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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:

  1. It gives you credibility with the seller/broker having achieved a certain level of net worth.

  2. It lets them know you have the ability to complete the transaction or investigate the size of business you are looking at.

  3. 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!

  1. 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.
  2. 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.
  3. 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.

  1. Interview multiple firms

  2. Ask who will handle your account - a partner CPA or just a staff accountant

  3. Ask for references from the firms you interview and other advisors (attorney, banker, etc)

  4. Consult a local chapter of the many CPA associations

  5. Feel comfortable and like the person you may work with

  6. Determine what kind (general accounting, specialized, tax planning, etc) and what level (fully outsourced, part time, or just guidance) of service you need

  7. 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.

  1. Interview multiple firms

  2. Ask who will handle your account - a partner or a recently hired graduate

  3. 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.

  4. Ask about professional affiliations or certifications. Ascertain what it takes to be a member... simply paying a fee or real work and examination.

  5. Ask for references from the firms you interview and other advisors (accountant, banker, etc)

  6. Consult local and national bar associations

  7. Feel comfortable and like the person you may work with

  8. 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.

  9. Be upfront about fees and costs and exactly how they are billed

  10. 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.
  1. Determine what services are most important to your business and compare that with what each bank is offering you.
  2. Along the same lines compare the costs of those services along with other fees.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.



Copyright 2006 Veracity Business Brokerage and Consulting, Inc.