BizQuest's Business for Sale Blog

Buying A Business By The End Of The Year

Traditionally, the period immediately following Labor Day weekend is quite active for those immersed in the process of buying a business. We have always seen a major uptick in the overall activity in our business during this time, and I think a lot has to do with people getting back into the business groove after the summer. Additionally, many people now realize they are just weeks away from the end of another calendar year, and so they need to fast track their plans to achieve goals they may have set months ago to own a business by year-end.

There are some extremely positive aspects to buying a business in this particular period which can prove to be advantageous for buyers:

Annualized Financials

I do not put much value on annualized financials which are done prior to the completion of three full quarterly periods. For example, if you look at a business for sale in the early part of any year, it makes no sense to me when sellers simply take two or three months of figures and multiply by six or four to paint a projected earnings picture to buyers of how the year will end up; that is simply delusional. However, once the business has surpassed three quarters of its year, it becomes a much more reasonable projection. As such, by mid-October, a buyer can review the January-September financials of a business and get a fairly good idea of how the year will end up barring anything extraordinary.

To complete this exercise, take the prior year’s fourth quarter figures as a percentage of that year’s total and simply extrapolate the figures using the same percentages for the current year.

Keep in mind however the seasonality of the specific business – this is especially important in any business that generates a significant amount of its annual revenues in the fourth quarter. In these cases, and especially in the current business environment, you may need to wait out the balance of the year to work with actual figures since the market is so volatile today.

Fed-Up Sellers

Sellers whose business has experienced a downtown over the past couple years (like most have), can become far more motivated over the next few months simply because they may not want to face the possibility of having to run the business for another year. It is a good idea to learn how long the business has been on the market, and also whether the seller has some plans he or she wants to begin after the sale which may start with the new year.

Transition Period

Depending upon the specific business type, it may be that the end of the fourth quarter can be a slower period for them and that will allow the buyer to transition into the business more easily and learn the basics more effectively. It also puts a buyer in a good position to hit the ground running in 2011.

Mental Quotas

Most people think in terms of calendar cycles. This includes lenders and business brokers. As the year-end approaches, lenders want to hit their quota of underwritten loans to meet certain company objections. Similarly, business brokers in many companies earn commissions on a sliding scale that resets each calendar year. As such, both of these stakeholders in a potential business sale may have more incentive to get the deal done before 2011.

In Summary

While the underlying rationale behind any business purchase has to be to do so in a pragmatic and diligent manner, there are, nevertheless, certain mitigating factors as outlined above which can be advantageous for a prospective business buyer to complete a transaction before the end of the year. In layman’s terms, with a new year just around the corner, let it serve to light a fire under your butt to get a deal done and to leverage these issues to negotiate great deal terms and get into your own business!

Why Buyers Need To Stand Out In The Business for Sale Marketplace

Regardless of the economy, the business for sale marketplace is still flooded with buyers. One of the points I have been preaching for years is that serious prospective buyers have to separate themselves immediately from all of the lookers when they contact sellers or brokers.

I received an email inquiry this week about a business for sale that I am representing. The buyer’s email simply stated: “Please send me the company’s recent financials”. It reminded me how many uneducated and poorly prepared buyers there are out there. This lack of knowledge, and moreover, most buyer’s unwillingness to acknowledge it, has been one of the most frustrating challenges I have faced in my career. It never ceases to amaze me that people can be so illogical to believe they’re going to successfully navigate their way through the business buying process and make all of the key decisions along the way, even if they have never done so before.

Although my company sells an incredible amount of guides on buying a business, there are times when I have been tempted to post some “in-your-face” copy on our website and tell buyers: “You are completely out of your mind if you think you’re going to buy a good business and negotiate a great deal without the right information and advice.” Maybe I should test it?

Anyways, let me get back to the email inquiry. My first reaction was to think “here is someone who has absolutely no experience buying a business.” If you are a prospective buyer, think about how such an inquiry is taken by the seller or their representative? If you were in their shoes, would your first action be to hand out your financials to anyone who sent you an inquiry? Of course not!

Whenever I get an inquiry from a buyer complaining about sellers or brokers not responding to them, I always ask what question they submitted on their first inquiry. In the majority of cases, the buyer requested detailed information (i.e. the financials, business address, how long on the market, etc.) and while these are valid requests, the timing is off. Moreover, most sellers or brokers will react as I did, and label you an amateur or more likely as someone who has no clue what they are doing.

Naturally, I emailed the buyer and informed them of the proper steps to take and we got right back on track. But if you make this same mistake to a seller or broker who is getting a lot of inquiries, it is possible you will never get a reply. 

So lesson number one when you first contact the seller, is to simply note: “I am interested in this business. Please send me the necessary non disclosure and any additional documents to complete so we can discuss it further”. That is all you should be requesting.

If you have never signed an NDA , they are generally fairly standard but certainly feel free to have your attorney read it. Also, get familiar with the contents of these documents, and learn what the various clauses mean, so you can quickly review them in the future and not be forced with having to pay your attorney to look at each one.

A few of the key elements of any Non-Disclosure will be:

• Identifying the business either by description or listing number.
• A stated term for the Agreement (usually 2-3 years).
• An acknowledgment to keep all information confidential.
• Your agreement to not circumvent the broker or contact the seller or any of their employees, customers, or suppliers directly.
• An agreement to destroy any documents upon request from the seller/broker

The only issue to really look out for is that the form must only cover the specific business or businesses identified on the document. Some forms provide a broad coverage to the broker for their other listings which you should not execute.

When you receive these from brokers, sign and send them back quickly. It demonstrates you are serious.

Next, set up a call with the broker (if one is involved) or the seller directly. Don’t come charging out of the gate like a pit bull. Don’t expect them to disclose reams of confidential information. All you want to do initially is get a good overview of the business to get a sense if you may be interested and to tell them a bit about yourself.

It is normal for the other side to dig into your financial situation. While you do not have to provide great details initially, it is only reasonable that when the time comes that you want to look at the company’s financials; you have to be prepared to provide yours to the other side as well. A refusal for a buyer to provide their financials simply sends out one very clear message to the seller side that you don’t have the money.

Interestingly enough, in the nearly twenty years I have been in this game, I have found that buyers who have the money, are never afraid to show you it is available. Here is a past post you need to read if you have any apprehension about providing your financials (read it here)

I realize that many people may not be in the same financial position they were in the recent past. But if you are spending your time searching for businesses and don’t want to waste it, then make certain you put yourself above the crowd of tire-kickers by being a well-informed, properly prepared  and knowledgeable buyer. If you try to fake it, you are only fooling yourself.

The Process of Buying a Business Is Not an Exact Procedure

Outside of the hard assets and financial statements, almost the entire process of buying a business comes down to intangible issues. I do not mean things like goodwill. Rather, a business sale transaction involves personalities, and so all of the main stakeholders -buyers, sellers and brokers, have to understand that there are many more ambiguous issues than cut and dry ones.

This was so evident to me this week because amongst all my emails there was one from a buyer, a business broker and a seller, all asking my opinion about the same particular business and situation that had arisen.

Here’s the situation: There is a business for sale where the current owner has only had it for three years. The business has not done well – it has not made any profit since he has owned it. However, the seller feels that since he has been making substantial investments to the infrastructure, upgrading assets, and repositioning the company, all of these improvements will benefit the next owner and therefore it warrants a “substantial” premium in the valuation.

The business broker refuses to provide the buyer with any past financials, and will only allow prospects to look at future projections. The broker stands by the asking price and said in his email to me that “anybody can hit the numbers because the business is a goldmine” – to me, that is definitely not the right description for a business that has not made any money in three years.

The buyer has the funds to complete the deal and some prior experience in this type of business. They have told the broker that the projections are simply not realistic based upon their experience. However, they did say that he is open-minded to the projections but needs to review the prior year’s figures to see where the business is now, and refuses to meet the seller until he analyzes them.

Now for a dose of reality: While the business may possibly turn around, it is completely ridiculous for any seller to expect to get a top price for an unproven business. Further, the seller cannot expect to get the entire benefit from the next owner’s effort and skill.

My main question to the seller and broker was: If the business is “going” to be so wonderful, why not first make it so, and then sell it when you can rely on actual numbers and get the right deal? Interestingly enough, both parties told me that the seller is not a great manager (no kidding), but it is primed for someone to take it “to the next level” - I just hate that expression by the way.

What is incredibly bizarre about this particular case is that the buyer and seller have never spoken directly. The broker has recommended it, but the parties won’t listen.

The buyer says he wants past figures. The seller says he wants any buyer to agree in advance to pay a price based upon the projections. The broker is tearing his hair out.

I just love this business!

My take - they’re all right; and all wrong. There are several lessons here for the parties

For the broker: While it almost always makes sense to get buyers and sellers talking, it is incumbent upon you to instill realistic expectations into your seller. Further, suggesting a business that hasn’t made any profit in three years is a “goldmine” is completely reckless.  Although buyers will purchase based upon their belief in the future, the only way they can guess what the future holds is using the past as their basis.

To the seller: You have to realize that small business buyers are looking to generate cash flow. That is why they buy existing businesses. If you cannot prove that opportunity to them based upon the prior history of the business, then you have to adjust your thinking and deal expectations. If not, the chances of your business selling are very slim. This business clearly brings up a performance-based deal scenario similar to what you can expect if you want to price your business based upon a large future pending contract. Click here to read a great article that discusses how to factor a seller’s future promises into a deal.

Finally, to the buyer: While having access to past financials is critical, it is not always a requisite to have these before you have a meaningful discussion with the seller. You may discover after a call/meeting that you have absolutely no interest in pursuing the business so why get yourself crazy? Or, you may find that the seller has some valid points and a further dialogue may make sense. Instead of winding yourself up about protocol, take the time to learn about the business. The financial details will come, but first get an overview of the company from the seller. Besides, at the very least, you’re going to learn something.

My final word to any business buyer...

There are no rules cast in stone about how the business-buying process must be staged. While it would be great if all the parties followed an exact process, it just isn’t reality. If you want to be in your own business, you must understand that things do not always operate “like they are supposed to” or that everything is black and white. Get used to the gray areas, or you are going to be in for a huge surprise.

A Time to Work - A Time to Search

Prospective business buyers find it hard to believe that 90% of the people who begin the search to buy a business never complete a transaction. After all, you're probably very enthusiastic about buying a business, how could this zeal wane so quickly? There are a lot of reasons I'll discuss in coming posts, but one thing I want to talk about today is when buyers do their searching. I find it amazing that the majority of purchases made for our program are done during the week, mostly during the day. I also know through surveys we've done over the years, that most prospective business buyers are currently employed. It doesn't take a genius to realize most people are searching while they're at work, getting paid by someone. Using work time for personal matters is not right, and probably grounds for termination, it's also a terrible strategy for buying a business altogether (by the way, once you own a business how will you feel if your employees are online for personal things when you're paying them???).

In any case, you can't be effective searching when you can only steal a few minutes here and there. Finding the right business is the most critical step in the entire process of buying a business. Instead, set aside at least one hour three times a week away from work when you can go through listings effectively, make proper notes, compare various businesses for sale, note follow up, list your specific questions about each listing and simply do a better job in the initial analysis. Don't rush. This is important. If you don't address the business buying process properly you'll either going to be a 90%er, or you're going to make a huge mistake.

17 Year Old Planning to Buy a Business - Advice for a young, aspiring entrepreneur.

Question:
I’m a 17 year old high school senior, graduating next June. My goal is to buy a small business after graduation, using some money I’ve saved, some help from my parents, and hopefully some seller financing. What should I be doing now to begin to prepare so I can hopefully be ready to buy a business 9 to 12 months from now? Thanks!

Answer:
My first reaction is to tell you to take your money and go to college! However, being a die hard entrepreneur, I have a world of admiration for you - but we must also be realistic. The chances of obtaining seller financing are close to nil, unless the business is either grossly overpriced, failing, or the owner is your relative. I do not mean to sound patronizing but it will be very difficult for you to convince any seller to participate in the financing given that you don’t have the benefit of ever operating a business full time, or any post-high school business experience.

If, however, you set some realistic goals and expectations, and use this business as the platform for you to have a phenomenally successful business career, then my advice would be to get into a small, affordable business where you can “cut your teeth” and learn all of the different facets of running a business through your hard work and “in the trenches” experience. I would also urge you to consider taking a business accounting course. It will pay huge dividends to you in the future.

How to Evaluate Listings that Don't Include Cash Flow or Revenue Numbers

Question:
Many of the listings I come across do not include the business's revenue or cash flow. How can I possibly be interested in a business without at least having some sense of these numbers?

Answer:
This is an excellent question. There's no doubt that it would be difficult to formulate any kind of meaningful impression or assessment of a business without certain key financial information - especially basic information like revenue or profitability.

That being said, keep in mind that your agenda when looking at business for sale listings should be first and foremost to determine if the business model/type is of interest to you. Naturally the financial ratios are key; however, these can easily and quickly be disseminated to you by the seller/broker once you contact them and express interest.

I have seen countless online business for sale listings and certainly the majority do include the key financial data (although still to be proven). In some cases though, especially in larger business, these details may be omitted initially due to confidentiality concerns.

Here is my suggestion: when you come across a business listing that is of interest to you, even if there is some missing information, go ahead and contact the seller/broker. Before you get busy requesting detailed financials you should simply note that you're interested in the business, and you'd like to sign the necessary confidentiality agreements. Once those are in place, you can then delve into the financial information you will need to further evaluate the business.

Relationship Between Asking Price and Businesses that Remain Unsold

Question:
Is there a co-relationship between a business' asking price and how long it remains unsold?

Answer:
One would think that the seller would lower the price of a business that has been has been on the market for a while. Quite often this is the case, especially when a good business broker or other intermediary is involved. They will constantly measure the market and advise the seller that price reductions may be necessary to increase activity. As long as the seller is truly motivated to sell, price reductions will occur because ultimately the market NOT the seller determines the price. However, if the seller isn't motivated, it doesn't matter whether they are selling themselves or through a broker, they will maintain their inflated price and probably never sell the business.

This should not be confused with a business where the seller may be holding out for the right buyer. Also in specialty businesses where the buyer pool is not large the time to sale can be much longer.

You should also consider why a particular business hasn't sold. Surely price can be an issue. But a good business, with a solid history, clean books/records, and good future prospects will move very fast in today's market. Of course there are always exceptions, but if a business has been on the market for many months with no activity, the best comparison is to fresh fish: the longer it hangs around, the smellier it gets.

Individual Buyer Can React Faster than Larger Acquirers to Good Deals

Question:
I've been searching as an individual investor (after reading your book) for a company that I can put 1/3 down, finance 2/3, and still get paid a salary. When I do find these opportunities, invariably an Investor Group or established company is competing with me and has much more leverage to make the deal happen. Any suggestion as to how I can create a win-win in this situation and not lose out?

Answer:
Thank you for your questions and I appreciate you purchasing my course. The good part is that you have located a number of opportunities that meet your investment criteria. Losing out to a bigger group is always a possibility but there is a way to avert this somewhat.

Without being reckless, the best ammunition you have on your side is timing. Often, large investors/groups have a very specific process they must follow before producing an offer on a business. Some will be quick, but many will be extremely slow at least in the early stages. In order to compete with these groups you have to move fast but, again, NOT recklessly.

In today's business for sale marketplace, it doesn't matter who is looking at the deal; good businesses sell fast!

As such, when you come across a business of interest, assemble as much information as you can but be prepared to pull the trigger and submit an offer. You can always include language that will provide adequate protection for you so as to not jeopardize any down payments until certain deal contingencies have been satisfied. The idea here is that while the investors are satisfying their internal processes, you can lock up the deal.

This should not be taken as a strategy to submit offers on businesses you cannot afford or are not seriously interested in acquiring. The objective is that once a solid opportunity comes onto your radar screen, move quickly to tie it up so you can progress to the next stage of the deal.

Seller Will Not Release Financials Without Personal Financial Statement from Buyer

Question:
I am looking at a business being sold directly by the seller. I have asked to see her financials but she won't release them to me unless I provide her with my personal financial statement. What should I do? I definitely have the money to make this purchase with some seller financing but I am really concerned about giving her this information because it is so confidential.

Answer:
While I understand your concerns about confidentiality, aren't you really asking the seller to do the same thing for you? The seller is not being unreasonable. After all, she wants to be certain that you have the financial strength the complete the transaction. The only way for her to determine this is by viewing your financials just as you have requested for the business.

If you will feel more comfortable, you can always have your attorney draft a simple reciprocal confidentiality agreement that basically provides for you and the seller to have adequate protection with one another for all of the information that you exchange. This way, both parties will be bound to the same agreement.

How to Avoid an Endless Search for the Right Business

Question:
I have been looking online and in the newspaper to buy a business for nearly a year now. I haven't even found one yet that is worth visiting. Is there a better way to go about this search? I'm just about ready to give up. Help!

Answer:
There is absolutely a better way to go about this process! First, you need to adjust your thinking. Keep in mind that a business for sale listing be it online or in a newspaper can only give you a snapshot of the business. These ads cannot, on their own, outline everything about the business.

If you spend your time searching endlessly you'll end up looking for another six months with no results. This is a common reason why 90% of the people who begin the search to buy a business never complete a transaction. You need to shift from "looker" to "buyer".

Arranging seller visits is critical to the business buying process. It is the best way to gain focus and clarity on the right business for you. Starting today, when you look at a listing, and even if it remotely interests you, I want you to do the following:

1. Contact the seller/intermediary
   
2. Sign the necessary confidentiality agreements
   
3. Ask your key questions when they contact you
   
4. If satisfied, immediately arrange a visit or phone call with the seller and broker

Make it your goal to visit with at least five businesses over the next 30 days. I can assure you that by doing so you will feel completely rejuvenated about this process.

From these meetings you will be able to either eliminate or pursue each business. As you meet more sellers, you will become clearer about what you want and don't want in a business. With this clarity, when that right one presents itself you'll be able to pounce right on it and get a deal in place.