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How to Buy a Business, How to Sell a Business

How to buy a business

Buying a Business - Selling a Business Guides

 


Buying a Business - Selling a Business Guides


Is there a small-business owner who has never considered selling his business? Probably not. Is there an individual with some money, talent, or an urge for independence (often only the last) who hasn't thought about owning his own business?

The number of small businesses actually bought and sold, however, represents only a small fraction of those who have felt these urges. To many people, the desire to buy or sell is only a passing thought.

Others find various ways to solve their problems or satisfy their ambitions. But sometimes an individual doesn't follow through because he finds the prospect of buying or selling a business too baffling.

The objective of this section is to describe the process of buying and selling a small business and to establish some guidelines. It will not remove the difficulties, but it will make them more manageable.

This section presents an outline to buying and selling factors as well as the necessary procedures for structuring transactions, negotiations and settlements.

    5 Questions To Ask Before Buying A Business Video

    The decision to buy and sell a business requires careful consideration of the many factors involved. If you are a seller, these factors include preparing your business for sale and finding buyers. If you are a buyer, they include pricing and financing your purchase.

    This buy and sell business section presents an outline to buying and selling factors as well as the necessary procedures for structuring transactions, negotiations and settlements.

    The first step is to find a business to buy or find a buyer for the business.

    Print Advertising

    Business opportunity classified ads are a viable way to advertise a business for sale. Many ads are placed by intermediaries (business brokers or merger and acquisition specialists), but some are placed directly by business owners. The larger local newspapers are the best source of such ads for smaller, privately-held businesses. Sundays are generally the most popular days for these ads.

    Business opportunity ads, whether for small or large businesses, usually describe the business in several short phrases, keeping its identity anonymous, and list a phone number to call or post office box for reply. The ad should be worded to demonstrate the business's best qualities, (both financial and non-financial) and many include a qualifying statement describing the kind of cash investment or experience required. A telephone number in the ad will draw more responses than a post office box number, but may not permit the anonymity of a post office box.

    Trade Sources

    Trade sources can be a viable source of information on businesses for sale. Key people within an industry or in companies on the periphery of the industry, such as suppliers, often know when businesses come up for sale and may be aware of potential buyers. Every industry has a trade association and trade association publications can do a good job of communicating the sale of a business in their industry. If a seller thinks a buyer is likely to come from the same industry, the trade association's publications department should be contacted to see if classified advertising is permitted.

    Intermediaries

    Business opportunity intermediaries generally can be divided into two groups,1) business brokers and 2) merger and acquisition specialists. The differences between these two groups are subtle, but in general, business brokers primarily handle the smaller businesses, and merger and acquisition specialists handle the larger middle-market companies. Both groups usually ask for a contract with a 180 day or more exclusive right to sell the business.

    Business brokers charge a fee usually as a percent of the purchase price. Merger and acquisition specialists also charge fees, although often the fee is well under 10% since the transactions they work on are much larger. Often, a good merger and acquisition specialist receives a portion of the fee in advance, paid as either a flat fee or an hourly fee. In exchange, the intermediary performs some tangible service such as preparing a presentation package for prospective buyers and a valuation report. Although it is sometimes paid by the buyer, it is more common for the seller to pay the intermediary's fee.

    An experienced intermediary can offer assistance in (1) pricing the business, (2) setting the terms, (3) compiling a comprehensive presentation package, (4) professionally marketing the business, (5) screening potential buyers, (6) negotiating and evaluating offers, (7) making certain that proper legal steps are taken. The result can be a considerable saving of the business owner's or business buyer's time and effort.

    4. Evaluating The Business

    The first step a buyer must take in evaluating a business for sale is that of reviewing its history and the way it operates. It is important to learn how the business was started, how its mission may have changed since its inception and what past events have occurred to shape its current form. A buyer should understand the business's methods of acquiring and serving its customers and how the functions of sales, marketing, finance and operations interrelate. General information about the industry can be obtained from trade associations.

    The business's financial statements, operating documents, and practices should be reviewed. A summary of the items to be reviewed follows.

    Balance Sheet

    Accounts Receivable

    1. Obtain an accounts receivable aging schedule and determine if there is concentration among a few accounts.

    2. Determine the reasons for all overdue accounts.

    3. Find out if any amounts are in dispute.

    4. Are any of the accounts pledged as collateral?

    5. Is the reserve for bad debt sufficient and how was it established?

    6. Review the business's credit policy.

    Inventory

    1. Make sure the inventory is determined by physical count and divided by finished goods, work in progress and raw materials.

    2.Assess the method of valuation and why it was used. (LIFO, FIFO, etc.).

    3. Determine the age and condition of the inventory.

    4. How is damaged or obsolete inventory valued?

    5. Is the amount of inventory sufficient to operate efficiently and for how long?

    6. Should an appraisal be obtained?

    Marketable Securities

    1. Obtain a list of marketable securities.

    2. How are the securities valued?

    3. Determine the fair market value of the securities.

    4. Are any securities restricted or pledged?

    5. Should the portfolio be sold or exchanged?

    Real Estate

    1. Obtain a schedule of real estate owned.

    2. Determine the condition and age of the real estate.

    3. Establish the fair market value of each of the buildings and land.

    4. Should appraisals be obtained?

    5. Are repairs or improvements required?

    6. Are maintenance costs reasonable?

    7. Do any of the principals have a financial interest in the company(s) that perform(s) the maintenance?

    8. Is the real estate required to operate the business efficiently?

    9. How is the real estate financed?

    10. Are the mortgages assumable?

    11.Will additional real estate be required in the near future?

    12. Is the real estate adequately insured?

    Machinery and Equipment

    1. Obtain a schedule of machinery and equipment owned and leased.

    2. Determine the condition and age of the machinery and equipment and the frequency of maintenance.

    3. Identify the equipment and machinery that is state-of-the-art.

    4. Identify the machinery and equipment that is obsolete.

    5. Should an appraisal be obtained?

    6.Will immediate repairs be required and at what cost?

    Accounts Payable

    1.Obtain a schedule of accounts payable and determine if there is concentration among a few accounts.

    2. Determine the age of the amounts due.

    3.Identify all amounts in dispute and determine the reason.

    4.Review transactions to determine undisclosed and contingent liabilities.

    Accrued Liabilities

    1. Obtain a schedule of accrued liabilities.

    2. Determine the accounting treatment of:

    -unpaid wages at the end of the period

    -accrued vacation pay

    -accrued sick leave

    -payroll taxes due and payable

    -accrued income taxes

    -other accruals

    3. Search for unrecorded accrued liabilities

    Notes Payable and Mortgages Payable

    1.Obtain a schedule of notes payable and mortgages payable.

    2. Identify the reason for indebtedness.

    3. Determine terms and payment schedule.

    4.Will the acquisition accelerate the note or mortgage or is there a prepayment penalty?

    5.Determine if there are any balloon payments to be made and the amounts and dates due.

    6. Are the notes or mortgages assumable?

    Income Statement

    The potential earning power of the business should be analyzed by reviewing profit and loss statements for the past 3 to 5 years. The business's earning power is a function of more than bottom line profits or losses. The owner's salary and fringe benefits, non-cash expenses, and nonrecurring expenses should also be calculated.

    Financial Ratios

    While analyzing the balance sheet and the income statement, sales and operating ratios should be calculated in order to point out areas requiring further study. Key ratios are the current ratio, quick ratio, accounts receivable turnover, inventory turnover and sales/accounts receivable. The significance of these ratios, the methods for calculating them, and industry averages are available through Dun & Bradstreet and Robert Morris Associates. Look for trends in the ratios over the past 3 to 5 years.

    Leases

    1. What is the remaining term of the lease?

    2. Are there any option periods, and if so, is the option exercised only by the choice of the tenant?

    3. Is there a percent of sales clause?

    4. What additional fees (such as a common area maintenance or merchants association dues) are paid over and above the base rent?

    5. Is the tenant or landlord responsible for maintaining the roof and the heating and air conditioning system?

    6. Is there a periodic rent increase called for to adjust the rent for changes in the consumer price index or for an increase in real estate tax assessments?

    7. Is there a demolition clause?

    8. Under what terms and conditions will the landlord permit an assumption or extension of the existing lease?

    Personnel

    1. What are the job responsibilities, rates of pay, and benefits of each employee?

    2. What is each employee's tenure?

    3. What is the level of each employee's skill in their position and are they employed under an employment contract?

    4. Will key employees stay after the business is purchased?

    5. Are any employees part of a union, or is any union organizing effort likely?

    Marketing

    1. Are any of the products proprietary?

    2. Describe any new upcoming products and projected sales.

    3. What is the business's geographic market area?

    4. What is the business's percentage of market share?

    5. What are the business's competitive advantages?

    6. What are the business's annual marketing expenditures?

    Patents

    A list of trade names, trademarks, logos, copyrights and patents should be obtained, noting the period of time remaining before each expires.

    Taxes

    1.Are all tax payments current?

    2.What was the date and the outcome of the last tax audit?

    Legal issues

    1. Are there any suits now or soon to commence?

    2. What government registration requirements and regulations must be met and are they currently being met?

    3. Are all local zoning requirements being met?

    4. Review the articles of incorporation, minute books, bylaws, and/or partnership agreements.

    5. What are the classes of stock and the restrictions of each, if any?

    6. Has any stock been canceled or repurchased?

    7. Is the business a franchise? If so, review the franchise agreement.

    Competitors

    1. Who are the business's competitors?

    2. What is their market share?

    3. What are each competitor's competitive advantages and disadvantages?

    All the factors identified in this section on evaluating a business have to be carefully scrutinized and weighed. Some factors will have a positive influence on the decision to buy. Others will have a negative influence. Seek out professional assistance if help is needed in interpreting the significance of the information. The important thing is to obtain all the information needed to make a decision. In most instances, all of the business records should be made available to the buyer. In some cases however, certain information may be withheld until a bona fide offer, contingent upon obtaining that information, has been made. If important information is unreasonably withheld, the likelihood of making the transaction work diminishes.

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