I’m often asked what the top critical issues are in buying or selling a business. If the top three issues discussed below in the sale or purchase of a business are not properly addressed, then there is a good chance the transaction will fail.
So to get to the core of the question, these are in my opinion the top three issues involved in buying or selling a business:
1. Confidentiality
Confidentiality is critical to the successful transfer of a business. If word gets out that a business is for sale, several things start happening and none of them are good for the seller or buyer of the business. First, key employees start looking for other jobs, fearing that a new owner may not retain them. In the uncertainty, customers may begin shopping elsewhere. Suppliers get nervous. Competitors can take advantage of the situation.
This is why a prospective business buyer will be asked to sign a non-disclosure confidentiality agreement early in the process of looking at a possible business acquisition. In this agreement, the potential buyer confirms that he/she will not disclose the fact that the business is for sale except to professional advisors.
If you show that you take the need for confidentiality seriously, you will be regarded as the professional that you are.
2. Valuation
Nothing causes the buyers and sellers of businesses more anxiety than the issue of valuation. The question of selling price haunts both parties. The seller doesn’t want to price his business too low and “leave money on the table.” On the other hand, the buyer of the business is afraid he’ll pay too much and not get the best possible price.
Formal, fully documented business appraisals are now readily available. In addition, there are rules of thumb guidelines that can be used to quickly estimate the value of a business. As just one example, we know that a full service restaurant with a liquor license is worth about 30% of its annual gross revenue as an ongoing business. This assumes – big assumption – that the business is earning the average bottom line profit for its peer group.
There are rules of thumb guidelines for almost all categories of business from ice cream stands to manufacturing plants. But again, these guidelines provide only quick estimates. And written, fully documented business appraisals are now done by several respected national firms at a cost similar to real estate appraisals.
3. Financing
Financing is always a concern, as hardly any business buyer has the financial capacity to write a check for the purchase price of a business. If they did, they would most likely be living off of investment income rather than buying a business.
These are five possible sources for business acquisition loans:
BANKS – Although most people seeking a loan to buy a business will think first of a traditional bank loan, I can tell you from years of business brokerage experience that banks generally do not make business acquisition loans. There are exceptions but they’re rare.
SBA – The SBA, through its approved lenders, provides business acquisition loans. The SBA does not make direct loans, but rather guarantees a portion of the loan that is made by the approved lender. It’s known as the SBA 7(a) program. Wells Fargo Bank is currently the top volume SBA lender nationally.
The SBA route for a business acquisition loan is sometimes frustrating because of the time and detail that is involved. However, keep in mind that the SBA will approve loans that others have turned down and will usually approve them with a smaller down payment. In most cases, it’s worth the wait.
FAMILY – Many times the older generation in a family will loan the down payment or the entire amount needed to a promising member of the family’s younger generation. If your family is willing to loan you the money, one word of advice is in order. Have a very clear understanding as to how the debt is to be handled and put it in writing in the form of a legal note.
THE SELLER – In a significant percentage of the business transfers that I handle as a business broker, the owner of the business finances a portion of the purchase price for the buyer. Some sellers cannot offer owner financing for a variety of reasons, but when they can, it conveniently solves the problem of financing.
The fact that the business owner is willing to finance the sale of his company provides more than a convenient finance plan. More importantly, it provides a strong validation of the owner’s belief that the business will support the owner and earn enough cash to pay back the loan. You can’t get any better recommendation on the business than this.
The normal down payment for owner financing ranges generally from around 30% to 50% of the purchase price of the business. Interest rates are generally market driven but there is more flexibility here than in other forms of financing.
401(K) FUNDS AND IRA ACCOUNTS – The use of these funds to buy a business, without tax penalty, is a fairly recent development. Several national CPA and attorney groups have developed a plan, approved by the IRS, which allows you to use your funds for business acquisition. There are legal and accounting fees involved, but they are a small fraction of the tax penalty that would be assessed for cashing in these accounts early.
The above five sources of financing are not exclusive to each other. I recently handled a transaction in which three of the five sources were used to buy the business.
It’s called creativity!
If I can assist you with any considerations involved in the transfer of ownership, please don’t hesitate to email or call me.
For further reading, here are additional related articles:
- How to Use Valuation Guidelines to Estimate the Value of a Business
- How to Analyze a Business You’re Considering Buying
- How to Make a Written Offer to Buy a Business
- Seven Negotiating Rules When Buying or Selling a Business
- How to Conduct Due Diligence When Buying a Business
By William Bruce
The maximum amount that can be loaned under the program is $5 million. The average loan amount in fiscal year 2018 was about $425,000. Interest on the loans is negotiable with the SBA setting the maximum rate that a bank can charge. As this is being written, the average rate for loans over $50,000 is 6.00 percent, give or take.
however, many lenders will approve a SBA 7(a) loan even when there is less than 100 percent available collateral coverage. Some banks are more “cash flow lenders” than others, meaning that they will look more to the future earnings of the business being acquired as collateral for the loan rather than current hard assets.
Google Maps – Previously, I relied on Waze for driving directions until it took me on a wild goose chase through the piney woods of the Florida Panhandle. Now, after switching to Google Maps and using it for several weeks, I’ve decided it’s the superior app. Very reliable.
Weather Bug – This is the best weather app that I’ve found: concise, understandable, accurate and easy to navigate. You can check your hometown weather of course, but also the weather and forecast for anywhere around the world. It worked well in Scotland on my last trip abroad.
My Radar – And speaking of weather, this is a handy radar app. It has vivid displays of rain and its intensity. You can also overlay wind directions and temperatures. When driving, it even follows you down the highway and shows any weather you may encounter ahead.
Dropbox – For me, this app has taken the place of Microsoft’s My Documents. The advantage is that all of your files are readily available across all devices including the phone, iPad, laptop and desktop. Mighty convenient!
TurboScan – I’ve tried several phone scanning apps and have decided this one is the best. It’s easy to use and produces excellent scans in either jpeg or PDF format. It’s great for use in offsite meetings when you’re signing documents and you want to make immediate copies for all the parties. It’s so handy, in fact, that I use it at my desk even when I have a full-featured scanner nearby.
Kayak – Fortune Magazine several years ago surveyed business executives asking what travel app they used. Kayak was the top choice. And I can see why now after using it myself. It’s a nifty app that collects all of your travel items in one place including airline and hotel reservations, rental cars, event tickets and appointments, etc. The app then builds your itinerary around these items with reminders. If you have a change of planes at an airport, it will even tell you when you arrive at the airport what gate your connecting flight is leaving from. Highly recommended.
Key Ring – This handy app stores all your loyalty cards: airlines, hotels, stores, restaurants, etc. Using this app means you never miss out on earning points because you don’t have the physical card with you. I’ve even scanned my driver’s license and medical insurance cards into this convenient service.
So let’s get a discussion going. What apps are you using that you like a lot? Which ones are the most helpful?
