How to buy a business
Are you looking to buy a business to secure your employment? If the answer is yes, then buying a business may not be right for you.
For most business owners they work harder in their business than they ever would have worked for someone else. The main difference is all the labor you put in will be for yourself and not someone else.
Depending on your background, most people who are successful buying a business have had some experience in that type of business. This is not a hard and fast rule, because what you don’t know you can learn.
You should understand that the school of hard knocks is often painful and expensive. If there is an area that you just love, but you don’t have much experience with, it might be a good idea to work for someone else in that area before looking for a business.
This can save you time, money and possibly prevent your business from going under.
Buying a business is a process and if you’ve never done it before, something to consider is take one, two or three business brokers to lunch. Pick their brains, find out what they can teach you and then pick the one you like the best and approach them to be on your side in the transaction.
A good broker will help you to identify the size of business you could afford, what financing options are available, and what would be the best type of business for you to go after.
A broker is just one part of a team, and understand you’ll be needing a team to acquire a business. A typical small business acquisition team would fulfill the following roles:
- Accountant
- Legal
- Operations
- Marketing
Accounting
The most critical role on the team, at least at the beginning, is the accountant. As you search for businesses you will need a solid understanding of accounting or you will need to find someone that is well versed in accounting.
If you don’t know anything about accounting, better take a course and work with someone. You will not want to pay an accountant at this stage because you will most likely look at multiple businesses.
Most of these businesses look great in the listing and it is not until you get the first run of financials that warts start popping up. Often that good business goes into the waste receptacle right here. If you are paying an accountant to do that analysis it will get very expensive before you even find one that you can move forward on.
Once you have made an offer and it has been accepted then you’ll move into the due diligence phase. In this phase you may have to pay an accountant to go through the books. The financials is something that you need to get right.
Legal
You will need to find a lawyer that you can work with and understands business and the business buying process. Just because a person has a law degree does not mean they understand business contracts or concerns around buying a business. More than one deal has been cratered by an overzealous lawyer trying too hard to protect their client.
Legal Is a key role on the team but is somewhat limited. There will be two main areas that you’ll be using a lawyer’s services. First is as soon as you’ve made the offer you’ll need your lawyer to complete a proper search that would identify any outstanding lawsuits or liabilities. Generally it is not a good idea to rely on the seller to disclose any lawsuits.
The main concern for your lawyer will be to help draft and finalize the purchase contract. You absolutely must have your own representation in this stage, don’t be afraid to spend the money it can really save you in the long run.
Operations
The importance of this role will really depend on the type of business you are looking at. Manufacturing or installations will require more effort than say a retail business.
The operations role is mostly about understanding how inputs that come in are transformed into output and sales. Identifying if the current business is doing this effectively or could it use improving. Of course, the more efficient your operations are the lower the cost and the greater the margin.
Operations is also going to be concerned with quality control. Where is the company at currently, can it be improved or does it need to be improved?
Marketing
Marketing is an important role that can help you to determine the potential for growth. Your marketing role should be responsible for:
- identifying trends in the industry,
- who your key competitors are,
- what is the businesses competitive advantage
Marketing will also be responsible for reviewing all current marketing efforts to include:
- Digital
- Face to face
- Website
- Online advertising
The key roles described above should all be included in the business buying team. They don’t have to be individual people, but all of the skills should be present to make the best evaluation.
How to sell a business
There are many reasons that businesses are bought, sold, or decide to merge.
Let’s explore some of the things that you will need to consider if selling your business.
Business sales team
You have been in business for some time long enough for the business to be sold, as a rule this usually means 5 years. This means you have built relationships, you should have an accountant, a marketing group, a lawyer and you’ll need all of the skill sets these professions represent.
What is needed to sell a business
Effective sale of a business is defined as: a business that is sold in the desired timeframe, at or near the desired price, and provides the desired cash on closing.
All sellers want to have an effective business sale. Some get lucky and it just happens. You should count on this like counting on the lottery for your retirement.
The reality is selling a business is hard work. Keep your expectations correct and you will not be as frustrated or possibly accept less than you should.
What to be thinking about when it is time to sell your business.
- Planning, start planning to sell your business about a year before you are ready to pull the trigger. There is a lot to be done and you want to give yourself enough time to get it done right.
- Put your sales team together, start small and begin working on the strategy to sell. There is a lot that goes into it. For instance, are you going to let all of your employees know about the sale? How will you maintain the current revenues or grow them as you get ready for the go to market day?
- Are you going to use a broker? You really need to think this one through. A business broker should be radically different from a real estate broker, but a lot of them are not. The poor ones have limited business knowledge and will do little to move the sale forward. No matter their level of competence they are all very expensive.
Business Sales Trends in 2020
The number of small businesses reported sold in 2020 dropped 22% compared to 2019. This was the largest year-over-year drop since 2009 at the start of the Great Recession when transactions dropped 28%.
A total of 7,612 businesses were reported as acquired in 2020, compared to 9,746 in 2019. Conversely, the median sale price rose 12% to $279,950, with revenue and cash flow reaching record highs, according to BizBuySell’s Insight Report, which tracks and analyzes U.S. business-for-sale transactions and sentiment of business owners, buyers and brokers.
Prior to COVID the IBBA, International Business Brokers Association, the percentage of small businesses that don’t sell that have been listed is over 90%. And this does not even include the businesses that are for sale but not listed.
According to the IBBA, International Business Brokers Association many small businesses that get listed do not sell in the first year. In fact each year only 10% of all businesses listed actually sell.
The top 3 reasons businesses don’t sell?
- Approximately ten thousand baby boomers are retiring each day. And 12 million baby boomers own small businesses. This means that online directories, brokers are flooded with listings. It is a buyers market.
- Many of the owners of these small businesses don’t know how to value their company. Often these owners relate all the time, effort, and money they’ve put in to the business to the sales price. And the price they want is often not realistic. If they take another step and review the listings they will often see lots of other prices that are not realistic, giving them a false sense of hope.
- Many owners have not prepared their business for sale. They assume that a broker will handle all of that. So when a potential buyer asks for the financial package they will not be ready or will have to ask for extended time to get it ready. This increases the risk for a buyer and because there is so much to choose from, they will just move on.
Some of this research is a little dated since COVID. Fundamental shifts have taken place in the market, and many of the trends that helped give a forward look may not apply, at least, for the immediate future.
Keep in mind, it is a daunting and frustrating task for a buyer to wade through the numerous listings that are overpriced, have unsupported cash flow, lack information, and add to that deal with brokers that are not well trained.
The more that you can do to properly represent your business the quicker you can expect an effective sale.