Buying and Selling a Business
Buying or selling a business is a great way to scale and build your existing, profitable business. Many businesses are suffering and facing permanent closure. Consolidating and aligning business interests creates business opportunities and prospects for growth. Cultivating a synergistic relationship between business owners results in greater scale and growth.
Why Buy a Business?
Buying a business is a great way to scale and build your existing, profitable business. Many businesses are suffering and facing permanent closure. Consolidating and aligning business interests creates business opportunities and prospects for growth. Cultivating a synergistic relationship between business owners results in greater scale and growth.
Many businesses have limited cash on hand and operating capital. Because of this limited cash flow, many of these businesses won’t make it through uncertain times like today. By acquiring these businesses, you gain the possibility to save these businesses, along with the people working there, while growing your own businesses foothold in the market.
Start with your free, confidential consultation to discuss your next business purchase.
Why Buy vs. Start-Up?
Here are 9 reasons to buy a business versus starting one up:
- Considerably less risk involved. Most start-ups fail in the first 5 years. Buying a business comes with an established foundation.
- Several financing options are available to purchasers. There are multiple ways to structure a purchase deal. It doesn’t have to be through cash or a loan.
- Brand recognition. The business comes with an established brand associated with it. No need to start from the ground up.
- Instant customers. A business is nothing without the people it serves. A pool of current and past customers is an invaluable asset.
- Instant sales. Remember those customers, above? They stayed around for a reason – for you to sell to them.
- Instant profits. Many businesses are profitable. The degree of profitability depends on many factors. Taking your processes and systems and integrating them into the foundation of an established business leads to growth and gain.
- Instant contacts. Marketing efforts become exponentially reduced when you have a base of clientele and resources to build from.
- Instant systems. Systems work. Not having to start a system from scratch or being able to build from current systems saves you time and money, allowing you to scale and grow faster.
- Instant employees. Your growth includes being able to utilize the knowledge and knowhow of people who have contributed to the success of a business. Not having to train new people in the systems and processes of the business, as well building on employee relationships with customers, helps your business flourish.
Steps to Buying a Business
1. Determine a Price. The purchase price is critical in determining whether you end up with a good deal. Steps like utilizing the services of an appraiser, accountant, business lawyer, investment banker, or another valuation specialist can assist you in determining how much you should pay for a business.
2. Chose a Deal Structure. There are various ways to structure your purchase. The three basic ways are either through merger, stock purchase (also known as an equity purchase), and asset purchase. Each of these alternatives brings with it various benefits and problems, including tax ramifications.
3. Sign an LOI. The Letter of Intent is a non-binding letter of agreement signed by both the buyer and seller. It sets forth the basic terms of the business transaction such as purchase price, deal structure, due diligence, expectations with respect to the purchase agreement, time for closing, and other material details.
4. Prepare a Closing Checklist. This is your list of everything that needs to be reviewed, like business documents and instruments, and what actions need to be completed before closing. Keep this list updated and maintain transparency with the seller to make sure everyone is on the same page for closing expectations.
5. Complete Due Diligence. This is your opportunity to investigate everything you can about your acquisition target. You want to use this occasion to find out anything about the company that could create any liability for you once you become the owner. It will also give you a chance to validate the purchase price you are paying for the company as well as the value of any assets and liabilities being bought. It will be during this time that you might decide to walk away from the deal because any discovered risk is too great.
6. Complete the Purchase Agreement. The Purchase Agreement is a legal document, usually created by an attorney, setting forth the deal terms in their entirety. Both the buyer and seller will have a voice in deciding the wording of the agreement. It will be loosely based on the deal terms outlined in the LOI. The Purchase Agreement is the contract which completes the purchase (and sale) of the business.
7. Obtain Consents and Approvals. If the business you are buying has any other owners, you will need their permission to buy the business. We call this a Consent of Members (in an LLC) or a Consent of Shareholders (in a corporation). Similarly, if there are any third-party contracts which the seller is bound by, or licensing assigned to the business, you might need to get permission from those people to assume the contract. A good example of this is a lease for an office and then needing to get the landlord’s approval before a new owner can come on board. This also applies to loans or lines of credit from banks and other financial institutions. If these consents are not received, then those contracts could be lost, or penalties could be imposed.
8. Close the Deal. Assuming due diligence has been finalized, the items on the closing checklist have been completed, then it’s payday! As the buyer, you should be ready to make any payments associated with the purchase, and the seller should be prepared to deliver any stock certificates, bills of sale, or other legal documents to effectuate the deal. Now, it’s time to celebrate!!
Structuring Payments in a Business Purchase
There is no single way to structure the payments for a business purchase. What is good for one buyer (or seller) might not be good for another. The reality is you should not be structuring any deal in any manner other than how YOU want it to be structured. This isn’t an opportunity to put a deal together with the way the other person wants it. This is business, and it’s your business. Structure the deal the way you want it structured. A good rule of thumb, if it’s the seller’s price, then it’s your terms. If it’s your price, then it’s the seller’s terms. Personally, terms are the way to go.
The Deal Stack is the is different way, or strategies, you can use to make your acquisition. What are the different ways you will be comfortable making a purchase? By my last count, over 200 ways to structure a business purchase had been identified to me. There is no right way. Only, your way.
When determining what the structure of payments will be, it’s important to first identify what a reasonable price for the business will be. This is usually done by taking the Seller’s Discretionary Earnings (SDE), which is simply the total owner’s benefit a business produces. These are things like salary, benefits, depreciation, and profit. Then, multiplying that total against an industry multiple to get your total value of a business. Another way is by taking the Earnings Before Interest, Depreciation, Taxes, and Amortization (EBITDA) and increasing that total by an industry multiple to get a total business valuation. Once you identify the value of the business, then you will be able to formulate a plan to structure the payments.
Why Sell Your Business?
2. Business Value. Maybe, it’s time to go out on top. Like Michael Jordan or Peyton Manning, leaving the ranks of a successful enterprise can leave you in a profitable position. Conversely, maybe the business isn’t performing as you planned, and it’s time to cut your losses and move on. Also, depending on your business industry, you might be able to fetch a large multiple for the value of the business as you decide to sell.
3. Tired of Risk. All businesses face risk, good and bad. Running a business can be both exciting and painful. As the risks and demands of business get greater, you might not want to be living in such an environment any longer. In times of crisis, which we are facing today with COVIC-19, the risks to customers, employees, and (heck) yourself, might be too great to face. Passing that risk on to someone else might be the way to go.
4. The goal of business ownership is to be working “above” the business and letting it work for you. However, many owners end up spending so much time working “in” the business rather than “on” the business, that burnout becomes a real thing. Bringing on new owners can help relieve your business fatigue and give you a fresh start into something new and exciting.
5. Industry Changes. In the immediate effects of COVID-19, unless your business fits into an “essential business” your business industry shut down. Despite PPP and EIDL loans, businesses faced high hurdles to reopening. And for those that did, the way the business operated was completely changed. New and additional protocols were put into place by various health and state organizations changing the landscape for many businesses for years to come. The industry-wide changes might not be something your business can withstand. Better yet, it might not be something you want to deal with as a business owner anymore. But I promise you, there’s someone out there who is happy to take on the change.
6. Lifestyle Changes. According to the Insured Retirement Institution, over the next 10 years, 50 million Baby Boomers (those born between 1946 and 1964) will retire over the next 10 years. According to Wealth Management Report, 12 million of those Baby Boomers own businesses. It’s time for a lifestyle change for many of them. We call that retirement. Also, the burnout of running a business is real. Many people want to leave the grind of running a business and search for something a little less crazy.
7. Owner Disputes. In many instances, one or another owner (pick your reason) wants out of the business. Owners also run into disputes about the values and direction of the business. Conflict can arise between owners leading to a business break up, and requiring the owner to sell, or, in some circumstances, for the business to sell all together.
Top 9 Reasons Businesses Close
1. Money Issues. Plain and simple. When the business doesn’t make money, there becomes little incentive to keep it going. Many reasons can be behind a lack of money as a reason for the closure. Perhaps the business has become too leveraged with debt, and it’s unable to pay its obligations. Another reason might be the business isn’t performing to expectations and is having a problem with income. Without the proper evaluation, identifying the growth limitations, or the excessive loss of capital, a business owner might feel obligated to give up the business venture.
2. Retirement. Not everyone wants to run a business forever. According to the Insured Retirement Institute, 50 million Baby Boomers will retire over the next 10 years. Meanwhile, 12 million of those people own businesses according to Wealth management Report. Retirement is a normal resolution to a long business endeavor.
3. Relocation. In some circumstances, owners of businesses move and it’s not possible to take the business with them. While some businesses are operational from anywhere (think here your typical online business), many brick and mortar businesses are unable to relocate with an owner. Even if they can, starting even an established business in a new location is like starting the whole process over again.
4. Burn-out. Much like retirement, not everyone wants to run a business forever. In many instances, business owners find themselves on the hamster wheel working in their business rather than on their business. A lack of systems and processes creates extra work for the owners, eventually leading to burn-out. Unfortunately, many businesses cannot survive with a distracted and uninterested owner.
5. Health. This refers not only to the financial health of a business but also the physical health of the owner. If systems and processes are not in place, very few businesses will have the ability to operate if the owner becomes ill or critically sick. Always ask yourself, can your business operate without you? If not, you might be looking at a business shut down if you become sick and unable to continue to operate your business.
6. Shiny object syndrome. Squirrel! Entrepreneurs have a tendency to seek enjoyment and satisfaction in the newest trends and quickest outcomes. They have a tendency to get distracted by new opportunities and greater ventures. While the grass might not always be greener on the other side of the fence, many business owners leave a well-founded business to start a higher risk one, with the hopes of greater rewards and satisfaction. This leaves the current business neglected and unable to be maintained.
7. Up-cycle. Some businesses transform and make drastic pivots into new industries, providing better use and benefit to the owner. In return, the old business is cast away while the new business flourishes.
8. Partner Challenges. Not everyone can stay in a relationship forever. Even when it comes to business. Differences in mission, vision, and company direction can be extremely detrimental to a business. If the owners are not aligned and are seeking different outcomes in the business, in many instances this leads to internal friction and deterioration of the business structure. This ultimately leads to closing down the business.
9. Death. Owner died. This is pretty self-explanatory. If there is no one to take over the company after the owner passes, it can’t survive. Without proper systems and processes, there is little, if any, ability to pass on the success of a business to someone else.
Selling your business: 8 Steps
1. Determine a Realistic Price Range
2. Understand the Tax Consequences
3. Look Good for a Sale
4. Seek Potential Buyers
5. Negotiate Your Deal
6. Sign a Sales Agreement
7. Plan for the Closing
8. File Paperwork With the IRS
How we can help
As a successful business owner, you need good partners and resources to run your company. You also need good information.
A confidential consultation call is the first step to better understanding your risk profile and the benefits of a full risk assessment.
As an expert in risk management, I will help you succeed in business by helping you to understand, mitigate, and prevent issues related to risk management.