- Evaluate your goals
- Formulate acquisitions
- Locate candidates
- Evaluate candidates
- Negotiate successful purchase
- Assist in financing
Things a buyer should know
We at Equity Financial Group, Inc. are advocates of finding a
business that you like and feel comfortable managing. You, like
every other prospective buyer, have a vision of being your own boss
and calling your own shots. An old saying in the real estate industry
is … “The three most important things a buyer should look for are
location, location & location.” While location is important to a
business buyer, be aware that track record and management round
out the three components of a successful business. Let us assume
that you find a business that you like and its location is fine,
but because of poor management, the business may not show the greatest
record of accomplishment. Purchased for the right price and terms,
this business could become more successful with proper management
making it a good way to achieve your vision of being in business
for yourself. Finally, be aware that many businesses sell for much
less than they are originally listed… sometimes-even 50% less. So,
if it is a business that you like, do not be afraid to make what
you consider to be a low offer.
The process of buying a business is as follows:
- Evaluate the basic information on alternative businesses that
sound interesting to you.
- Visit the business (if possible) without announcing yourself
as a buyer (incognito) to get a “feel” for the business.
- Meet with the Seller, asking from general to probing questions
on anything and everything, except actual price negotiations.
- Do your preliminary evaluation, based on the information provided
by the seller to Equity Financial Group, Inc. and you.
- Make an offer, assuming that all of the information you have
been provided is correct, but include contingencies, which allow
you to confirm such information. Equity Financial Group Inc. will
show you how to write an offer to protect you as the buyer.
- Once a sales price is agreed upon, make a closer investigation
of the business, confirming to your satisfaction the validity
of your offer.
- Have documents prepared for the closing. You may agree with
the seller to share the cost of a closing attorney. This lawyer
will not argue the position for either party, but drafts all necessary
legal documents to comply with the agreement a buyer and seller
- Close the purchase, and begin your first day as the owner of
your own business. The seller will assist in an orderly transition
because most of his money is coming from your success.
- You are part of the American Dream – You and your family own
your own business!
Top 10 Tips for Buying the Right Business Right
- Buy a business you like. Although profitability is important,
you will risk making a terrible mistake if you do not buy a business
that you like. Often, people who buy hastily without considering
personal satisfaction later sell their businesses at a loss. Will
you be proud to own the business? If you are not sure, do not
buy that type of business.
- Be flexible. Equity Financial Group Inc. advises its clients
to be open to all sorts of businesses. Do not lock your self into
a McDonald’s or a Mailboxes, etc. Who knows, you may surprise
yourself by taking a liking t a Blimpie or Signs Now franchise.
If you lock into only one type of business, it will take you much
longer to find a business to buy. Examine the following categories:
retail; service; manufacturing; distribution; restaurant; lounge;
coin-operated business. First, decide if there are any categories
that you do not want to be in, then focus on the remaining categories.
- Do not expect much financial information. Do not expect “traditional”
financial information from the owner of a privately owned business.
The only accounting required of a privately owned business is
filing tax returns, which are prepared to report the lowest possible
tax liability. There are other ways to verify cash flow later.
- Consider chemistry. This may seem like an unusual recommendation,
but Equity Financial Group, Inc. tells its clients to forget about
buying a business if they do not like the current owner. The buying
process is a long and somewhat complicated one -- it is imperative
that the buyer and seller work through it together.
- Go with owner financing. The owner of the business should finance
the purchase. In most cases, this is the sole source of financing
available to buyers of an existing business. With owner financing,
you can feel secure in believing the owner’s representations as
to income and expenses, and you have a remedy if there are any
problems after closing. It also gives you a “silent partner” with
a personal stake in you success.
- Do not pay cash. You may not want a loan over your head, but
do not pay all cash for a business – even if you have it. You
should keep a stash on hand for emergencies and business improvements.
If you insist on paying all cash, at least place some of the purchase
price in escrow for a period of time to protect yourself from
any problems that may surface after the closing.
- Make an offer before you have seen all of the financial and
other business records of the business. It is simply not possible
to know everything about a business before you make the initial
offer. The offer does not commit you to the business, but it does
let the seller know you are serious.
- Stay calm. Buying a business can be like dating. You’ve got
so many emotions going – do you like the business, does the owner
like you, is this feasible, what does my family think, etc. –
that you’re bound to get a little flustered. Keep your wits about
you; you will need them. Remain calm, and negotiate your offer
with quite reflection and reasoned discussions. As you go through
negotiations, always use this simple formula: Cash Flow Available
minus Annual Payments to Owner = $$$ for you and your family.
If at any time during the negotiations this formula does not result
in enough money for you and your family, stop.
- Investigate the business. Once the owner has accepted your offer,
the real work begins. Verify cash flow and identify any hidden
problems. If you see red flags in either of these areas, change
or terminate your offer. There should be stipulations in your
offer that allow for this.
- Close quickly. Once the deal is made, try to close as quickly
as possible. You do not want owner to have second thoughts or
news of the sale to leak out to employees, suppliers and clients.
THE 90% RULE: FACTS ABOUT BUYERS
- 90% of all buyers are first-time buyers. In other words, they
have never been in business before.
- 90% of all buyers will finance the purchase of their business.
- 90% of all buyers do not know what kind of business they want
or best serves their needs.
- 90% of all buyers are terrified and/or uneducated in the business
- 90% of all sales will be financed by the seller.
- 90% (or more) will not buy the business that was advertised
or the one that they called in on.
"What we can do for you..."
A big advantage in 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.
We assist you in obtaining financing. Banks are reluctant to finance
business purchases for several reasons. One, all small businesses
attempt to minimize profits shown on financial statements to reduce
tax liability. Also, a bank cannot come in to manage a business
if foreclosure becomes necessary. Therefore, over ninety percent
of business purchases are financed by the owner himself, which demonstrates
his confidence in the business.
Unlike the sale of real estate or franchises, the sale of an ongoing
business is very confidential for both the seller and the prospective
buyer. All inquiries are held in strict confidence. Meetings are
confidential, and we are available after hours and on weekends.
Advantages of Buying an Existing Business
- Actual results rather than pro-forma.
- Immediate cash flow.
- Trained employees in place.
- Established suppliers and credit.
- Established customers and referral business.
- Existing licenses and permits.
- Training by the seller.
- The availability of owner financing.
Advantages of Buying a Franchise
- Known name means instant recognition.
- Proven product or service.
- Ongoing support means you are in business for yourself but not
- Better than 90% of new franchises are successful.
- Operating system in place all the mistakes have been made!
- Opportunity to add additional units within the franchise system.
- Training by the seller.
- The availability of owner financing.
- to deal only with qualified buyers,
- to maintain strict confidentiality about the practice,
- to incur the least amount of disruption during the process,
- to understand the process and participate as needed, and
- to remain affiliated with the operations after the sale, if
Definition of a Practice Broker
The term broker” is generally defined as any person or firm
acting for another either on commission or for other compensation
who engages in the securing of prospects interested in the
sale, exchange, optioning, or leasing of the property of a seller.
The property may be either the stock or the assets of the seller,
or a combination of both stock and assets. The broker may
also serve to effect transactions and contracts (but not engage
in the practice of law), as either a middleman or negotiator, secure
or determine the value of property (typically at fair market value),
calculate the results of the transaction (such as tax positions
or cash flows), find or introduce financing by third parties, or
otherwise act to hold together the intentions of a prospective buyer
and seller. The broker takes no possession of the subject
matter of the negotiations, but may hold earnest or other trust
monies. Source: Wikipedia.
The broker and the seller decide the nature and extent of their respective
obligations in a contractual agreement often termed a Listing Agreement.”
In effect, the parties establish a broker-seller agency relationship
pursuant to the Law of Agency
The Brokerage Process
The brokerage process includes a myrial of steps and procedures
which are likely, but not necessarily required, in a successful
transaction. The process is not linear in that one step leads
directly to a predetermined subsequent step. Rather, there
are starts, progress, withdrawal, and re-engagement of parties over
extended periods of time. The process, typically, necessitates
frequent and intense interaction with either the seller or the seller’s
advisors (e.g., an attorney or accountant). Accomplishment
of each step varies in length of time depending on the complexity
of the aquired practice and motivation of the transacting parties.
The brokerage process from the seller's position may include the following:
A selling memorandum is a written document the purpose of which
is to explain succinctly the seller’s practice. A well
written document communicates the following:
- it informs the buyer about the operational and financial aspects
of the practice in a clear manner.
- it enhances the due diligence process by allowing the buyer
to focus on key matters.
- it indicates to a buyer that the seller is motivated as it requires
the seller to focus on transactional issues.
- it serves to inform the buyer’s consulting group of advisors
about the core nature of the practice.
An accurate selling memorandum conveys the essence of the company,
builds credibility, and serves to induce a buyer to participate
further in the transition process.
Negotiation is the process where interested parties resolve differences,
agree upon contract terms, bargain for individual advantage, and/or
attempt to craft outcomes which serve their mutual interests. The
first step in negotiating is to determine whether the situation
is in fact a negotiation. The essential elements of negotiation
is the existence of two parties who share an important objective
but have some significant differences. The purpose of a negotiation
conference is to seek a compromise and, if possible, resolution
of the differences.
A skilled negotiator serves as an advocate for one party to the
negotiation and attempts to obtain the most favorable outcome possible
for that party. During the process, he also attempts to determine
the minimum outcome the other party is willing to accept.
When multiple issues are involved, differences in the parties’
preferences make win-win negotiation possible.
The negotiation process can be divided into seven steps:
- Preparing and Planning
- Setting the tone
- Exploring underlying needs
- Selecting, refining, and crafting an agreement
- Reviewing the agreement
- Reviewing the negotiation
- Capturing deal and relationship learnings
Situations and circumstances that might cause a deal to break down
include the following:
- A a prospective buyer’s verbal representations should
not cause the seller to become so excited that they ignore the
intrinsic complications of a deal. When a formal contract arrives
it may not be appealing but shoukd be responded to or counterd.
- The advising attorney, accountant, banker, etc. may interject
more than an opinion into a potential deal, resulting in roadblocks
to minor or solvable matters.
- A seller may become stricken with seller’s remorse,”
or emotionally and psychologically withdrawing from the
deal. In this instance refocus on your selling
- Legitimate concerns over lawsuits and/or environmental or tax
matters may prove to be too expensive for a particular buyer.
Listen carefully to all buyer concerns. Nonetheless, when
an impasse is apparent, our experience may lead us to propose alternatives
to a deal structure, including alternatives to an outright sale.
Seller Tips and Techniques
If you are a seller, then consider adhering to the following mandates,
as they will help secure a successful transaction:
Ask A Reasonable Price For The Practice.
An inflated asking price turns off potential buyers. Determine
the fair market value
and then price your practice in line with this figure.
Maintain Business As Usual.
Remain focused on the day-to-day sales and operations. Plan
for adequate time to address buyer inquiries.
Prepare For The Sale.
Adequate advance preparation will yield long-term dividends.
Perform the needed housecleaning at the facilities and attend
to necessary accounting matters.
Anticipate Buyer Information Request.
The buyer will need appraisals on major assets such as real
estate. Make copies of at least three years of tax returns,
the most recent financial statements, and depreciation schedules.
Strive To Get A Competitive Buyer Situation.
A good practice priced properly will create interest from
several buyers and create a competitive situation. Leverage
the circumstances to your advantage.
Maintain Deal Flexibility.
All-cash at closing are the exception. Consider accepting
deferred payments. Examine an offer from the buyer's perspective.
Don’t Dominate Negotiations.
Maintain a cordial and professional demeanor even if
the buyer fails to do so. Understand when it is appropriate
to walk away.
Maintain Deal Momentum.
Keep the inquirer’s interest and maintain the momentum.
Respond timely to buyer’s questions and document requests.
| Be Willing To Stay Personally Involved.
Even if you are feeling burned-out, realize that the buyer may
want you to stay
within arm’s reach for awhile. Consult with practice brokers
to determine how you can best effect a smooth transition.
A business valuation report is a necessity when the seller’s
thoughts turn to accurately pricing the business. A buyer
will place little credibility on the practice owner’s opinion
because the seller has a vested interest in obtaining a high price.
Equity Financial Group uses the services of third-party valuators
to create reports for seller clients who are trying to secure
full market value for their practices. Equity Financial
Group knows what price other practices, like yours, are really
producing. Their reports are reader friendly and can be
shown to prospective buyers. They justify that the price
recommended is the most obtainable for the practice owner and
that the report proves the asking price is realistic to a prospective
When valuation reports are presented as part of the practice
offering package, practice brokers have consistently produced
higher prices and smoother sales than have similar practices without
the benefit of a comprehensive valuation report.
Expert valuation of a seller’s practice combines
financial and economic analysis into a relevant and quantifiable
representation of value. An objective of the valuation process
is the translation of complex practice valuation theory and terminology
into a clear and understandable opinion of value.
Fair Market Value (FMV) is the most commonly utilized standard
of value. The definition of FMV from Treasury Regulation
The price at which
the property would change hands between a willing
buyer and a willing
seller when the former is not under any compulsion
to buy and the
latter is not under any compulsion to sell, both parties
knowledge of the relevant facts.
The property can be any of the following: stock of a
corporation, a partnership interest, an interest in a limited
liability entity (e.g., an LLC or LLP), or ownership of a proprietorship.
It is imperative to understand the conceptual elements of the
above definition. A fundamental concept is that FMV is a
hypothetical determination, whereas price is based upon an actual
sale transaction. Also critical to the understanding of
FMV are the following conceptual underpinnings:
- that the parties are considered hypothetical,
meaning also that there is no identified
- that both parties have reasonable knowledge
of all of the material relevant facts
- that the parties are capable of consummating
the transaction at current economic
- that neither party is under any compulsion
to purchase or sell
- that reasonable time is allowed for
exposure of the property on an open market
- that the transaction is based on known
or reasonably knowable events, but not
General guidelines and responsibilities for dealing with clients
include the following:
- Protect and promote the best interests of the client.
- Perform all services with honesty, care, and good faith.
- Represent only factual information to buyers.
- Maintain confidentiality of the seller’s proprietary
- Obtain terms and conditions of agreements in writing.
- Take the necessary steps to complete an assignment competently.
- Offer the client objective advice, recommendations, and analysis.
- Advise the client to make full disclosure of all material
- Conduct all negotiations on behalf of the seller in good faith.
- Keep the client informed of the status of all negotiations.
- Work with the seller’s other advisors to structure a
transaction in the client’s best interest.
Tips for a Better Sale
- The decision to sell should be firm.
- Decide early who is going to be the ultimate director of
the selling process.
- Partner with professionals knowledgeable about brokerage.
Improper advice can cost you dearly.
- Set up a document file in one place for all relevant information.
- If a buyer indicates he will submit a Letter of Intent,
tell the buyer up-front what items you want to be included.
- Settle all litigation and environmental matters before discussing
the sale of the practice.
- Be flexible with the real estate. Most buyers would
rather rent the facility, perhaps with an option to acquire.
- The best deal for buyers is one in which a seller’s
Note is used as subordinated debt.
- Do not negotiate directly, but through an intermediary.
- Don’t delegate important aspects of the deal to underlings.
- Complexity is a killer in deal making. The more complicated
the deal structure, the less likely it is to work.
- Valuation is an important exercise, but usually the value
calculated is not the final purchase price.
- Determine who the decision-maker is on the buying side.
- Control to the greatest extent possible the drafting of
the Purchase and Sale Agreement.
- The essential features of any acquisition agreement are
and warranties, covenants, conditions
precedent to the
closing, and the indemnifications.
- In negotiations, start with the less confrontational issues.
Seek initial agreement.
- Avoid entering into contracts with marginally qualified
- Always be prepared to negotiate.
- Transactions may come apart at the Letter of Intent stage
because new parties get involved in the deal and consensus
becomes difficult. Have experienced transaction attorneys
- Once you sign a Letter of Intent, your leverage drops dramatically.
Make sure it covers as many critical deal points as possible.
- Deals involve three sometimes inconsistent objectives: speed,
confidentiality, and value.
- If the deal fails to be consummated, a great deal of confidential
information has been provided to the wrong people.
Act with absolute clarity in all negotiations. Allow
deal breakers to surface as early as possible.
The professional practice brokerage utilizes key financial and
economic attributes of the selling practice to initiate the brokerage
process. The broker’s initial goal is to adequately
promote the availability of the practice for acquisition –
then to qualify prospective buyers. An objective of the brokerage
process is to maintain confidentiality during the exchange of proprietary
information. A successful sale integrates tactful negotiating,
addresses tax positions, and leverages creative deal structuring
into an arm’s length transaction acceptable to the seller.
This Guide presents selected topics relevant to the consulting service
of Practice Brokerage. It is written from the perspective
of the practice seller. Each topic is highly summarized.
You should consult with a practice broker or transaction attorney
to address specific issues and concerns. Exceptions, limitations,
or conditions may apply.
||Remember there is no Right business, so buyers
must be flexible. |
© 2005 - 2010 Christopher S. Whitener CPA. All