Category Archives: Business Purchase

Selling a Business

Business owners considering selling their company should utilize as many resources as possible.  The New York Times Small Business Page (see link here) has a wealth of information on this topic.  The linked article provides a good overview of what to consider when first thinking about selling a business.  While not detailed, this article, along with additional resources at the site, are a good starting point.

Some good information in the referenced article addresses three questions owners should ask themselves:

 

Can Your Business Be Sold?

Many elements of a business make it attractive to buyers. For example, does it have a solid history of profitability, a large and loyal base of customers, a competitive advantage (intellectual property rights, long-term contracts with clients, exclusive distributorships), opportunities for growth, a desirable location and a skilled work force?

Are You Ready to Sell?

Make sure you are ready, both financially and emotionally. Think about what life will be like after the sale. What will you do — not just for money but also with your time? Many business owners suffer real remorse after handing over their business to a new owner.

Here are a few indicators that it may be time to move on:

¶It’s not fun anymore. Burnout is a very real issue for business owners, and an entirely legitimate reason to sell.

¶You’re not inclined to invest in growth. You may be comfortable with the current size and profitability of your business and have no desire to make the capital expenditures necessary to take it to the next level.

¶You feel your management skills are overmatched. It is not uncommon for business owners to build their business to a certain point and then realize they lack the skill set required to go further.

What’s Your Business Worth?

Many owners have no idea. On one end of the spectrum, for example, was a client who owned a professional services firm. She felt the firm was worth more than $1 million. After a lengthy search, a buyer paid her less than half that amount. Then there was a client who was about to sell his I.T. company to an employee for $200,000. After advertising the business for sale nationwide, he sold it for one dollar shy of $1 million.

Selling a business is both art and science, and in no other area is this more evident than the valuation. While every seller wants to achieve maximum value, setting an asking price that is too high signals to buyers that you may not be serious about selling.

While there are a number of methods used to value a business, the most common formula for smaller transactions is a multiple of seller’s discretionary earnings (S.D.E.). This type of market-based valuation involves recasting profit-and-loss statements — adding back owner’s salary, perks and nonrecurring expenses — to find the S.D.E. of the business and then using comparable data for similar businesses to arrive at an appropriate multiple. (the rest of the article can be found here)

Of course, Apex Counsel also provides substantial resources for business owners.

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Buying or Selling a Business – Some Q & A

Why would you want to buy an existing business rather than start your own? For some, an ongoing cash flow is an attractive reason to buy. Another reason is a chance to grow an existing business more quickly.

Many people who buy businesses say that it is easier than a startup, although they may spend months scouting and researching a potential purchase. One thing is clear-researching the industry, the market and ultimately the company is key to future success.

Due Diligence

Once you get to the point of seriously considering the purchase of an ongoing business and have signed a letter of intent with the current owner, you need to thoroughly investigate all aspects of the business so there are no surprises once the transaction is complete.

What does “due diligence” actually mean?

Due diligence is the process of investigating a business to make sure that you have up-to-date, accurate and complete information that will later affect your operation of the business. This means verifying the seller’s statements and the business’s documents and records.

What is a letter of intent?

A letter of intent is signed by both the buyer and seller after most of the terms of the purchase are generally agreed upon. It shows that each is serious about completing the transaction and opens the way for the buyer to look more closely at the business records of the seller.

What if I am not familiar with all the regulations or if I do not feel very comfortable with all the bookkeeping and financial statements?

Even if you are on a tight budget, the time to bring in your lawyer and accountant is before you have written a check to the seller.

What should I look for when completing due diligence?

Here are some items you want to be sure to investigate when you are buying a business.

Paperwork: A good part of your due diligence time will be spent reviewing the company’s documents. This includes reviewing all financial records, such as income statements, balance sheets, cash flow statements, payroll, tax audits and a list of all physical assets owned by the company.

Other records, reports and contracts to study would include lease and loan agreements, any lawsuits past or present and insurance policies. Records of dealings with customers can give you valuable information, as will a thorough look at the company’s marketing materials-catalogs, brochures, Web site and sales letters, for example.

Compliance: If you were starting a company from scratch, you would need to research the registrations, licenses and permits required for the business. Ensuring compliance with local and national laws and regulations is just as important if you are buying a business.

Operations: You might want to roll up your sleeves and spend some time on the factory floor if you are considering a manufacturing facility. This is the time to talk with employees to get a better feel for the business.

You can check the company’s facilities with an eye toward safety and efficiency. Look at physical inventory and compare with corporate reports. Some potential buyers have been known to actually work at a company for several weeks before finalizing the deal.

Sales-current and potential: You have most likely studied and researched a potential purchase’s market and industry before you sign a letter of intent. Now that you have the opportunity to dig deeper, you can talk with suppliers and customers. You may be able to get a better sense of the competition.

I am selling my business. What due diligence should I complete?

As the buyer is studying the prospective acquisition, you should be studying the buyer. Of course you want to know if he or she can make the one or more payments called for in the contract. Even if the buyer is paying cash and you are retiring, you have an interest in maintaining a positive reputation for the business within the community.

The Small Business

People follow many paths to the point where they start their own business. For some, it is the American dream, a desire they hold all their lives. Others realize that they do not like working for other people-they just want to be their own boss.

Still others see themselves as pushed into going into business for themselves, perhaps because they have lost a corporate job they had always believed was secure. Some business owners start because they want a particular lifestyle, as might a mother who wants to work from home to be near her children. And then there are those who have the vision and drive to create a unique new product or service.

Whatever the reason for starting a business, many experts say that small businesses-which make up 99.7 percent of all employers in the United States-are a prime fuel of the American economy. And each of these business owners confronts a maze of decisions as they establish and move forward with their enterprises.

While there are virtually infinite ways to manage a business and an array of support services available, laws and regulations put boundaries on the choices that a business owner will make. If the business owner has a basic knowledge of the options, he or she can make smarter choices and avoid time-consuming and expensive problems.

One of the earliest decisions a potential business owner makes is how exactly to begin. Selecting a business that fits the owner’s personality, knowledge and resources is a step that usually takes both research and thought. Many people just assume that they will start a business from scratch. But others do not want to do so, and they decide to buy an existing business or a franchise.

In the coming months, we will look at numerous issues facing small business owners, entrepreneurs, and people who want to start their own business.