BizQuest's Business for Sale Blog

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.

Hypothetical Business for Sale

Q: Browsing through your ads I see a lot of businesses for sale similar to this hypothetical one: Business for sale, 9 million in sales, 2.3 million cash flow, selling for 5.5 million. This business does not have any hard assets, it is just a business that has been built through the years. Inventory is 150,000 and equipment is 200,000. I understand that there will be non-compete agreements when the deal is closed. My questions are:

1. What precludes an individual from being a silent partner or a consultant in another business similar to this one?
2. If a business like this is so good why doesn't this individual allow a family member or friend to run it?
3. How do you compensate the amount of money invested for the lack of any tangible assets?
4. How do you structure a business deal so as to avoid being burned by a seller in a case like this?

A: You raise some excellent points; let's address each one individually:

Regarding the non-compete, you asked: "What precludes a seller from then being a silent partner or a consultant in another business similar to this one?" A solid non-compete contract drawn up by your attorney will cover these points precisely and many more. The entire concept behind a non-compete is to ensure that the former seller has no role whatsoever in a competing business after the sale. This includes direct ownership,consultation agreement, employee, investor, or in any other capacity. It should also preclude them from having any continued affiliation in a competing entity that they may have now.

Your second question: "If a business like this is so good why doesn't this individual allow a family member or friend to run it?" There can be a numberof reasons why including: they may not have a competent friend or family member to run it. They may simply want to "cash in their chips" and move on. They may want to get involved in another business. They may be looking to retire. It could be health reasons. I think that a better question would be for you to learn why they are selling altogether and to try to assess their sincerity. Quite often, owners of good businesses have just reached the point where it makes sense for them to sell.

Question number three: "How do you compensate the amount of money invested for the lack of any tangible assets?" This is where the business buying process gets interesting, and confusing to many people. From my perspective, the assets of any business are nothing more than a vehicle to drive revenue. What are they really worth if the business isn't profitable? In other words, if you had $1,000,000 of hard assets (equipment, machinery, etc.) in this deal but the business continually loses money, who cares? Now, you may be saying that you can always sell the assets, and yes, you're right, but what are they worth? Have you ever tried to sell equipment in a liquidation scenario? I guarantee that you'll get a fraction of what they're valued on the books. What you're really trying to justify is the amount of goodwill inthe sale. While this is a terribly arbitrary number, one must evaluate the business itself. With $2.3 million in cash flow and a $5.5 million dollar asking price, the potential return on your cash investment should all things remain the same is simply phenomenal. Would you feel better if the business only generated $1,000,000 in cash flow but had $1,300,000 more in hard assets? Personally, whenever I've gone to the bank to pay my mortgage, they've always accepted cash and not machinery.

Your last question was: "How do you structure a business deal so as to avoid being burned by a seller in a case like this?" Unfortunately, I do not have enough details on the business itself and it's a hypothetical situation in any case. Assuming that the numbers in your example are correct, you would employ an accountant to validate them. Please keep in mind however there is far more to investigate than just the financial components to any business transaction. In addition, you need to investigate the assets, competition,customers, contracts, sales and marketing strategies, employees, the market, the industry and so forth. The determination must be made that this is a good business with a great future with you as the owner. This fact should be placed far above whether the owner is trying to "burn" you.

Furthermore, you will want an element of seller financing. This is another way to get the seller to validate the business. Over and above all this, you will have a non-compete, plus specific representations and warranties that the seller must make as part of any purchase agreement. While I believe that skepticism is a trait that every business buyer must have, the onus is on you to investigate the business flawlessly so that you learn everything before you buy.

Selecting A Good Time To Sell

<>I'm thinking of selling my travel agency to another, larger agency. Is now a good time to sell?
A: There is good news for you if you're interested in selling your business now! It's a great time to be selling a profitable small to mid-sized business, especially as an acquisition for a larger company or to an entrepreneur looking to get started on their own way to personal wealth. Interest rates are low, the economy is improving and interest in small business ownership ia at an all time high. Presumably the other travel agency is interested in your business for strategic reasons. Typically, these type of buyers pay more than purely financially-motivated individual buyers so I would recommend you see if they are truly serious. Also, financing is usually not as big an issue when selling to another, larger company although sellers are frequently asked to take back some stock in the acquiring company as part of the purchase price.

There are several ways you can approach this situation on your own if you're not yet ready to involve an expensive attorney/CPA. You can start by getting as much information about the business buying/selling process as you can deal with. If you want to handle the preliminary basics yourself, including getting an idea about what your business might be worth and drafting a sale prospectus, I recommend that you read, Preparing Your Business for Sale.

If you want to develop your own detailed valuation and "crunch the numbers" somewhat, I recommend that you look into the BizPricer™ Business Valuation Software which is used by many business owners (as well as potential buyers) to get a fast, accurate estimate of the business's fair market value.

For some rules of thumb about travel agency valuations so you can determine what ballpark you're in and also get a wealth of other information about the process of buying/selling a business I highly recommend The Business Reference Guide.

Lastly, there is a very good free article that you mat want to read: Selling Your Business? Follow These Ten Commandments to Avoid Wrecking the Deal. Thanks for your question and good luck with the sale of your business!

Ask The Right Questions When Inquiring About A Business - The more information a seller knows about you, the better

I've submitted countless inquiries for listings and I rarely get a reply. I have been diligent in listing many relevant all questions in the email. Why don't they answer?

P. Bernadine, Flower Mound, TX

A: Sorry Paul, you're asking the wrong questions! Why would they tell you anything at this stage? They have no idea who you are, or if you even qualify financially to buy the business. Please understand that sellers are bombarded with "tire kickers". Your first step is to inquire and demonstrate to the seller that you're serious and would like to learn more.

My suggestion is your emails should simply state a brief bit about yourself and that you'd like to learn more about the business. Ask them to send you a standard non-disclosure form to complete. Ask the seller if you can then set up a convenient time to discuss the business a bit further.