A professional business broker can be helpful in many ways. A business broker has the training and experience to guide buyers through the process in a comfortable and efficient manner. The business broker is a team player who will coordinate the efforts of professional advisors, such as attorneys and accountants. The business broker has handled many transactions and understands the complexities of buying businesses. The buyer benefits in many ways, such as the business broker may provide a selection of businesses a buyer would not have been able to find on their own. The business broker is able to pre-screen businesses for sale before presenting them to a buyer, including assembling the financial information and background of the business. This helps to reduce some of the uncertainty for the buyer and make their search and due diligence more efficient. Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise buyers about trends, pricing and what is happening locally. The business broker will handle all of the details of the business purchase, including, involving other professionals who may be able to assist you. Your local professional business broker is the best person to talk to about your business needs and requirements.
Transactions handled by Touchstone Business Advisor are held in the strictest of confidence to protect the interests of all parties. Touchstone requires that a prospective buyer review and sign a Confidentiality Agreement outlining their responsibility in having access to a seller’s confidential information. This occurs before any detailed information concerning a specific opportunity is released. Touchstone is committed to protecting the confidentiality of the business sale, understanding that public knowledge of a potential sale can affect the attitudes and actions of customers, employees, competitors, lenders, suppliers and/or investors, and thus the value of the company. Touchstone also wants to safeguard the employment status of potential buyers while they considers very important change for their future.
It may take more money than time to buy a business. It often takes more time than money to start one. The break-even point for buying a business versus starting a business is the cost to buy equipment, rent a space, pay a staff, pay for advertising, establish contractual relationships and support their self while a start-up is building up a customer base. With the purchase of an established business, buyers have income from the day they take over. Buyers already know what can be accomplished by the business. With a start-up business, entrepreneurs face a lot of uncertainty over the success and desirability of the product, service or location. Buying a business takes a lot of the risk out of the equation.
Beauty is in the eye of the beholder. Most buyers want to own a profitable, well-managed business in an industry that holds a personal interest for them. On the other hand, some buyers may look for opportunities that offer turnaround or improvement potential, where they can apply their special skills. In general, there is no industry that is particularly better than another. However, there are specific businesses that are more successful than others – even in the same industry! For instance, two retail shops can be located in the same shopping center, but one is successful and the other is not. The successful one may have a hands-on owner versus an absentee owner. It may have more effective advertising. It may have friendlier employees. It may provide better customer service or offer more competitive prices. It may pay less rent. It may have newer and more efficient equipment. It may pay less for inventory. It may have higher profits! The only way to find out which one is better is to compare the two and select the more desirable one.
Most main street businesses (under $300,000 of total owner benefit) sell for a multiple of seller’s discretionary earnings (SDE) of 1.5 to 3, often plus inventory. Lower middle market companies (over $300,000 in EBITDA) generally sell for 3-6x multiples of EBITDA, including normalized working capital and a reasonable manager’s salary. Lenders of SBA backed loans generally require a 20-25% cash injection; and working capital will be needed in addition to the down payment. Sellers generally prefer to receive all cash at closing and some buyers are willing to accommodate them with a combination of cash and bank financing. However, many buyers will want to leverage their down payment to buy a larger business with more cash flow available to pay themselves and service debt. Additionally, most buyers and lenders want the seller to have a commitment to a smooth transition by including a component of seller financing. A typical bank financed transaction might include 20% down payment, 20% seller financing and 60% bank financing. In reality, there is probably no such thing as a “typical transaction” because each transaction has unique characteristics. Structures may range from all cash to all seller financed as an earn-out.
Businesses can be financed from a variety of sources, all or only some of which may be used in a particular transaction. Financing sources may include: the buyer’s own cash or funds obtained from equity in real property, securities or retirement funds; loans from banks and lending institutions; or seller financing. It is expected that the buyer will have a vested interest in the business by investing his own monies. Seller financing is usually the cheapest and quickest to obtain, and it tells the buyer that the seller has confidence in his business. There are no loan fees, but the term of the loan is often short, and sellers are usually reluctant to offer it without substantial collateral. Banks will loan money on businesses that show a strong earnings history on the tax returns. However, they require extensive documentation and the payment of upfront fees. The most common type of bank loans are those guaranteed by the Small Business Administration. While many lenders participate in the SBA loan guarantee program, it can be volatile and funds are not always available. Finally, family members or investment partners are also sources of investment funds.
Yes, it is advisable to have an attorney review the legal documents associated with a business acquisition. It is important, however, that the attorney hired is familiar with the business selling/buying process and has the time available to handle the paperwork on a timely basis. While most business brokers are not qualified to give legal advice, most attorneys are not qualified to give business advice. Touchstone can provide a list of attorneys who are familiar with the business buying process. An experienced attorney can be of real assistance in making sure that all of the details are handled properly. In the end, the transaction must be fair for all parties.
When you find a business for sale, the business broker will be able to answer many of your questions immediately or will research them for you. Once you get your preliminary questions answered, the typical next step is for the business broker to prepare an offer based on the price and terms you feel are appropriate. This offer will generally be subject to your approval of the actual books and records supporting the figures that have been supplied to you. The main purpose of the offer is to see if the seller is willing to accept the price and terms you offered. There isn’t much point in continuing if you and the seller can’t get together on price and terms. The offer is then presented to the seller who can approve it, reject it, or counter it with his or her own offer. You, obviously, have the decision of accepting the counter proposal from the seller or rejecting it and going on to consider other businesses for sale. If you and the seller agree on the price and terms, the next step is for you to do your “due diligence.” The burden is on you – the buyer – no one else. You may choose to bring in other outside advisors or to do it on your own – the choice is yours.
Once you have checked and approved those areas of concern, the closing documents can be prepared, and your purchase of the business can be successfully closed. You will now join many others who, like you, have chosen to become self-employed!