Business Brokerage

Buyer Benefits

• 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

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 have reached.



• 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

1. 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.



2. 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.



3. 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.



4. 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.



5. 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.



6. 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.



7. 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.



8. 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.



9. 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.



10. 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 buying process.



• 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..."

Cash Flow
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.

Financing
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.

Confidentiality
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 by yourself.


• 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.

Seller’s Needs

• 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 desired.
  

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 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.

Selling Memorandum

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

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
  

Deal Breakers

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 objective.


• 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.

Business Valuation

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 buyer.

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 20.2031-1(b) is:

        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
        having reasonable 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
        buyer
    -  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
        conditions
    -  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
       subsequent events

Brokerage Standards

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 information.
• 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 information.
• 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 the
          following: representations 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 buyers.
• 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 and advisors.
• 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.

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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. SM

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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.