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About Brokers

• Can I buy a business without the services of a Broker?
Absolutely, in fact you may be better off than using the wrong broker. The purchase of a small business is a complex and risky proposition. You should not take the process lightly, or underestimate the effect either positive or negative this will have on the rest of your life. Consider that you will only get one chance to do this correctly; you will not get a trial run to gain experience.

The process will be time-consuming, expensive, and frequently frustrating. You will need to find a suitable opportunity, perform and understand the evaluation, assemble data necessary to complete your due-diligence, negotiate detailed contract terms, have legal documentation prepared, and perform the myriad tasks associated with the closing process. You must at least find and use a lawyer and accountant with “real world” experience in similar sized business transfers.

 

• Why should I consult a business broker?
Locating a quality business to buy will be a time-consuming and frustrating experience. A quality business broker can be an excellent source of potential opportunities, as well as, a wealth of real world information about the process of buying a business, and the local small business market.

It is essential that you access the inventory of opportunities business brokers maintain, make yourself known to all of them. Unfortunately you must use caution, there are brokers who will prey on your ignorance and very often provide a great deal of misinformation. You will find working with a quality professional will ultimately give you greater peace of mind and will save you substantial time and effort in locating a suitable business.

 

• What are the benefits of using a professional Broker?
Few transactions are as significant or emotional as buying a business. Dealing with a true professional can make the experience profitable and enjoyable.

The broker should have assembled and prepared all documentation necessary for you to evaluate an opportunity, they should be prepared to demonstrate the justification of the asking price, and rationally answer most of your questions about the business. The broker should have prepared the seller psychologically for the sale, and will generally make the process less stressful by eliminating surprises. Quality sellers appreciate and value a professional involved in the process, and prefer to have an intermediary to provide a buffer from the emotional aspects of the negotiations and to offer step-by-step assistance through the sale process. The broker will have the ability to protect the stability and value of the business, by maintaining confidentiality throughout the process.

 

• How do I choose brokers to work with?
Use caution when working with any broker; learn to recognize their philosophy. Many have little or no concern for the future success of the business transactions they are involved with, and have an attitude of “buyer beware”. You will get the most out of working with brokers that you trust can provide honest, intelligent, competent, and professional service. Remember you will be sharing substantial private and personal information. The brokers experience and integrity make a difference.

Ask for and speak with the broker’s references, both buyers and sellers that have worked with them. Ask tough questions and be comfortable with the answers. How long has the broker been a business intermediary? How many transactions have they personally handled? Will the broker invest the time to allow you to understand the process? Will they show you how to understand sellers and their perspective? Provide and completely explain a justification of the seller’s asking price? Have they dealt with your expectations, concerns, and goals in a frank and straightforward manner? Are they committed to real world win-win?

Find a professional that specializes in transactions the size you qualify to purchase, they will be experienced and understand the specific complexities of your transaction. Listing services and realtors generally offer an inventory of opportunities with minimal additional services, no evaluation or price justification, no seller education or preparation, no confidentiality, and no transactional assistance. Business Brokers such as Choice Business Opportunities, Ltd. will attend to all details of the transaction and be experienced in evaluations, seller qualification and education, contract negotiation, assist you to understand all the essential legal terms, conditions and tax ramifications of the sale. A mergers and acquisitions (M&A) intermediary will be a more sophisticated firm offering similar service to larger businesses, generally with NET income over $2 Million. Investment bankers (technically, a securities brokerage firm) provide services to large often publicly traded companies.

Business brokerage is a very specialized field; there are but a handful of full-time professionals in Colorado. Because there is no multi-list for business opportunities and you need to reach the inventory of available opportunities, you should speak with all of the brokers in your area and learn how to work with them.

 

• Why do I need to sign a non-disclosure agreement?
A professional business broker understands the primary reason to maintain confidentiality is to preserve the integrity of the business throughout the sale process, in particular to protect the profitability of the business. If confidentiality is not maintained it is highly likely, the business will be damaged. Key employees start looking for alternative positions fearing they will loose their jobs. Customers may consider using competitors’ goods or services fearing the new owner may not maintain the standards to which they are accustomed. Suppliers may search for other outlets as they often assumed that a company goes up for sale because of financial difficulty. Competition will delight in spreading the word to all of the above.

Consider what is likely to happen, after you take possession, if you buy the business and confidentiality was not maintained.

• Key employees, who remained prior to closing out of loyalty to the seller, leave for other positions they arranged months earlier.
• Good customers are now gone having been concerned about the ongoing quality of service, they are now using a competitor.
• You find one or more of your competitors is now offering the same goods your major supplier had previously limited its distribution to you.

It is highly unlikely you will escape the negative fall out from a breach of confidentiality.

 

• Why should I provide a buyer profile and my financial statement?
You should completely review the information on the Seller section of this web site to understand the issues that are important to sellers and the commitment a broker makes to a seller.

We have committed to the seller we will verify the financial qualifications of the buyers and require you provide reasonable verification of your financial condition.

The more information we have about your requirements the better prepared we are to assist you in reaching your objective. The buyer profile is an important tool that allows us to assist you in a professional fashion without wasting your valuable time on opportunities that do not fit. More importantly, we recommend you invest the time to meet with us in order to help us clearly understand your objectives and motivation for owning a business.

The financial realities seem to be difficult for many people to understand. We wish we could put a 1.2 million dollar transaction together with a buyer who has a total of $100,000 cash to invest, but it cannot be done no matter how high the buyer’s credit score is. In fact, it is unlikely this buyer could support the working capital requirements of the transaction.

 

• What should I expect when working with a broker?
A professional business broker will initially spend a substantial amount of time with you. They should share with you basic evaluation methodology, provide you comparable sales data, help direct you in how to conduct your search, and give you a general outline of the buying process. The broker should not waste your valuable time setting meetings with sellers before you have complete information including financials on the business. The broker should be able to provide detailed answers to most all your questions and aid you with your market research.

If you determine the business is appropriate for you, the broker will then arrange a meeting with the seller and insure the seller addresses your concerns and answers any remaining questions. Should you wish to make an offer on the business the broker should be able to provide detailed contracts and thoroughly go over the documentation with you to confirm your complete understanding the transaction. You should be provided ample time to review and discuss the contract with your advisors. We urge you to listen to and understand their advice, but ask that you make your own business decisions. You should not be subjected to, nor should you ever enter into harsh back and forth negotiations.

The broker should offer step-by-step assistance throughout the process, coordinate due diligence, assure contingencies are satisfied, direct all do before closing activities, assemble the closing documents, as well as, work closely with all your professional advisors, attorneys, accountants, landlords, and bankers. The broker should keep all parties to a transaction completely informed, on track, and insure that all details are handled. You deserve no surprises!

About the process

• Why buy a business instead of starting one?
Starting a business is a risky proposition; government data shows that over 80% of startup businesses fail in the first 3 years. It will likely take far more money than you budget to start a business and factor in a reasonable value for your investment of time and the purchase of an existing business is likely a bargain. Buying a quality ongoing business with a proven cash flow will minimize, but not eliminate your risk. You have the advantage of immediate cash flow, reduced working capital requirements, established customers, trained staff, and existing credit/banking relationships. If structured correctly the purchase of a business will greatly increase your opportunity to succeed.

Owning your own business may be the "American Dream"; the reality is that both starting and buying a business is a high-risk proposition. In a market where brokers generally accept that 30% to 50% of transactions they handle will fail within three years of the closing, we are pleased that over 98% of the transactions we have handled the businesses were successful and prosperous five years after closing.

 

• Is buying a business a prudent choice?
Buy the right business and you will experience an overwhelmingly positive change in your life. You will have the opportunity to build equity, create wealth, and enjoy a reasonable amount of control over your own destiny.

Buy the wrong business and you subject yourself to unbelievable mental anguish and financial hardship. You may regret the day you ever decided to go into business for yourself. In addition to the crushing effect that it will have on your life, it will take years to recover financially.

If you decide that you are going into business for yourself, consider competent professional assistance.

 

• What is the best business to buy?
The business that most comfortably fits your abilities, talents, and personality while meeting your financial requirements, is the opportunity that is best for you. We find that the business a buyer actually acquires is often something they had never considered before we introduced them to the opportunity. Be open to exploring new possibilities. In general, any business will offer challenges and opportunities. We look for businesses that offer opportunities for improvement, but highly recommend you avoid turnaround projects.

 

• Why would a solid profitable business be for sale?
There are a number of legitimate reasons a seller decides to sell a solid business. Some are easy to understand such as, retirement, divorce, health problems, or a partnership breakup. However the majority of sellers are simply tired, often suffering from burnout and in need of a change. They may just have other investments or opportunities they wish to pursue.

Do not underestimate how hard you will work as a small business owner; burnout is a very real factor. Whatever the stated reason, be certain you trust the seller is being candid. It is critical that you are able to ascertain the seller’s true motivation for the sale. There are a number of other reasons businesses are put up for sale, often the issues prompting the sale will have major detrimental consequence on the future of the business. If you fail to recognize the seller’s true motivation the results can be disastrous.

 

• What is a fair price for a business?
There is no simple one size fits all answer; we provide substantial detail regarding the evaluation process on our VALUATION BASICS page, this information will help get you in the ballpark. There are literally dozens of methods used to place a value on a small business; we must first understand the purpose and scope of any evaluation before we can understand its relevancy. Accountants often determine the value of a business for reasons unrelated to “fair market value” such as, estate planning purposes, and IRS considerations. The only way to get a more concrete idea of value is to have a professional provide an evaluation of “fair market value” of the business; but be certain the evaluator demonstrates to you the validity of the results. Be cautious of opinions from accountants, attorneys, shareholders, and/or family members who are not familiar with evaluations and unwilling to admit ignorance. Many have a conflict of interest and tell you what they believe you want to hear.

The direct answer is a business will sell for its fair market value. The price at which, given an arms length transaction and a reasonable period of time on the market, a buyer could reasonably be expected to pay and a seller could reasonably be expected to accept, buyer and seller both being in possession of all pertinent facts and neither being under any compulsion to act.

Most important is that you spend the time to work through a justification of the purchase price paid and understand exactly where you will be financially after the closing.

 

• How will the financing of the purchase likely be structured?
The fact is seller financing is involved in over 90 percent of business sales under $1 million and in more than half of larger transactions. Typically, your equity investment will come from your cash reserves or funds obtained from borrowing on equity in real property, securities, or retirement funds. The sellers willingness or resistance to finance the transaction should give you a good indication of the sellers confidence in the future of the business, belief in its value, and often the truthfulness of their representations. You should not expect the seller to consider financing you without you providing a substantial down payment, generally 40 to 60% of the transaction value. Your investment demonstrates to the seller you have a vested financial interest in and are committed to the future success of the business. Transactions with properly structured financing are successful, improper structure will often lead to failure. Paying a high price in exchange for a low down payment and/or agreeing to short-term payouts will likely lead to failure.

There are opportunities that can conform to the stringent qualifications and qualify for the SBA guaranteed program that enable banks and lending institutions to finance the transaction. Be aware banks have strict lending criteria for acquisition loans and while they are anxious to talk to you about their willingness to make such loans, when it comes right down to it they are very reluctant to actually finance business purchases. Ask your banker for references to individuals who have actually had business acquisitions accomplished!

If the business meets the strict criteria necessary to quality, you can expect to need 25 to 35% down payment on non-real estate loans and 20 to 30% down if real estate is included in the transaction. In our experience, the SBA often requires the seller to carry an additional 10 to 20% of the transaction. To qualify for SBA guaranteed financing we must provide three years of business tax returns showing clean profit sufficient to repay the loan, maintain sufficient working capital, and provide you with a reasonable salary. Substantial tangible assets (preferably real estate) and your professional qualifications and experience are also critical.

 

• What should I expect the seller to provide initially?
Prior to any commitments, and after your execution of a non-disclosure, you should expect to see at least the past three years financial statements (profit & loss and balance sheets), complete business tax returns, list of hard assets, copies of real property leases, and summaries of all leasing or financing commitments. In addition, you should be provided general information including sellers marketing material, product lines/services mix, number of employees, summary of customers, and competition. You should have a clear understanding of the seller’s reason for the sale, be familiar with the sellers role in day-to-day the operations and have a good sense of the business strengths, weaknesses, opportunities, and challenges.

 

• What does it take to be successful?
To be a successful business owner you need to be willing to work harder than you have ever worked before and in many cases put in very long hours. You must be prepared for a significant lifestyle change; business ownership is a 24-hour a day 7-day a week commitment. A business owner has to be willing to do what ever it takes to get the job done. Are you ready to be the salesman, receptionist, janitor, delivery driver, bookkeeper, warehouseman, and “president”? Successful small business owners are dedicated motivated self-starters. If you believe you can buy a business and manage it from behind a desk, between golf dates, you will not make it.

About the sale

• What do I include in an offer to the seller?
Your offer should be complete with all terms and conditions clearly articulated and in writing. Include the total price, down payment, financing terms (interest rate, loan period, etc.), disposition of A/R A/P, specifics as to work-in-progress, any assumption of liability, price allocation, familiarization/training, consulting requested, and non-competition agreement terms. The offer will contain important contingencies that allow you to perform your due diligence, obtain assignment of contracts and/or leases, and mutually agree to the numerous exhibits or schedules that need to be assembled prior to closing. You should also provide a reasonable refundable earnest money deposit.

Most transactions are structured as the sale of assets, tangible (such as real estate, equipment, and inventory) and intangible (such as goodwill, customer accounts, and trade names). There are rare occasions when the purchase of stock is necessary and appropriate, but you must fully understand the increased risk associated with the contingent liabilities you are exposed to in the purchase of a stock. If you purchase stock, be certain you obtain very competent legal counsel with an understanding of securities law.

 

• What should I review in due diligence?
The due diligence procedure is initiated after you and the seller have reached an agreement on the details of the transaction. It is your responsibility to both verify the accuracy of the seller’s representations and satisfy yourself the business is a good investment for you. Analyze every phase of your business.

You should be given reasonable access to all business financial records, bank statements, complete A/R A/P aging, payroll and employee benefits records, depreciation schedules, as well as, any reports used by management, such as sales reports, inventory records, customer lists, organizational charts and facility maintenance records. Fully inspect the hard assets furniture, fixtures, equipment/vehicles, inventories, facilities, and leasehold improvements. Check on pending or potential litigation, tax audits, insurance claims, liens, legal standing, and corporate minutes. Review copies of all leasing or financing commitments, any contractual agreements, patents, licenses, special permits, and loan agreements. Depending on the nature of your business, you might consider having an environmental audit or insurance review performed.

 

• What should I expect the seller to provide for training?
The size and complexity of the transaction will dictate the appropriate familiarization and training period. Generally you should expect the seller to provide two weeks to two months familiarization and training as a part of the purchase price. It is common that the seller agrees to be available for additional telephone consultation for a number of months after closing.

Our experience is that long-term employment agreements are rarely satisfying experiences, we recommend you be very cautious negotiating such agreements with the seller.

 

• What non-compete agreement should I expect the seller to provide?
You should expect the seller to agree to a three to five year non-compete agreement that covers the geographical area from which the business draws its current customers. Be careful to construct a non-compete agreement which is reasonable, unreasonably broad terms may make the agreement unenforceable.

 

• Do I need an attorney and/or accountant?
Yes, buying a business is a complex transaction; we advise you to avail yourself of a professional advisory team. Try to retain advisors with prior experience in similar sized business transfers. Attorneys should be used to review contracts and additional closing documents. Accountants consulted for tax advice, structure, and the review of financial data. An experienced attorney and accountant can be of real assistance in making sure all of the details are handled properly, at the same time inexperienced advisors can easily kill your transaction.

Keep in mind transactions that work are structured as win-win; this is generally a foreign concept for your attorney. Remember only you can make the final business decision, stay in control of the process.