What does Summit Business Advisors
offer me
when I’m buying a business?
SECURITY - FINANCING - CONFIDENTIALITY
At SUMMIT, we want to help you find a business that meets your needs and goals. You have a vision of being your own boss, making your own decisions and achieving a certain level of success. The business you buy should correspond to both your vision and your skill set so that you can be successful. Before a search for a viable business can begin, buyers should have a good idea of their needs and buying requirements. How much money do you need to make? What types of businesses appeal to you? Do you have experience that relates to the types of businesses you're interested in? If not, what training will be available to you? One key factor is the financial requirements of a deal. Depending on the current SBA policy (they change fairly often), you will need from 10 to 20 percent of the selling price of the business in free and clear cash to use as a down payment in order to qualify for an SBA loan. The SBA likes to see three years or so of related experience.
Summit Business Advisors has a regional focus and an international scope. We are a general business brokerage, which means that we work with all kinds and sizes of businesses. We'll present you with all the facts, and provide honest, straightforward and timely answers to your questions.
HAVING TROUBLE FINDING A GOOD BUSINESS?
Call us ! We will be happy to conduct a targeted search for you based on your specific criteria.
Security
An advantage to buying an ongoing business is that you, as the new owner, have an immediate cash flow and an established customer base. You do not have to build a business. You simply take over an existing successful business with the present owner's assistance, and grow it as you see fit.
Did you know?
- 80% of businesses started from scratch fail within three years.
- 90% of businesses three years or older make money and continue to make money.
Financing
SUMMIT BUSINESS ADVISORS assists you in obtaining financing. We can refer you to a variety of local and national lenders that have experience arranging business acquisition loans. SBA (Small Business Administration) loans are usually the best source of funds. They require some related experience, a 10 to 20% down payment, and some collateral. SBA loans are normally for 10 years, unless real estate is involved, in which case the loan term is extended to 15, 20 or 25 years.
Other options include owner financing, by which the owner becomes the bank. If a seller offers owner financing, it shows that he or she has confidence in the business to provide you a living as well as to pay back the note. Sometimes sellers don't offer financing because they may need the cash at closing, or they will be moving away, or for other legitimate reasons. Most owners will require a down payment of 50% or more before considering holding a note. Normal owner financing terms are 3, 5, or 7 years at standard interest rates.
Confidentiality
Unlike the sale of personal real estate, the sale of an ongoing business is very confidential for both the seller and the prospective buyer. The reasons to maintain confidentiality are that if word gets out that a business is for sale any of the following may occur: employees may quit, fearing change; competition may try to take advantage by spreading the word among customers and suppliers; creditors may be tempted to shut off lines of credit, and may require cash on delivery; and customers' loyalty may waver as they consider other choices now that they expect ownership will be changing.
Why Businesses Are For Sale
Many reasons including:
- Owner wants to buy a bigger business
- Retirement
- Marital problems
- Partnership dispute
- Tired, needs a break
- Owner wants a lifestyle change
- Losing money (For buyers with deep pockets and direct experience.)
- Owner needs to relocate, usually for personal or family reasons
- Health issues
Did you know that the average term of business ownership is 4.9 years?
How a Business Is Valued
Many long and complex books have been written on the topic and there are many techniques and rules of thumb used to approach the development of business valuations. They include a variety of methods under the classifications of:
Market, Income, and Asset Approaches
- The Market approaches use comparative sales data (if available), and publicly available data about business acquisitions.
- The Income approaches use income as the primary factor. The "Multiple of Seller's Discretionary Earnings" is a common method that involves recasting the tax returns for a business to separate out certain costs that legitimately show up in a tax return, but which are not required by the business to operate. The new bottom line number derived from this process is commonly called Discretionary Income, Discretionary Earnings, Cash Flow, True Net Profit, Owner Benefit, and several other names. This number is a representation of the dollars that are available to a business owner to spend at his/her discretion. It's also used as the basis of the value of the business in that it represents to the buyer the annual dollar amount that the business is capable of generating for the buyer to pay back the debt incurred by the purchase of the business and to live on the rest. A multiple can be applied to this number, which typically ranges between 1.5 and 3 and even higher under certain circumstances. Factors such as size, growth rate, the nature and age of the business, etc. are used to determine the multiple.
- The Asset approaches focus on the assets of a business, their value, and/or the expected returns that can be projected based on their use.
- Many factors and methods can be considered. But, in the end, it really all comes down to both buyer and seller motivations and what a willing and knowledgeable buyer is willing to pay, and what a willing and knowledgeable seller is willing to accept.
Meeting the Owner and Touring a Business
- Write down your questions in advance.
- Ask the owner about anything you want to know about except the justification for the price (that's a question for the broker).
- Look at everything: side rooms, back lot, parking area, bathrooms, etc.
- Don't speak to employees without owner's permission.
- Be discreet and speak quietly if employees or customers are nearby.
- Look around the neighborhood as well.
The Purchase Offer and Negotiation Process
If you decide you want to purchase a specific business, the broker can assist you to make a written offer, or you may want to use a lawyer to prepare a Letter of Intent.
- It's customary to present an earnest money check for $1000 with the written offer, which is refundable if you and the seller do not come to an agreement on terms.
- Often, the seller will make a counter offer. And, sometimes the parties will go back and forth several times, hammering out key details before agreement on price and terms is reached.
- Once agreement is reached, a further deposit to total 10% of the selling price is customarily due within 72 hours.This amount is always negotiable.
- If inventory is involved, a count is usually taken on the day of closing or the day before. If the inventory is lower than the agreement stipulates, the price will be adjusted down and if it's higher, the price will go up accordingly.
- If a lease is involved, the offer will include a contingency for you to obtain an acceptable lease.
- There may be other contingencies or stipulations, such as bank funding, or verifying specific revenue or cost figures through due diligence. If any of these contingencies is not met by the deadline, the deal is off and all deposits are refunded. If both parties are amenable, though, the timeline can always be extended.
Due Diligence
Due diligence is a period of time, after agreement has been reached, usually two to four weeks, for the buyer to verify particular facts about the business, such as revenue or specific costs. We recommend that buyers perform as much due diligence prior to making the offer as is possible. However, sometimes, sellers will not release certain sensitive or confidential documentation unless an acceptable offer to purchase is on the table.
The Closing
- After the offer has been accepted, all contingencies must be removed before a closing can take place.
- In the meanwhile, any required licenses and permits are applied for, financing arranged, and the path is then open to a final closing.
- You will probably want to have a lawyer represent you at closing. In addition to conducting a title and/or lien search, he or she will write up a final (sometimes called "definitive") closing document, which expands upon and clarifies the terms in the original purchase offer agreement.