sunbelt education series: buying a business 2008 sunbelt education series buying a business day 3:...
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Sunbelt Education Series: Buying a Business 2008
Sunbelt Education Series
Buying a Business
Day 3: Deal Mechanics
Sunbelt Education Series: Buying a Business 2008
Deal Mechanics
• Questions about recasting?
• Buyers and Sellers
• The steps from Letter of Intent to Closing
Sunbelt Education Series: Buying a Business 2008
Reminders from week 1
• Money is seldom the first motivation to buy a business
• Neither the buyer /seller or their advisors know what the business
is worth, but all have an opinion
• Different buyers pay different prices for a business
• Transaction structure and financial requirements will vary
depending on the size and type of company involved
• Buyers need to find “all the right things wrong” rather than
searching for the “perfect” business
• Future value of the business depends on who buys it
Sunbelt Education Series: Buying a Business 2008
Reminders from week 2
• Tax returns and income statements usually distort the
true earnings of the business. The impact can be
negative or positive.
• You must ask the right questions to get accurate
information
• Business Intermediaries use SDE to identify owner’s
benefit
Sunbelt Education Series: Buying a Business 2008
Reminders con’t
• SDE is the amount of money the business generates to
pay debt service and provide wages for one owner /
operator
• The balance sheet is adjusted to the fair market value of
the assets to be transferred to the buyer
Sunbelt Education Series: Buying a Business 2008
Why Do Owners Sell Their Businesses?
Reasons for selling – Usually “Human Reasons”
Health Divorce
Partner disputes Relocation
Death Burn out
Retirement
Other Reasons…
Losing Lease
Losing Money
Owner doesn’t like the business
Sunbelt Education Series: Buying a Business 2008
Why do people buy a business
• Independence
• Challenge
• Personal Growth
• Financial
• Lifestyle
• Other?
Sunbelt Education Series: Buying a Business 2008
Buyer / Seller relationship
• Different Goals - Sellers want to sell the business for the
highest price. Buyers want to pay the lowest price.
• How do we get to the “fair price”?
• Selling price will vary with buyer’s motivation to buy
and opportunity envisioned
• Selling price will vary based on the sellers’ reason for
selling
Sunbelt Education Series: Buying a Business 2008
Steps in the process
• Identify a potential business -“All the right things
wrong”
• Meet the Seller and tour the business
• Complete a Letter of Intent with contingencies
• Due diligence
• Arrange financing
• Close the deal
Sunbelt Education Series: Buying a Business 2008
The Buyer/Seller Meeting
1) Prepare yourself properly for the meeting.
• Answers and Research - You want to get enough answers and detail to your
questions so you can immediately focus on researching the business, the
industry, the competition, etc.
• Although the Internet allows prospective business buyers to do phenomenal
research quickly, in today’s environment, good businesses sell fast. As such,
you may not have a lot of time between a seller meeting and preparing an
offer. Obviously, you’ll want to do your homework before moving to an
offer so be sure to get enough information in your seller meeting to conduct
your research.
Sunbelt Education Series: Buying a Business 2008
The Buyer/Seller Meeting
2) Visualize Yourself In The Business - If you take away anything from a seller
meeting, it should be the answer to these four questions:
– Do I like the business?
– Can I see myself running it?
– Do I like the seller?
– Do I trust them?
Note: Questions 1 and 2 are obvious. Questions 3 and 4 are critical. If you
like the seller and trust them, chances are you and they will be able to work
through any and all of the deal challenges that will arise. Trust is also
paramount. If not, you will always keep thinking they are hiding something.
Sunbelt Education Series: Buying a Business 2008
The Buyer/Seller Meeting
3) Impress The Seller
If you have any chance of getting the seller to finance the deal, or bend more they
would normally on the deal terms, you need to leave them feeling that “you’re the
one” to buy their business. If they believe that you can not only get the deal done, but
also run the business successfully, they will go out of their way to make the deal
happen.
Sunbelt Education Series: Buying a Business 2008
Buyer/Seller Meeting Questions
Questions to ask at the first Buyer/Seller Meeting:
• Tell me about your business?
• How did you get started?
• What services does your business provide?
• What do you do everyday?
• Why are you selling your business?
• What is it that you like best and least about the business?
• How long have you been considering selling your business?
• What keeps you up at night about the business?
• How much vacation do you take (not that you’re looking for time off…rather, you
want to know if they have adequate staff that will allow you time away)?
• What are the last three year's sales and SDE?
Sunbelt Education Series: Buying a Business 2008
Buyer/Seller Meeting Questions
Questions to ask at the first Buyer/Seller Meeting:
• Who are your biggest competitors?
• What are your industry trends?
• Is your market share growing, shrinking, or steady?
• Have there been any significant changes in your marketplace?
• What do you think I can do to increase sales and profits? Why are you not doing these things?
• Ask the seller if he/she has copies of any trade publications. They’re a great source for
additional information.
• Who are the employees? Any manager in place? Are there any employees that are critical to the
business?
• How many employees do you have?
• Will you agree to a covenant not to compete?
• Will the business sale include the transfer of real estate?
• What are the details of the lease? How long? Any options? Do you anticipate any problems with
the landlord assigning it to me or entering into a new lease?
Sunbelt Education Series: Buying a Business 2008
Buyer/Seller Meeting Questions
Questions to ask at the first Buyer/Seller Meeting:
• Don't you have children to transfer your business to?
• Are you the only owner?
• Who knows that the business is for sale?
• What is your timetable for completing the business sale?
• What are you going to do after we sell your business?
• How long will it take me to really learn this business?
• How long can I count on you to train me after the sale?
• What do you believe is the profile of the ideal buyer for this business?
• Do you anticipate any problems with me getting credit from your suppliers?
• Do any of your suppliers represent more than 10% of your purchases? If yes, who
are they?
• Who does the buying for the store?
Sunbelt Education Series: Buying a Business 2008
Letter of Intent
The Power of the Letter of Intent
• A Letter of Intent (LOI) shows the Seller that you are seriously interested in
the business
• A Seller views a Buyer who submits a LOI as a serious Buyer and may be
willing to share additional details on the business and its operations
• A Buyer is protected using a “Buyer Friendly” LOI that has basic
contingencies that must be completed for due diligence
• Deposits are placed in a non-interest bearing escrow account
Sunbelt Education Series: Buying a Business 2008
Common Letter of Intent Contingencies
Some common contingencies in the preliminary offer to purchase might include:
• Buyer to obtain financing on terms acceptable to buyer
• Buyer to make loan application within 5 days of acceptance of this agreement
• Buyer examination and approval of 3 years of financials and tax returns
• Buyer examination and approval of assets, inventory, and equipment list
• Seller is to give non-compete agreement acceptable to buyer
• Seller is to provide training period acceptable to buyer
• Buyer is to obtain lease of terms acceptable to buyer
Sunbelt Education Series: Buying a Business 2008
General Due Diligence Topics
Buyers will inquire and inspect:
General Business Information Organizational Matters
Litigation Issues Regulations/Permits
Intellectual Property Financial & Accounting
Receivables Liabilities
Budgets & Forecasts Taxes
Contracts & Agreements Sales & Marketing
Insurance Employees
Environment Issues Real Estate
Customer & Supplier Relationships Equipment
Sunbelt Education Series: Buying a Business 2008
Financing the Deal
3 Options for Financing the Purchase
• Your money - All or Part
• Bank financing - Conventional or SBA
• Seller financing – Seller Note or Earn Out
Sunbelt Education Series: Buying a Business 2008
Using Your Money Wisely
• If you can buy a business with 100% payment; may
want to consider a larger business
• 20% or more down payment. Where does the other 80%
come from?
Sunbelt Education Series: Buying a Business 2008
Truth About Lenders
• Banks - reluctant to lend to buy a small business
• Banks prefer to lend on assets versus goodwill
• Bank don’t know how to operate small businesses
• Banks view small business tax returns very
conservatively
• SBA lenders require detailed documentation, personal
collateral, and charge additional fees
Sunbelt Education Series: Buying a Business 2008
Seller Financing
• May be necessary to complete the deal, however most
sellers want all cash at closing
• Seller believes in the business and the Buyer
• Seller has ongoing interest in the success of the business
• The key to owner financing between Buyer & Seller is
“Chemistry”
Sunbelt Education Series: Buying a Business 2008
Seller Financing
• All cash deals are sometimes discounted from cash &
term deals
• Seller may benefit from tax effect of a seller financed
deal
• Properly structured, a seller can protect his business
until the note is paid
Sunbelt Education Series: Buying a Business 2008
Asset vs. Stock Purchase
Advantages Disadvantages
No legal liability for the corporation prior to the purchase
No liabilities for employees
Costs paid for the assets are depreciable
"Clean" credit, reputation, workers comp, etc.
• No established credit • Rehire the employees • Negotiate transfer of
leases & contracts • New licenses • Operating Capital
Advantages Disadvantages
• Established credit • Many times, no or
minimal operating capital required
• Leases are in place • Contracts are in place • Employees are in
place with worker's compensation rate established
• Licenses are in place • No public notification
of the sale • No sales tax on the
FF&E • No deposits required • Corporation, tax &
employment numbers & documentation in place
• Legal liability for the corporation prior to the purchase
• Assets are normally fully depreciated
• Sometimes stock is a hard sell to CPA's & lawyers
Asset Sale vs. Stock Sale Stock Sale vs. Asset Sale
Sunbelt Education Series: Buying a Business 2008
Closing
• Usually the Buyer’s Attorney will draft an ASSET
PURCHASE AGREEMENT
• Seller and Seller’s Attorney will review the document
and request changes, additions, or deletions. Buyer,
Seller and their Attorneys work out the language
NOTE : They do not change the deal, only protect their
client legally.
Sunbelt Education Series: Buying a Business 2008
Business Structure
The type of business entity you choose will depend on
three primary factors:– Liability
– Taxation
– Record-keeping
Here's a quick look at the differences between the most common forms of business entities:
Sunbelt Education Series: Buying a Business 2008
Business Structure
• A sole proprietorship is the most common form of
business organization. It's easy to form and offers
complete managerial control to the owner. However,
the owner is also personally liable for all financial
obligations of the business.
Sunbelt Education Series: Buying a Business 2008
Business Structure
• A partnership involves two or more people who agree
to share in the profits or losses of a business. A primary
advantage is that the partnership does not bear the tax
burden of profits or the benefit of losses—profits or
losses are "passed through" to partners to report on their
individual income tax returns. A primary disadvantage
is liability—each partner is personally liable for the
financial obligations of the business.
Sunbelt Education Series: Buying a Business 2008
Business Structure
• A corporation is a legal entity that is created to conduct business. The
corporation becomes an entity—separate from those who founded it—that
handles the responsibilities of the organization. Like a person, the corporation
can be taxed and can be held legally liable for its actions. The corporation can
also make a profit. The key benefit of corporate status is the avoidance of
personal liability. The primary disadvantage is the cost to form a corporation
and the extensive record-keeping that's required. While double taxation is
sometimes mentioned as a drawback to incorporation, the S corporation (or
Subchapter corporation, a popular variation of the regular C corporation)
avoids this situation by allowing income or losses to be passed through on
individual tax returns, similar to a partnership.
Sunbelt Education Series: Buying a Business 2008
Business Structure
A hybrid form of partnership, the limited liability
company (LLC), is gaining in popularity because it
allows owners to take advantage of the benefits of both
the corporation and partnership forms of business. The
advantages of this business format are that profits and
losses can be passed through to owners without taxation
of the business itself while owners are shielded from
personal liability.
Sunbelt Education Series: Buying a Business 2008
Closing day
• No surprises or new information. This should be a
formality, all the hard work has been done.
• Signing documents, exchanging money and shaking
hands.
Sunbelt Education Series: Buying a Business 2008
Some thoughts to consider
• Self-employment is not right for everyone. The marketplace provides a balance
of owners to workers. Which are you?
• Knowledge is more important than capital when exploring business ownership.
• Business ownership requires a serious commitment on all levels. There are
financial, emotional and physical demands, so be sure that your family
understands and supports you.
• The longer you look, the less likely that you will buy a business. Don’t shop
yourself into paralysis.
• Chronic lookers have the wrong attitude. They spend their time looking for
what’s wrong and thinking the “next one” will be better. Instead, be open -
minded to opportunities that are presented. The decision is easier when you have
all the information you need to make a decision. FIND “THE RIGHT THE
THINGS WRONG WITH THE BUSINESS.”
Sunbelt Education Series: Buying a Business 2008
Thoughts to consider
• The benefits of having a track record far outweigh any positive factors of
starting your own business. Over 50% percent of start ups fail in the first 3
years.
• If you’re serious, the goal will be to find a good business within six [6]
months.
• Find a good business ----- then improve it. Pay for the past but buy for the
future.
• Business ownership can provide freedom, security, independence, personal
challenge, growth and financial rewards.
• The only place where your job is truly secure is in your own business!
Sunbelt Education Series: Buying a Business 2008
Final Thoughts
10 Commandments; for buying & owning a business
• Pay for the past, Consider the present, Buy for the future
• Buy a good business and make it better
• Have a plan and follow it
• Fall in love with the profit potential, not the product / service
• Do what you do best and manage the rest
• Use technology where ever and whenever you can
• Identify what factors drive the business (location, service, product, etc.)
• Be proud of the business, and have an effective introduction to explain your business to
others.
• Fix EVERYTHING that is not working to its optimum
• “What’s it worth to you?” - Only you know that answer
Sunbelt Education Series: Buying a Business 2008
Goals for attendance
• Comfort with the process
• Remove emotions
• Analysis
• Gather knowledge
• Self-discovery
• Don’t know what we don’t know
Sunbelt Education Series: Buying a Business 2008
Conclusion
Good luck in your business search!
If you have any additional questions, contact us at:
Sunbelt Cleveland Business Sales & Acquisitions
216-739-0272