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Confidential Business Sale, Inc. ConfidentialBusinessSale.com Buying a Business Understanding The Process
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Confidential Business Sale - Buying or Selling Business Process

Jan 13, 2015

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Economy & Finance

bharatishahi

Confidential Business Sale, Inc. specializes in business brokerage services for privately-held businesses priced up to $20 million. Our company works with individuals and companies in the process of buying businesses.
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Page 1: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

Buying a Business

Understanding The Process

Page 2: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 3: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

Why do people buy a business

• Independence

• Challenge

• Personal Growth

• Financial

• Lifestyle

• Other?

Page 4: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 5: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 6: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 7: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 8: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 9: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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?

Page 10: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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?

Page 11: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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?

Page 12: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 13: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 14: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 15: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 16: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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?

Page 17: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 18: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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”

Page 19: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 20: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 21: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 22: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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:

Page 23: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 24: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 25: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 26: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 27: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.

Page 28: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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.”

Page 29: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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!

Page 30: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

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

Page 31: Confidential Business Sale - Buying or Selling Business Process

Confidential Business Sale, Inc. ConfidentialBusinessSale.com

Contact One of Our 3 Offices

Confidential Business Sale, Inc.

Independence Tower

5755 Granger Rd.

Suite 360

Cleveland, Ohio 44131

Phone: (216) 739-0272

Fax: (216) 739-0279

[email protected]

Confidential Business Sale, Inc.

Laurel Office Park I

17177 N. Laurel Park Drive

Suite 236

Livonia, Michigan 48152

Phone: (313) 221-9378

Fax: (313) 221-9379

[email protected]

Confidential Business Sale, Inc.

StanJim Building

5437 Mahoning Ave.

Suite 2

Youngstown, Ohio 44515

Phone: (330) 423-0879

 [email protected]