1. What are the key motivators for people going into business for themselves?
Before making a decision to purchase a business, a buyer should understand his or her objectives to
make sure those objectives can be met by purchasing any or a particular business. Most relevant surveys reveal similar responses
and, interestingly, making money is not at the top of the list. Here is a list of the typical answers, in the order of importance:
- To control my own future.
- To
work for myself.
- To take advantage of my skills and abilities.
- To make money.
2. Should I start my own business
or buy an existing one?
An existing business has a historical track record
(good or bad) which can be used to evaluate the business. An existing business has usually shown there is demand for its products
or services, and it should have, among other things, detailed financial records. Sometimes, a seller will agree to stay with
the business and help to train a new owner and to provide seller financing. These are important factors because many small
businesses tend to fail during the early stage of their development. On the other hand, there can also be disadvantages to
buying an existing business. A buyer will be assuming an established corporate culture and infrastructure which may make implementing
changes more difficult. Also buyers will generally have to pay a premium for an existing business.
3. What should I be looking for in a business?
A buyer
should only consider a business he or she will feel comfortable owning and operating. The time and effort which will be required
is an important consideration as is how much the buyer can afford to pay for the business. The amount of cash the buyer hopes
or needs to regularly take out of the business is very important, especially if the business is to be the buyer's only source
of income. Because many experts believe you should not purchase a business unless you can make it better, it is helpful if
a buyer has some definite ideas on how to improve the purchased business.
4.
Why is confidentiality so important to the seller?
Typically, confidentiality
is very important to a seller. It can be damaging to a business if it is known that it is for sale. Customers may not be interested
in buying from a business that is up for sale, competitors could use the information to their advantage, and employees generally
experience anxiety and often leave.
5. How is the asking price of the business
determined?
Sometimes the seller's business broker will review the financial
records of the business and make a recommendation about the price. Other times, the seller will obtain a professional valuation
of the business. Sometimes, the deal structure is more important than the financial status of a business in determining the
actual selling price. As an example, the cash to be paid and the availability of seller financing are important determinants.
All other things being equal, typically, a greater cash requirement and/or lack of seller financing will lead to a lower selling
price.
6. Should I hire an attorney?
Yes, it is a good idea to retain an attorney to review the necessary legal documents. Although most businesses
already use any attorney, it is important that the attorney you hire be familiar with business acquisitions to be as effective
as possible during the process.
7. What is due diligence?
Due diligence is a systematic process for acquiring and analyzing information to help a buyer or seller
to determine whether or not to proceed with a proposed business transaction. The information obtained relates to all aspects
of the business to be purchased. Due diligence should include both quantitative information, such as sales and other financial
data, and qualitative information, such as an assessment of the existing management, internal systems, existing licenses,
location and other matters. Sometimes the information to be reviewed can be quite technical or industry specific. It is important
that the person doing due diligence have a complete understanding of the information being reviewed.
8. During the due diligence process, what are some significant warning signals, and what should I do about
them?
The seller has:
- Imposed
an unrealistic time frame for the transaction.
- Withheld key information.
- Limited access to information and people.
- Provided unclear
or biased reasons for selling.
- Presented information that is significantly misleading
or false.
- Displayed a lack of commitment to remain after the sale.
If these signals are present you should:
- View them
as real warnings of increased risk to the transaction.
- Increase the amount and
extent of due diligence procedures to ensure a realistic assessment of the business.
- Determine whether to invest more time investigating the opportunity or to simply pass on the deal.
9. What are the main reasons for the failure of a business after it's bought?
- The price paid was significantly over market value.
- The
due diligence procedures were not adequate.
- A previously dependent asset was
unable to function/survive without support (i.e. sales to related parties or below market debt).
- A change in business environment created unexpected problems.
10.
How much cash do I need in order to purchase a business?
In most cases,
a portion of the total consideration paid for a business is paid in some sort of deferred payment - whether in the form of
a seller note or payments contingent on the performance of the business. Third party lenders are also available to make acquisition
loans. Therefore, a cash investment of 1/3 to 1/2 of the purchase price may be sufficient to complete a transaction, depending
upon the financeability of the transaction.
11. Where can I obtain financing
to help me buy a business?
There are a variety of sources available for
purchase financing. These range from a typical commercial lending source to asset-based lenders and seller financing. The
availability of outside financing will depend upon the asset base of the business, its operating history, collateral availability
and projected cash flow - the same issues considered in all business lending. Seller financing is also an option. In this
case, the seller of the business takes back a promissory note for part of the value of the company. Seller financing may be
a good indication of the seller's faith in the continuing operations of the business. The SBA and the is a helpful resource when trying to determine what type of financing is available.
