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Can I buy a business without the services of a Broker?
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?
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?
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?
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?
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?
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?
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?
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 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 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?
Why would a solid profitable business be for sale?
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?
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?
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?
What does it take to be successful?
About the sale
What do I include in an offer to the seller?
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?
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?
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?
Do I need an attorney and/or accountant?
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.