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Buying Q&A
What type of business should I look for?
A. We advise our
clients to try to find an industry they are familiar
with or can use similar skills to quickly learn the new
business. We also recommend that they enjoy the
business. No one wants to go to a job they hate
everyday.
How will I know if I'm paying the right price?
A. A business is only worth
what someone is willing pay. Although, there are
general rules of thumb, other businesses that have sold
can be used as a comparable, and other standard industry
guidelines can be used to establish a fair and
reasonable price.
How much of down payment should be expected?
A. For private individuals
purchasing smaller businesses a general rule is equal to
the owners earnings for one year.
Do I need to get an attorney?
A. We always advise
seeking the guidance of an attorney. Although, we
also advise keeping their involvement to a minimum until
you are approaching final contract negotiations or closing on a business to minimize
your fees and everyone's time.
Is there a fee to pay when buying a business?
A. For the most part, no. Although in some cases
we are hired on a retainer to find a particular
acquisition target.
Are most businesses for sale going bankrupt or out of
business?
A. Contrary to what many people
believe, businesses
aren't sold just because they are bankrupt. There are
very legitimate reasons why a business owner might want
to sell. Some of these are:
- Tired of, burnt out, or bored with
the business.
- Personal preference of the
owners to retire or simply change their lifestyle.
- Divorce or dissolution of
partnership.
- Owner's desire to pursue
other business interests which may be more
challenging or less stressful.
- A need within the company
for new skills, new resources, or a new philosophy
to cope with ever changing economic forces,
government regulations and competition.
- Lack of sufficient working
capital.
- Possible failure of the
business if the owner becomes seriously ill or
disabled.
World wide, businesses change hands every 5 years on
average. 20% of all businesses are for sale at any
time.
What is an "Earn-Out"?
A. An earn out is simply a
way to link the purchase price of the business to future
earnings or profits. It enables the buyer to shift some
of the risk to the seller and for the seller to obtain a
higher price for the business... provided everything
works out. They often become problematic solutions
as it creates complex situations and gives rise to
disputes. If one is being considered, an advisor
who specializes in M&A transactions of this sort should
be used. Any earn out must be carefully
drafted and thought through completely with easily
identifiable metrics or milestones.
How important is purchase price
allocation?
A. It is very
important. There are tax and accounting
consequences in how the purchase price is allocated.
Veracity will make suggestions or give opinions, but we
always suggest speaking with your accountant or attorney
regarding asset allocation.
Can I use the accounts receivable of
a business to help finance or collateralize it?
A. No.
Generally the seller will take the cash in the bank,
A/R, and A/P upon sale. When running your pro
forma's make sure you have enough capital to bridge the
cash flow.
There are multiple partners in the
business I want to buy... who should I deal with?
A. You should
try to deal with the majority owner or get written
confirmation from all of the owners that the person you
are dealing with has the authority to speak or enter
contracts on their behalf.
Why does the broker or seller need a
personal financial statement from me?
A. Many buyers
ask this question and are apprehensive about handing
anything over. In our experience, those buyers that are
unwilling to provide their financials are generally the
ones who are either not serious about buying a business,
they are often completely misinformed about the
business-buying process, or they are simply not in any
position to acquire the size businesses they are
investigating. Brokers and sellers ask for it
because:
-
It gives you credibility with the
seller/broker having achieved a certain level of net
worth.
-
It lets them know you have the
ability to complete the transaction or investigate
the size of business you are looking at.
-
The seller is providing you access
to his books/tax returns isn't it fair that they see
yours? In addition, if there will be an
element of seller financing this will be even more
important.
The
Biggest Reasons
to Complete a
Personal
Financial
Statement
I am amazed
every time I ask
a buyer "How
much are you
willing to
invest to buy a
business" and
they reply:
"Well... it
depends" or "I
haven't really
thought of it."
Well guess what,
if you haven't
thought of it,
you should stop
looking and
start
thinking...
right now!
- It is
critically
important
that you get
a handle on
your
personal
financial
situation.
Yes, it is
true that
there are
some
creative
ways to
finance a
business
purchase,
and we'll do
everything
we can to
help, but
generally in
smaller
deals the
creative
options play
less of a
role.
- If there
is someone
else who is
involved
your
financial
venture
(i.e. a
spouse,
partner,
relative,
etc), you
need to have
them
completely
on board so
that when
the time
comes for
you to write
a check
there won't
be any
surprises.
- This is
a simple
task to
complete and
you will put
yourself in
a much
better
position
against
other
interested
buyers on
those
businesses
that you can
afford to
acquire.
This sounds like a lot of work,
should I just start a business instead?
A. We always
encourage entrepreneurs to start new companies. We
also advise our clients that the failure rate of a new
business is very high. An existing business has a
track record and so to does a franchise. It is a
lot of work, but no more than starting up from scratch.
Nothing is ever a for sure thing, but buying existing
businesses or franchises is one way to increase your
chances. Last note, sellers that will train you
and help finance the purchase is better than a cold
shoulder from a conventional funding source for new
businesses.
What is the difference between and
Letter of Intent and a Purchase Agreement?
A. There is a
pretty big difference between them and your situation
will generally dictate which one to use. A LOI is
usually non-binding and is more of a basic terms and
conditions letter. It is a good way to lay out an
initial price, have a "no-shop" clause to tie up a hot
business, and request for additional information needed.
These are pretty standard in larger more complex
transactions, but in smaller deals they are often times
not needed. An Offer to Purchase is far more
detailed, and will include all of the material deal
terms, conditions, representations, warranties. It will
also cover non-compete conditions, inventory, financing,
training, leases and contracts, etc. Both
agreements have their place and time to be used and both
are tools to get a deal done. In either case, we
always recommend having your LOI or PA reviewed by your
attorney.
How to choose an accountant?
Sound
financial and tax planning is a foundation of good
business. Accounting is the language of business and a
great CPA is worth every penny you will spend on their
fees.
-
Interview multiple firms
-
Ask
who will handle your account - a partner CPA or just
a staff accountant
-
Ask
for references from the firms you interview and
other advisors (attorney, banker, etc)
-
Consult a local chapter of the many CPA associations
-
Feel
comfortable and like the person you may work with
-
Determine what kind (general accounting,
specialized, tax planning, etc) and what level
(fully outsourced, part time, or just guidance) of
service you need
-
Be
upfront about fees and exactly how they are billed
How to choose an
attorney:
Most people find an attorney at a time
of need or crisis... not the best time to conduct due
diligence and make an informed decision. The
process is similar to finding a good accountant and any
problems that you will need an attorney for are the type
that dictate you seek professional and experienced
advice. Again, we'll say a good attorney is worth
every penny of their fees.
-
Interview multiple firms
-
Ask
who will handle your account - a partner or a
recently hired graduate
-
Find
out where they went to law school... was it an
accredited institution. There are good
attorney who did not attend accredited schools, but
you may increase your chances of finding a good
lawyer.
-
Ask
about professional
affiliations or certifications. Ascertain what it takes
to be a member... simply paying a fee or real work and
examination.
-
Ask
for references from the firms you interview and
other advisors (accountant, banker, etc)
-
Consult local and national bar associations
-
Feel
comfortable and like the person you may work with
-
Determine what type of attorney you need - general
or specialized. If you are involved in a
dispute that covers complex or specific areas
additional expertise is needed. We don't
recommend paying for your attorney to learn a new
field or subject. Choose someone who has
experience in the area. If the dispute goes to
court be sure your attorney has real litigation
experience.
-
Be
upfront about fees and costs and exactly how they
are billed
-
Technology - See how up to date your firm is.
Are they using books to research instead of a
computer? If you are getting billed by hour
which do you think is faster to find something.
Take notice of how the office operates and whether
they are employing technology or methods that reduce
or increase legal fees.
How to choose a bank:
After you have a solid
accountant and a great attorney you need to find a good
bank and banker. Selecting a bank for your business is
more complicated than choosing a bank for personal
needs. Convenience, services, fees and your banker are
all important, but you must find a bank that is willing
to grow with and understand your business.
- Determine what
services are most important to your business and
compare that with what each bank is offering you.
- Along the same
lines compare the costs of those services along with
other fees.
- If you payroll requires withholding taxes
greater than $50,000 or more in a year, the IRS
requires automatic transfer from your account.
Most banks can provide this, but be sure to ask.
- Many businesses
choose a bank that is close by if they need to make
daily deposits. Technology is changing this to
the point you don't even have to leave your office
to make check deposits anymore. Although, if
you require other services such as change for a
retail store on short notice location is still
important.
- Select a bank that can
accommodate your growth. We all enjoy the service of
a smaller community bank, but if you require large
amounts of capital or working lines of credit you
may end up at a bigger bank that has the resources
to fill your needs.
- Like choosing any other professional
it's important to be
comfortable with the person who will be
handling your account. Your banker should take the time
to understand your business and how the bank can
best serve you.
- Make sure the bank or institution you choose is
a member of the correct federal agencies... FDIC, OCC,
or NCUA, etc.
Did you know all of the answers?
We have only listed a few quick Q&A's here, but this is
just a fraction of what you need to know about buying or
selling a business. Missing the smallest piece of
information could turn into a very critical mistake
costing you thousands of dollars. Don't you want to be
sure you know everything before you buy or sell your
business? Veracity can guide you with ongoing expert
advice at each step of the buying and selling process.
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