BizQuest's Business for Sale Blog

NEWS ALERT: The Greatest Technological Advance Now Available

Email has changed the world and how we communicate. It is without question, a tremendous tool. In the course of a typical day, I receive and send over 100 emails. I am not sure if this is a good thing. I have really found that this new mode of communication has two awful drawbacks: First, email has robbed all of us of the time we need to just daydream. This is especially important when either running or buying a business. We need to time to just think about "stuff". Some of the greatest initiatives I've implemented in my businesses have surfaced when I was able to devote undisturbed time to reflect on what the business should do or become. Always being "connected" by email and mobile phone prevents this random thinking.

Second, we have set aside what I believe is the greatest mode of communication outside of in person conversations: the telephone. It's amazing to me that people just don't talk. Emails are fired off in rapid- fire succession. The problem is, you cannot rescind the written word. The good news is that people are now far more accessible at their offices than ever before, because people don't call.  This is critically important when it comes to buying a business and then operating one. If you have any critical issues to discuss with the other side, or with prospective clients; call them - don't email. You may think I'm crazy but a good part of my publishing business has grown simply because I don't email prospective affiliates of joint venture partners. I call them and that immediately establishes a relationship at an entirely different level.

All of this is very important when it comes to buying a business. You will run into roadblocks with sellers. Firing off emails, and especially if you use them to vent frustration, is the wrong approach. Call them, or meet with them. Also, this "new" way of communicating works with business brokers. They are slammed with email inquiries. If you want to separate yourself, pick up the phone and inquire about their listings.

Email cell phones, PDAs, Blackeberrys, are all great, but they are no substitute for the human voice and personal touch. When all is said and done, just remember that Alexander Graham Bell's invention in 1876 is the greatest technological advance of all.

 

What are Typical Terms for Seller Notes? - Also, what are the advantages of Seller Financing vs. an SBA loan?

Question:
I put an LOI on a $1M ecommerce business, and offered 30% down, with a 6% 10-year note. The broker came back and said the terms were way too low, that seller notes should be prime plus 2-3%, like SBA. Is this typically what seller financing goes for? I was under the impression it was much lower, like 6-7%. Also, what additional terms should I negotiate? Lastly, what are the real advantages if any, of getting a seller note versus an SBA loan?

Answer:
The beauty of seller notes is that they can allow you far more flexibility in both rate and term than what you can expect from a traditional lender. That being said, the broker is correct; interest rates now average around 7-8% and are generally in line with what you can expect from an SBA-backed loan.

In addition, seller notes are usually over a shorter time period. While there are no hard statistics on this, an average of 3- 5 years is common. As you know, the interest rate is far less important than the term specifically as it relates to the impact on the business’ cash flow. As such, it would be in your interest to negotiate a longer term, even at the expense of a one or two percent increase in the rate.

Plus, you will want to include the ability to pay off the loan early and make periodic lump sum payments towards the principal without penalty. On this point, as you get into the business and things are going well, you may find yourself in a position with extra cash in the business. It is an ideal time to offer the seller to buy out the note at a discount.

SBA vs. Seller Financing

There are a couple key issues to consider:

Security: With a seller note, while you will likely have to sign personally, you will not have to pledge personal security and can use the business assets as security. I usually joke that the SBA only wants your first-born. While they aren’t that rigid, it’s usually not far off; they want as much security as possible in most cases.

Timing: SBA and its lenders have improved the timing in which they get deals done, but it still is not a quick process. With a seller note, there’s no delay whatsoever and the note simply becomes part of the closing documents.

Fees: The fees can be quite substantial with SBA backed loans although the lenders will be kind enough to build these fees into the package and finance them over the note term. However, when you need the money to complete the acquisition, the fees are a small price to pay to get into a good business.

Should Buyer Use a Letter of Intent (LOI) or an Offer to Purchase Agreement? - Buyer wants to use LOI but seller's broker is insisting on his Offer to Purchase agreement. How should the buyer handle?

Question:
I want to use a Letter of Intent to make my offer on a small auto repair business. The seller's broker insists that I use his full Offer to Purchase agreement. I like the business, have completed my valuation, and my offer will be close to the seller's price, but it just seems more reasonable and customary to use an LOI as a first step don't you think?

Answer:
There's no question that an LOI can be a logical approach as a first offer but by no means is it a standard step. In fact, it should be the exception. Personally, I like to move forward with a full blown Offer to Purchase contract versus an LOI wherever possible because it gets all issues onto the table for resolution versus a non-binding LOI.

An LOI is best used for:

• Large transactions
• Situations where time is of the essence and you wish to tie up the business somewhat
• Your valuation is dramatically lower from the seller and you want to put out a feeler to measure their counter on price and terms.

Insofar as the broker contract is concerned, the vast majority of agreements I have seen used by brokers are satisfactory as a template but almost always need some revisions to reflect the particular acquisition. My suggestion is that you first get a copy of the agreement the broker would like you to use. Review it and note your comments as well as any additional conditions/contingencies that you need to have as part of the contract. Then, send it to your attorney for review. Try to get it in "Word" format so your attorney can work off it as it will save you a ton of money versus having them redraft it.

Should Buyer "Stall" to Negotiate Better Terms?

Question:
I'm thinking about buying a 20 year old wholesale/distribution business. They have many longtime clients. I have some experience with this type of business. The current owner will be retiring to Europe from Florida. He is scheduled to leave in three months. I know that if I wait for 60 days or so to finalize the deal, I'll be able to negotiate better terms. How can I lock up the seller now so nobody comes in and scoops the business from me?

Answer:
The key question here may be why would you want to wait for 60 days? Good businesses sell quickly and if this is a solid business, chances are it will be gone in far less time to another buyer. Besides, the seller is probably highly motivated right now given that he wants to leave in 90 days.

The other thing to consider is whether you may be shooting yourself in the foot by waiting too long. Given the time it takes to close a deal and I'm certain you'll want to have a proper transition and training period, you can do more harm than good by waiting.

Sure you can be a bit "sneaky" and negotiate a deal now and then try to revise it but that is never a tact that I would recommend. Besides, with many long-term clients, you will want the owner to stay for a smooth transition period so that all of the accounts and employees are comfortable with you as the new owner.

In getting back to your original questions, my recommendation to "lock up" the seller is to aggressively negotiate the deal now, get a duly executed agreement in place, conduct your due diligence, and if there are any major issues, you can revisit them. Do a thorough job investigating and researching the business, allow for an adequate transitional period, and close the deal.

Seller Refuses to Allow Buyer to Meet With Employees

Question:
I am in the final stages of negotiating the purchase of an existing Subway location from the owner. He is the owner operator of this particular location. My lawyer insists that I must meet with all of the employees before closing or else "no deal". The seller refuses to let this happen. What do you suggest?

Answer:
In this particular case, I think your attorney is going overboard in his request. Don't get me wrong, there are many instances of a business purchase where it is critical to meet with the key employee(s); however, that is only when a certain employee holds a crucial position within the business. For example, if you were looking to purchase an absentee run business that was being run by a key manager, and your goal was to remain absentee, then certainly a meeting with the manager would be appropriate.

However, one must look at the individual situation. With no disrespect to the Subway employees in this particular business, you are talking about hourly employees who will come and go over time. Turnover is always an issue and part of your role will be to continually train and hire new employees. I cannot imagine that any of the current employees are critical to the business' ongoing success and while I don't want to discount their role, they are, after all, basic employees with skill sets that can be taught by you as the new owner.

How to Convince the Seller to Carry Back a Note?

I am in the process of negotiating to buy a business directly from the seller. The seller is absolutely refusing to carry back a note. I have explained to him that most deals are done this way, but he says he is seeking an all-cash sale, and has priced the business accordingly. In my research, valuations for this type of business are usually about 2.5 times the seller cash flow and his price is $270,000 (the SDCF is $100k). Should I offer to pay more in order to get a carry-back? I'm not sure I can get the business financed otherwise.

This is a great question and I truly admire your thought process in potentially offering more to get the terms you need - excellent strategy. The first step however is to determine that the seller has truly priced it accordingly for an all cash deal.

While there are no hard rules, generally speaking an all cash deal will usually translate into a 15 - 25% discount off the asking price when seller financing is being offered. As such, if your 2.5 multiple is correct, this would mean a $250,000 price. As such, he hasn't priced it accordingly at all. Unless there are extenuating circumstances that you have not revealed, you should look to pay around $200,000 for an all cash transaction.

How to Convince the Seller He is Asking Too Much?

Question:
I am interested in buying a business, but the seller is looking for a valuation that is more than three times the average earnings multiple for his industry. How can I convince him that he is simply asking too much? He has listed the business himself and there are no attorneys or business brokers involved in the deal.

Answer:
This is a perfect example of why a seller should engage a competent business broker to assist them with the sale of their business! A broker would provide him with the education needed to effectively market the business. Since that is not the case, it's up to you although you should realize that you may not be able to convince him that he is simply asking too much.

If this seller is not motivated to sell the business, then it really doesn't matter what you say or do, there's no deal here.

Has the seller identified how he actually established the price? Did he have a professional appraisal done or has he simply priced it based on what he thinks it is worth or what he wants to get from the sale? Chances are it's a shot in the dark valuation and so the first step is to understand his logic and possibly suggest a professional valuation by a Certified Business Appraiser. It's possible that the seller may not want to have an appraisal done so you should provide him with some industry statistics of comparable businesses that were sold so he begins to understand the marketplace.

You should also have your CPA compile a valuation based upon the financials presented to you at a multiple that is in line with the industry and what you feel the business is worth.

If you truly believe that he wants to sell the business, then he will have to demonstrate some flexibility on the price and/or terms. I would recommend that you compile your data and present it to him. Then, you may even want to present an offer to him at your valuation. If the seller does not counter your offer, or show any flexibility whatsoever, then move on to the next deal because it will then be abundantly clear that he does not have the level of motivation needed to sell his business.

Factoring pending contracts into purchase price

Q: Here's my dilemma: I'm looking at a business that's been around for 18 months. There are three huge pending contracts that the seller says will come in over the next 12 months. They are factoring these into their asking price and won't budge. It's a great business but if those three don't materialize how can I protect myself?

E. Stone - Melbourne, Australia

A: Present two offers: one based upon the hard data of what the business is like today and a second whereby you'll pay more based upon the value of the new business in the form of an earnout. However, the "premium" has to be weighed against who will do the work to secure the business. If the seller will remain active to get the new business then they should receive appropriate compensation but if you're going to do all of the work then they should only be rewarded with a portion of it. Likewise, if the so-called new business is imminent and can soon be realized, then the seller's percentage can be adjusted accordingly.

When all is said and done, it's OK to pay for "blue sky" but you cannot do so until you see for yourself that the sun is shining!