Top 3 Issues Involved When Buying or Selling a Business

Updated April 2, 2019

By William Bruce

America is a nation of small business owners.  In fact, there are over 22 million of us.

Why do people want to go into business for themselves?  In surveys done several years ago, the number one response was the potential for higher income.  But now in the most recent survey, the top reason was “control of one’s own destiny.”  The change is most likely a reaction to the recent economic times.

More and more individuals are now viewing small business ownership as a viable alternative to the vagaries of corporate America.  As a friend said recently, “There is no more job security.  The only job security you’ve got nowadays is the person looking at you in the mirror.”

As a business broker, I’m often asked about the issues involved in buying or selling an existing business.  In my opinion, these are the top three issues:

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 problem 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 rule 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 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 rule 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 the majority 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:

And the businesses offered for sale by William Bruce may be viewed at www.WilliamBruce.net.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His website listing businesses for sale may be viewed at www.WilliamBruce.net.
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Small Business Confidence Jumps in Second Quarter

A recent poll which surveyed 1,000 small business owners during the month of April showed a jump in business confidence that matched the all-time quarterly increase in the poll’s history.

The quarterly poll is a joint project of MetLife and the U.S. Chamber of Commerce.  The survey produces the Small Business Index.  The current Index score is 68.7, up 3.1 from last quarter.

Some bullets from the report:

Manufacturers turn bullish.

Small business manufacturers’ optimism took a big leap in Q2, with 69% feeling positive about the national economic outlook, a substantial 16 percentage point increase from last quarter.  However, nearly two-thirds of manufacturers (62%) believe the cost of healthcare crowds out other priorities for their business.

Small businesses hold investment, staffing levels steady.

Twenty-seven percent of small business owners plan to increase investment in their company over the next year, continuing a trend from the last two quarters.  Twenty-eight percent plan to increase staff in the next year.

Female business owners become more optimistic.

Last quarter, the survey reported a significant gap between male-owned businesses (more positive) and female-owned businesses (less positive). However, female-owned businesses have optimism this quarter only 1% below that of male-owned businesses.

Millennial and Gen X-owned small businesses drive hiring plans.

Plans to increase headcount are primarily driven by Millennial or Gen-X-owned businesses (39%) despite representing only 27% of survey respondents.

Other notable findings from the survey include:

  • Regionally, more small businesses in the South plan to increase investment in the coming year compared to last quarter, while the opposite is true for those in the West.
  • At the sector level, manufacturers are the most likely to report increasing investments.
  • More than half of small businesses (57%) report expectations that next year’s revenues will increase. Another third (34%) expect revenue to stay the same, while just 7% think it will decrease.
  • The number of small businesses reporting good health remains consistent, with 65% of small businesses reporting that their business is in good health. Business size impacts perceptions of health: the smallest businesses are least likely to believe they are in good health.
  • Small businesses in their second decade of operations seem to be in an optimism sweet spot. They are most optimistic about their business health (71%), compared to both younger and older businesses. Those in operation for less than 10 years (62%), as well as those around for 20 or more (64%), are both less optimistic about their health.

The full survey results may be reviewed at https://www.uschamber.com/sbindex/.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 

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Be Careful with Via Airlines!

Be forewarned before booking a flight with Via Airlines.

BE CAREFUL! This is really a terrible company.

I made reservations on Via for a flight from Mobile, Alabama to Orlando.  On the morning of the flight, I went to Via’s website which was then not showing any flights from Mobile.  I called Via’s customer service three times and got a scratchy, disjointed voice mail greeting.  I left an urgent message each time.  They never called back.

I finally found a number for their corporate office and got an employee who confirmed there were no flights from Mobile on the day for which they had sold me a ticket.

They had my cell phone number and my email address from my reservation information, but there was never any notice from them.

I should have checked their online reviews before I bought the ticket. The reviews are overwhelmingly horrible.  See https://www.tripadvisor.com/Airline_Review-d13635970-Reviews-Via-Airlines, https://www.airlinequality.com/airline-reviews/viaair/, and https://www.yelp.com/biz/via-airlines-maitland-2.

Seems like my experience is the norm when dealing with this outfit.  I wound up driving 8 hours to Orlando. With this kind of service, it makes me wonder also what kind of pilots they hire.

Be forewarned.

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My Thoughts on the Democratic Presidential Field for 2020

Of the 40,000 Democratic candidates running for president in 2020, CNN invited five of them to a town hall meeting last night.

I’ve been a Republican since Barry Goldwater, which gives you a clue of my age and leanings.  But party loyalty aside and by chance, I happened upon the CNN Democratic Candidates Town Hall last night.  These are my impressions of the five candidates on the program in the order that they appeared:

Amy Klobuchar – I tuned in late, but from the last few minutes of her that I caught, she seems to have a pleasant manner of presenting herself with some humor thrown in.  Conservative columnist George Will wrote four months ago that “Sen. Amy Klobuchar is the person perhaps best equipped to send the current president packing.”  That’s significant coming from George Will.

Elizabeth Warren – Damn!  There’s just something about this strident individual that irritates the Hell out of me.  I had to pour a strong bourbon to keep my blood pressure within safe limits.

Bernie Sanders – If Bellowing Bernie, age 77, ever had an economics class in college, it doesn’t show.  But to give him some credit, I think he sincerely believes in what he’s espousing, and I can see how my liberal friends find him an endearing character.

Kamala Harris – I know little about her, but she has a reasonable, lawyerly manner of presenting her very liberal views.  She’s about as far to the left as Lizzie Warren without the sandpaper.

Pete Buttigieg – Wow!  Harvard, Oxford, Rhodes Scholar, Afghanistan military veteran, successful mayor, articulate.  I respectfully disagree with George Will, above, when he said Klobuchar is the Democrat’s strongest candidate.  I think Buttigieg is the one to watch.

I know that politics is usually a no-no for a business column, so I’m venturing into dangerous territory here.  But with that caveat, let me have your thoughts on these candidates.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes advisory services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.
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When Buying or Selling a Business, What are Differences in an Asset and Stock Sale?

My business brokerage firm is often asked this question.  The differences are huge and they can be critical in the sale of small to medium size privately held businesses.

First, let’s define each.  In an asset sale or acquisition, selected assets are bought from the selling entity by the buying entity.  Those “selected assets” usually include all of the operating assets of the business and the intangibles (trade name, goodwill, etc.).  No liabilities of the selling entity are assumed.

A corporate stock sale is just the opposite.  The buyer purchases the outstanding shares of stock in the corporation held by the seller.  The purchaser thereby assumes, through the stock acquisition, all of the assets and liabilities (known and unknown) of the company.

The same concept applies to a Limited Liability Company (LLC).  Instead of shares of stock, the buyer purchases the seller’s membership in the LLC and thereby assumes the assets and liabilities of the company.  In this article, when referring to corporate stock transactions, the same considerations apply to LLC membership transfers.

What are the advantages and disadvantages of each?

The critical advantage of an asset sale to the buyer of the business is that none of the UNKNOWN liabilities are assumed.  The potential of unknown liabilities is the real problem.

I remember from my law school days, the typical textbook example is a slip and fall accident in a business. The owner of the businesses is unaware of the incident when he/she sells the company.  A couple of years after the sale of the business, the accident victim files suit for damages.  In a corporate stock sale, the new owner of the business is on the hook for that accident.  Not so in an asset purchase.

It’s this kind of potential exposure that causes most lawyers for business buyers to strongly – very strongly – advise against a corporate stock purchase when acquiring a small to medium size privately held business.

Another advantage to the business buyer in an asset versus a corporate stock purchase is that the new owner of the business gets to set up the individual assets on a new depreciation schedule and start depreciating the assets all over again.  This provides a significant tax deduction for several years.

In the acquisition of the corporate stock of a privately held business, the buyer assumes the existing corporate depreciation schedule in which, most likely, the assets have been fully depreciated, providing little to no tax shelter in the coming years.

On the other side of the table, an advantage to the seller in a corporate stock sale is that most of the proceeds of the sale are taxed at the lower capital gains rate.

However, 90-plus percent of the small to medium size privately held business ownership transfers that my firm has been involved in have been asset sales, primarily due to the liability exposure issue.  I remember one instance when we nearly had to peel a lawyer off the ceiling when his client thought he might want to buy a business in a corporate stock acquisition!

As a practical matter, about the only time we get involved in a corporate stock sale is when the corporation holds licenses that are not transferrable. Durable medical equipment dealerships are an example with their licenses and contracts from Medicare, Medicaid and BlueCross-BlueShield.

Should you have any questions about this or other issues involved in business ownership transfers, don’t hesitate to call or email.  Please be aware that I’m neither an attorney nor an accountant, but hey, I did spend the night in a Holiday Inn Express last week!

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes advisory services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.
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Considering Buying a Business of Your Own? Here’s a List of the Most Frequently Asked Questions and Responses by William Bruce.

If you’re considering buying a business of your own, it’s natural that you would have lots of questions about the process.

William Bruce, President
American Business Brokers Association

I’ve been a business broker for many years.  During these enjoyable times, I’ve had the opportunity of assisting many individuals in achieving their goal of owning a business of their own.

In this work, I’ve found that many buyers of businesses have the same questions.  So I thought I’d list those questions that I’m most frequently asked along with my responses.

Why would a good business be for sale?

Answer by William Bruce: “I have found that some buyers think that if a business is for sale, there must be something wrong with it.  This is sometimes true, but most businesses are for sale for legitimate reasons including retirement, health problems, family issues and burnout.  Burnout after many years of operating a business is real.  I suffered from it years ago after owning a heavy equipment dealership for almost 20 years.

How will I know if the asking price of the business is reasonable?

Answer by William Bruce:  This is a very good question.  There are fairly simple guidelines for closely estimating the value of many types of small to medium size businesses.  These rules-of-thumb vary by category of business, but usually seek to estimate value (1) by applying a percentage to gross annual revenue of the business or (2) applying a multiple to the discretionary earnings of the business.

For example, we know that a full-service restaurant will most likely be valued at around 30 percent of gross annual revenue, assuming that the bottom line earnings support that appraisal number.

We also know that the majority of businesses will appraise for somewhere in the range of 2 to 3.5 times discretionary earnings.  As just two examples, a convenience store will appraise at approximately 2.25 times discretionary earnings plus inventory at cost, and a lawn maintenance service valuation will average about 2.75 times discretionary earnings.

Written and fully documented business valuations are also available for a reasonable cost from several highly respected national business valuation firms.

For further reading on this issue, please see this article.

What are discretionary earnings?  Is it the same as cash flow?

Answer by William Bruce:  The terms “discretionary earnings” and “cash flow” are used interchangeably by business buyers, sellers and brokers to refer to the total owner’s benefit from owning the business, regardless of how the owner takes the money out of the business (salary, draws, perks, etc.).  It’s the cash left over after only the necessary operating expenses of the business are paid.

CPAs sometimes refer to the process of computing discretionary earnings as “normalizing” the profit and loss statement.  The computation removes the camouflage from the bookkeeping practices of most business owners.

For an article on how to compute discretionary earnings, please see this article.

 How do I finance the acquisition of a business?

Answer by William Bruce:  There are five possible sources of financing for buying a business including (1) banks, (2) SBA-guaranteed loans, (3) the seller of the business, (4) family and (5) in recent years a new program that allows you to use your 401(k) or IRA funds to buy a business without an early withdrawal penalty.

For a discussion of the pros and cons of each of these options, please see this article.

How much down payment do I need?

Answer by William Bruce:  It depends on several things but between 25 and 35 percent should suffice in most situations.  You should also have in reserve for working capital about two months operating expenses of the business to get you comfortably over the initial timeframe.

What is due diligence?

Answer by William Bruce:  Due diligence is a fancy term.  In practical use, it can be summarized as that phase in the purchase of a business when you have access to all the books and records of the business (1) to verify the accuracy of the information that you’ve previously been furnished and (2) to make sure that there are no serious, undisclosed problems with the business.  It’s customarily done after a buyer and seller have agreed upon price and terms, with the completion of the transaction fully contingent upon a satisfactory due diligence investigation.

For a more thorough explanation, please see this article.

For a comprehensive discussion of these and other issues involved in buying a business, you can order William Bruce’s free 62-page booklet “How to Buy a Business in a Safe & Organized Way.”  The booklet walks you through step-by-step the process of buying a business to make sure you get what you pay for.  To order, please click here.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His website listing businesses for sale may be viewed at www.WilliamBruce.net.
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Small Businesses Selling for Record Prices

2018 Q3 Small Businesses Sale Price vs Asking PriceBizBuySell.com, the Internet’s largest business-for-sale marketplace, recently reported that sale prices of businesses sold in the third quarter of 2018 reached new highs. The record prices are directly related to higher earnings which also hit new levels in the third quarter.

With buyers able to offset increasing prices by acquiring healthier businesses, the result is a well-balanced market. While owners are getting top dollar for their business, buyers are acquiring businesses with a better financial footing.

Average selling prices in the third quarter of 2018 were up 10.7 percent as compared to the same quarter last year, setting an all-time record since the firm started collecting data in 2007.

2018 Q3 Key Financials for Sold Small Businesses

“Locally, here across the Southeast which is where my business brokerage practice is centered, our activity reflects the national trends,” said William Bruce, president of the American Business Brokers Association and a mergers and acquisitions specialists.

“The strong bottom line earnings,” Bruce continued “are giving business buyers an excellent investment opportunity.  And it’s giving business sellers, many of whom are at retirement age, a fair price for a business they’ve nurtured and grown over the years.”

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William Bruce is a business broker, an Accredited Business Intermediary and a business appraiser.  He currently serves as president of the American Business Brokers Association.  His practice includes consultations on matters involving business valuations and transfers.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.

(C) Copyright William Bruce.  All rights reserved.
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Small Business Optimism Reaches All Time High

The Small Business Optimism Index as measured by the National Federation of Independent Businesses soared in August to a new record in the survey’s 45-year history.  According to the NFIB, the record-breaking figure is driven by the changes in the nation’s economic policies.

The August survey showed:

  • Job creation plans and unfilled job openings both set new records.
  • The percentage of small business owners saying it is a good time to expand tied the May 2018 all-time high.
  • Inventory investment plans were the strongest since 2005 and capital spending plans the highest since 2007.

“Today’s groundbreaking numbers are demonstrative of what I’m hearing every day from small business owners – that business is booming. As the tax and regulatory landscape changed, so did small business expectations and plans,” said NFIB President and CEO Juanita D. Duggan. “We’re now seeing the tangible results of those plans as small businesses report historically high, some record-breaking, levels of increased sales, investment, earnings, and hiring.”

August is the ninth consecutive strong month of reported sales gains after years of low or negative numbers. The net percent of owners planning to build inventories rose six points to a record net 10 percent.  The frequency of reports of positive profit trends rose to the second highest reading in the survey’s 45-year history.

“At the beginning of this historic run, Index gains were dominated by expectations: good time to expand, expected real sales, inventory satisfaction, expected credit conditions, and expected business conditions,” said NFIB Chief Economist Bill Dunkelberg.“Now the Index is dominated by real business activity that makes GDP grow: job creation plans, job openings, strong capital spending plans, record inventory investment plans, and earnings. Small business is clearly helping to drive that four percent growth in the domestic economy.”

As reported in last week’s NFIB’s monthly jobs report, 38 percent of owners reported job openings they could not fill in the current period, a survey high. Sixty-two percent of owners reported trying to hire, with 89 percent of those owners reporting few or no qualified applications for their open positions.

A record 25 percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, up two points from last month.

The report concludes, “As a leading indicator of economic activity, the Index turned up sharply late in November 2016 and headed to readings in the top 5 percent of the Index history in December, never looking back. Three months later, economic activity soared, rising from 1.5 percent GDP growth to over 3 percent. Profits are driving the stock indices for ‘small’ firms to record levels, mirroring the record levels of profit gains for NFIB firms.”

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His website offering profitable businesses for sale may be viewed at www.WilliamBruce.net.

 

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