d love to help you find one that’s just right for you.  Contact us today!