Presentation on theme: "Sunbelt Education Series: Buying a Business 2008 Sunbelt Education Series Buying a Business Day 3: Deal Mechanics."— Presentation transcript:
Sunbelt Education Series: Buying a Business 2008 Sunbelt Education Series Buying a Business Day 3: Deal Mechanics
Sunbelt Education Series: Buying a Business 2008 Deal Mechanics Questions about recasting? Buyers and Sellers The steps from Letter of Intent to Closing
Sunbelt Education Series: Buying a Business 2008 Reminders from week 1 Money is seldom the first motivation to buy a business Neither the buyer /seller or their advisors know what the business is worth, but all have an opinion Different buyers pay different prices for a business Transaction structure and financial requirements will vary depending on the size and type of company involved Buyers need to find “all the right things wrong” rather than searching for the “perfect” business Future value of the business depends on who buys it
Sunbelt Education Series: Buying a Business 2008 Reminders from week 2 Tax returns and income statements usually distort the true earnings of the business. The impact can be negative or positive. You must ask the right questions to get accurate information Business Intermediaries use SDE to identify owner’s benefit
Sunbelt Education Series: Buying a Business 2008 Reminders con’t SDE is the amount of money the business generates to pay debt service and provide wages for one owner / operator The balance sheet is adjusted to the fair market value of the assets to be transferred to the buyer
Sunbelt Education Series: Buying a Business 2008 Why Do Owners Sell Their Businesses? Reasons for selling – Usually “Human Reasons” Health Divorce Partner disputes Relocation Death Burn out Retirement Other Reasons… Losing Lease Losing Money Owner doesn’t like the business
Sunbelt Education Series: Buying a Business 2008 Why do people buy a business Independence Challenge Personal Growth Financial Lifestyle Other?
Sunbelt Education Series: Buying a Business 2008 Buyer / Seller relationship Different Goals - Sellers want to sell the business for the highest price. Buyers want to pay the lowest price. How do we get to the “fair price”? Selling price will vary with buyer’s motivation to buy and opportunity envisioned Selling price will vary based on the sellers’ reason for selling
Sunbelt Education Series: Buying a Business 2008 Steps in the process Identify a potential business -“All the right things wrong” Meet the Seller and tour the business Complete a Letter of Intent with contingencies Due diligence Arrange financing Close the deal
Sunbelt Education Series: Buying a Business 2008 The Buyer/Seller Meeting 1) Prepare yourself properly for the meeting. Answers and Research - You want to get enough answers and detail to your questions so you can immediately focus on researching the business, the industry, the competition, etc. Although the Internet allows prospective business buyers to do phenomenal research quickly, in today’s environment, good businesses sell fast. As such, you may not have a lot of time between a seller meeting and preparing an offer. Obviously, you’ll want to do your homework before moving to an offer so be sure to get enough information in your seller meeting to conduct your research.
Sunbelt Education Series: Buying a Business 2008 The Buyer/Seller Meeting 2) Visualize Yourself In The Business - If you take away anything from a seller meeting, it should be the answer to these four questions: –Do I like the business? –Can I see myself running it? –Do I like the seller? –Do I trust them? Note: Questions 1 and 2 are obvious. Questions 3 and 4 are critical. If you like the seller and trust them, chances are you and they will be able to work through any and all of the deal challenges that will arise. Trust is also paramount. If not, you will always keep thinking they are hiding something.
Sunbelt Education Series: Buying a Business 2008 The Buyer/Seller Meeting 3) Impress The Seller If you have any chance of getting the seller to finance the deal, or bend more they would normally on the deal terms, you need to leave them feeling that “you’re the one” to buy their business. If they believe that you can not only get the deal done, but also run the business successfully, they will go out of their way to make the deal happen.
Sunbelt Education Series: Buying a Business 2008 Buyer/Seller Meeting Questions Questions to ask at the first Buyer/Seller Meeting: Tell me about your business? How did you get started? What services does your business provide? What do you do everyday? Why are you selling your business? What is it that you like best and least about the business? How long have you been considering selling your business? What keeps you up at night about the business? How much vacation do you take (not that you’re looking for time off…rather, you want to know if they have adequate staff that will allow you time away)? What are the last three year's sales and SDE?
Sunbelt Education Series: Buying a Business 2008 Buyer/Seller Meeting Questions Questions to ask at the first Buyer/Seller Meeting: Who are your biggest competitors? What are your industry trends? Is your market share growing, shrinking, or steady? Have there been any significant changes in your marketplace? What do you think I can do to increase sales and profits? Why are you not doing these things? Ask the seller if he/she has copies of any trade publications. They’re a great source for additional information. Who are the employees? Any manager in place? Are there any employees that are critical to the business? How many employees do you have? Will you agree to a covenant not to compete? Will the business sale include the transfer of real estate? What are the details of the lease? How long? Any options? Do you anticipate any problems with the landlord assigning it to me or entering into a new lease?
Sunbelt Education Series: Buying a Business 2008 Buyer/Seller Meeting Questions Questions to ask at the first Buyer/Seller Meeting: Don't you have children to transfer your business to? Are you the only owner? Who knows that the business is for sale? What is your timetable for completing the business sale? What are you going to do after we sell your business? How long will it take me to really learn this business? How long can I count on you to train me after the sale? What do you believe is the profile of the ideal buyer for this business? Do you anticipate any problems with me getting credit from your suppliers? Do any of your suppliers represent more than 10% of your purchases? If yes, who are they? Who does the buying for the store?
Sunbelt Education Series: Buying a Business 2008 Letter of Intent The Power of the Letter of Intent A Letter of Intent (LOI) shows the Seller that you are seriously interested in the business A Seller views a Buyer who submits a LOI as a serious Buyer and may be willing to share additional details on the business and its operations A Buyer is protected using a “Buyer Friendly” LOI that has basic contingencies that must be completed for due diligence Deposits are placed in a non-interest bearing escrow account
Sunbelt Education Series: Buying a Business 2008 Common Letter of Intent Contingencies Some common contingencies in the preliminary offer to purchase might include: Buyer to obtain financing on terms acceptable to buyer Buyer to make loan application within 5 days of acceptance of this agreement Buyer examination and approval of 3 years of financials and tax returns Buyer examination and approval of assets, inventory, and equipment list Seller is to give non-compete agreement acceptable to buyer Seller is to provide training period acceptable to buyer Buyer is to obtain lease of terms acceptable to buyer
Sunbelt Education Series: Buying a Business 2008 General Due Diligence Topics Buyers will inquire and inspect: General Business InformationOrganizational Matters Litigation IssuesRegulations/Permits Intellectual PropertyFinancial & Accounting ReceivablesLiabilities Budgets & ForecastsTaxes Contracts & AgreementsSales & Marketing InsuranceEmployees Environment IssuesReal Estate Customer & Supplier RelationshipsEquipment
Sunbelt Education Series: Buying a Business 2008 Financing the Deal 3 Options for Financing the Purchase Your money - All or Part Bank financing - Conventional or SBA Seller financing – Seller Note or Earn Out
Sunbelt Education Series: Buying a Business 2008 Using Your Money Wisely If you can buy a business with 100% payment; may want to consider a larger business 20% or more down payment. Where does the other 80% come from?
Sunbelt Education Series: Buying a Business 2008 Truth About Lenders Banks - reluctant to lend to buy a small business Banks prefer to lend on assets versus goodwill Bank don’t know how to operate small businesses Banks view small business tax returns very conservatively SBA lenders require detailed documentation, personal collateral, and charge additional fees
Sunbelt Education Series: Buying a Business 2008 Seller Financing May be necessary to complete the deal, however most sellers want all cash at closing Seller believes in the business and the Buyer Seller has ongoing interest in the success of the business The key to owner financing between Buyer & Seller is “Chemistry”
Sunbelt Education Series: Buying a Business 2008 Seller Financing All cash deals are sometimes discounted from cash & term deals Seller may benefit from tax effect of a seller financed deal Properly structured, a seller can protect his business until the note is paid
Sunbelt Education Series: Buying a Business 2008 Asset vs. Stock Purchase AdvantagesDisadvantages No legal liability for the corporation prior to the purchase No liabilities for employees Costs paid for the assets are depreciable "Clean" credit, reputation, workers comp, etc. No established credit Rehire the employees Negotiate transfer of leases & contracts New licenses Operating Capital AdvantagesDisadvantages Established credit Many times, no or minimal operating capital required Leases are in place Contracts are in place Employees are in place with worker's compensation rate established Licenses are in place No public notification of the sale No sales tax on the FF&E No deposits required Corporation, tax & employment numbers & documentation in place Legal liability for the corporation prior to the purchase Assets are normally fully depreciated Sometimes stock is a hard sell to CPA's & lawyers Asset Sale vs. Stock SaleStock Sale vs. Asset Sale
Sunbelt Education Series: Buying a Business 2008 Closing Usually the Buyer’s Attorney will draft an ASSET PURCHASE AGREEMENT Seller and Seller’s Attorney will review the document and request changes, additions, or deletions. Buyer, Seller and their Attorneys work out the language NOTE : They do not change the deal, only protect their client legally.
Sunbelt Education Series: Buying a Business 2008 Business Structure The type of business entity you choose will depend on three primary factors: –Liability –Taxation –Record-keeping Here's a quick look at the differences between the most common forms of business entities:
Sunbelt Education Series: Buying a Business 2008 Business Structure A sole proprietorship is the most common form of business organization. It's easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.
Sunbelt Education Series: Buying a Business 2008 Business Structure A partnership involves two or more people who agree to share in the profits or losses of a business. A primary advantage is that the partnership does not bear the tax burden of profits or the benefit of losses—profits or losses are "passed through" to partners to report on their individual income tax returns. A primary disadvantage is liability—each partner is personally liable for the financial obligations of the business.
Sunbelt Education Series: Buying a Business 2008 Business Structure A corporation is a legal entity that is created to conduct business. The corporation becomes an entity—separate from those who founded it—that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that's required. While double taxation is sometimes mentioned as a drawback to incorporation, the S corporation (or Subchapter corporation, a popular variation of the regular C corporation) avoids this situation by allowing income or losses to be passed through on individual tax returns, similar to a partnership.
Sunbelt Education Series: Buying a Business 2008 Business Structure A hybrid form of partnership, the limited liability company (LLC), is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.
Sunbelt Education Series: Buying a Business 2008 Closing day No surprises or new information. This should be a formality, all the hard work has been done. Signing documents, exchanging money and shaking hands.
Sunbelt Education Series: Buying a Business 2008 Some thoughts to consider Self-employment is not right for everyone. The marketplace provides a balance of owners to workers. Which are you? Knowledge is more important than capital when exploring business ownership. Business ownership requires a serious commitment on all levels. There are financial, emotional and physical demands, so be sure that your family understands and supports you. The longer you look, the less likely that you will buy a business. Don’t shop yourself into paralysis. Chronic lookers have the wrong attitude. They spend their time looking for what’s wrong and thinking the “next one” will be better. Instead, be open - minded to opportunities that are presented. The decision is easier when you have all the information you need to make a decision. FIND “THE RIGHT THE THINGS WRONG WITH THE BUSINESS.”
Sunbelt Education Series: Buying a Business 2008 Thoughts to consider The benefits of having a track record far outweigh any positive factors of starting your own business. Over 50% percent of start ups fail in the first 3 years. If you’re serious, the goal will be to find a good business within six  months. Find a good business then improve it. Pay for the past but buy for the future. Business ownership can provide freedom, security, independence, personal challenge, growth and financial rewards. The only place where your job is truly secure is in your own business!
Sunbelt Education Series: Buying a Business 2008 Final Thoughts 10 Commandments; for buying & owning a business Pay for the past, Consider the present, Buy for the future Buy a good business and make it better Have a plan and follow it Fall in love with the profit potential, not the product / service Do what you do best and manage the rest Use technology where ever and whenever you can Identify what factors drive the business (location, service, product, etc.) Be proud of the business, and have an effective introduction to explain your business to others. Fix EVERYTHING that is not working to its optimum “What’s it worth to you?” - Only you know that answer
Sunbelt Education Series: Buying a Business 2008 Goals for attendance Comfort with the process Remove emotions Analysis Gather knowledge Self-discovery Don’t know what we don’t know
Sunbelt Education Series: Buying a Business 2008 Conclusion Good luck in your business search! If you have any additional questions, contact us at: Sunbelt Cleveland Business Sales & Acquisitions