BUYERS & SELLERS!
Suggestions From ED That Can Help You!
“Review these items for your smoother traveling through the potential minefield of buying and selling a business.” Most “small” businesses sell in the $50,000 to $750,000 price range with most buyers being less sophisticated to the buying and selling process. Generally, businesses that sell in the $1,000,000 to $10,000,000 and beyond deal with less of the following issues and many have internal or “on retainer” expertise to deal with the more technical facets of buying and selling a higher priced business. The following suggestions are not meant to be a complete list but they will all help you in many ways and every price range. Most buyers and sellers and Business Brokers will expect many of these procedural responses from you. Read on to help you avoid becoming a business minefield casualty! No one is immune!
Don’t use a broker and save the fee…. Let’s start from the beginning. First, it’s important to understand that a business sale is known as a “bulk sale” from a legal definition position. In Nevada, there are no bulk sale laws on the books! That’s correct, NONE! Generally speaking in most cases, legal positions for legal remedy are only available if you can prove misrepresentation or fraud. By the way, have you tried to prove fraud or misrepresentation lately? Most of the time, the “bad guys” won’t deal with a firm such as First Choice or me because they know that there is a very high probability of being exposed and flushed out. Of course there are no guarantees but the worst business sales stories that I have ever heard are all when a business owner tries to sell their business directly to a buyer without a business broker. You know, to save the fee? I have had experienced men and women call me, after the fact, asking and almost begging for my advice and assistance to help them recover. Well, at that point, it’s usually too late. It is worth the fee alone just for this professional business broker review. Legal advice should always come from a qualified legal professional. Call me, I sell businesses for a living, you don’t.
We remind you, “Please don’t go into the businesses introduced to you by a broker and announce that you are a possible buyer in order to talk to the owner or possibly the employees.” This is a huge mistake and a direct violation of the Confidentiality Agreement (NDA). Everything needs to go through the Broker/Agent. The undoubtedly upset owner will probably want to shoot you and me too. Being shot could ruin my whole day! Please don’t do this, it could really cost you.
Buyers working with financial backers, relatives or partners (financial backers) should have a written and signed operating or partnership agreement in place or at least a memo of understanding with the financial backer/relative/partner. The financial backer should put up a significant amount of money in an Escrow Account to be used for down payment earnest money or a bank account in the name of the legal entity to which all parties have an ownership etc. This will save you a lot of heartache because in 95% of the time, the buyer who has the smaller amount of funds and who is running around looking at all the businesses will usually find that when he or she informs the financial backer that it is now time to put up the funds, the surprised buyer finds that there are no funds available and no financial backer!
“Make the offer!” “If the business has the basic potential and working parts that you like then write up an offer.” On certain business issues that you might question, you can include them as additional contract contingencies for you protection or add them to the “Due Diligence”. The best deals are obtained with your written offer plus an earnest money check in the amount 10% of the purchase price. A Buyer’s offer and negotiation details are seldom reflected in the Seller’s listing details and pricing. All of those “great deals” you hear about at cocktail parties and BBQ’s are done with a written offer against the listed price and terms. There is far greater selling price variation in business sales than in residential real estate sales! You should always make the offer, they just might take it!!
Don’t give them any money!! Sellers beware! There are a number of out-of-state (outside of Nevada) very phony business marketing and promotional firms. They solicit you by fax or mail or email asking for some basic information on your company. You contact them and they take a telephone profile on your company and have one of their “experts” contact you, possibly in person, and develop a marketing profile based on a business valuation that is usually unbelievably and excessively high. Then they will ask for a prepaid upfront national marketing fee anywhere from $10,000 to $100,000, depending on their trumped up valuation of your business. You pay it, they place a few ads around the country and you are on your own. Rarely a buyer is found, but if a sale is made, it is at a more sobering price because of your desire to sell. They will still collect an additional estimated 10% to 20% fee on top of the pricy up front fees you have already paid and they won’t do your deal for you or represent you at the closing! Remember, they aren’t licensed here! In Nevada, you need a Business Broker Permit in addition to a Real Estate License in order to sell businesses. We are licensed and you have protection.
My uncle, who is a dentist in Chicago, says, “My business should sell for…..”, or for the business I am attempting to buy, “I should pay no more than…..” I say, “Please, give me strength!” Everyone’s friends and relatives want you to succeed, do well and pay the least amount or receive the best price for your car or your business. Please let all of the non-professional business advice end there. These well intended inexperienced folks are the last people from whom you want to receive advice about buying or selling a business. They really haven’t a clue about business valuations, selling terms and market conditions. With all do respect to their intentions, they don’t do this for a living. But I do, so please call me with all of your questions and issues.
My accountant says my business is worth or I should pay no more than $$$ for this business…… Please note and with all do respect to the very important accounting industry and the valuable services they perform, recommending or estimating the current market value of a business (large or small) is not one of their strong suits, in my opinion. As I see it, the general basis and formulas they learned in college have very little to do with market value reality of today. First, businesses sell differently in every major population area. Second, in my view, their old college formulas don’t fit market realities and constantly changing current sales experience. Third, the vast majority of accountants have never bought a business, operated a business or ever sold a business. You need an active professional full time well experienced business broker to perform this service. Call me, Ed Smith!
An agent calls you and says, “Yes, although I primarily sell homes, I can sell your business….” My advice? Hang up! Selling businesses in Nevada requires a Business Broker Permit in addition to the regular required Real Estate License. Why? Because selling businesses is very difficult and highly specialized as compared to selling homes or even commercial real estate. There are very little market, accounting and legal based business resources available to these regular real estate agents. Generally, they really don’t know very much about bulk sales and this attempt to list or sell a business is a direct violation of Nevada State Statutes unless they hold a Business Broker Permit! In addition, they generally do not have or understand the appropriate paperwork that must be used to protect you as a business buyer or seller. In my opinion, most of them are a law suit waiting to happen! Don’t go there! Even if he or she is a friend or neighbor! When in doubt, call me!
It’s important to understand that when you are buying a business, if you find a business that even comes close to what you feel you want, you are probably well ahead of the game. You should review it, negotiate and buy it! Buying a business is not like looking at homes to purchase wherein you walk into a home and say to each other. “This is perfect!” This home buying experience will not happen when buying a business. You are buying an entity that has the potential to earn you an income providing you operate it correctly. This business entity can be in a location you might not live in but the operation generates the income that you desire and that is the important feature. You will undoubtedly upgrade and personalize the business with your own ideas.
“I’d like to see the company’s paperwork”, says a potential buyer. The “paperwork” is a catch-all phrase that generally refers to the Profit & Loss Statements for the current year and last 1-3 years, a current Balance Sheet if applicable, the last 1-3 years Federal Income Tax Returns, an equipment list, copies of equipment leases if any and other reports that might be customary to that business. The problem is that very few business sellers have all this prepared up to date wherein they can reach into a file draw and pull it all out. Most business brokers spend the early weeks of the listing and sometimes months attempting to collect all this information. Sellers do not go home after a day at the business and sit in front of a computer loading information into an accounting program. Be prepared for the possibility of a delay in receiving all this information. However, for the sellers reading this paragraph, it should be noted that it is imperative to have most of if not all of these documents available at the time of listing the business. Buyers will look at the paperwork before they visit the business! Remember, no paperwork, no visit!
You can’t get a regular loan or mortgage on a business! It doesn’t work that way. Also, for the majority of businesses in America, you can forget the Small Business Administration (SBA). In my opinion, banks don’t really understand businesses and are afraid of these types of loans and most businesses don’t have the quality of good paperwork that shows appropriate profits along with business growth for three years. Most sellers look to shelter business income with seller’s discretionary spending and the other legal deductions allowed by the IRS. So the bottom line of the business tax return often shows a small profit or loss. The SBA does not admire the seller’s tenacity with extensive business write-offs. They want to see the profits in black and white on the bottom area of the tax return. You have clashing interests and goals here. Once in a while a business will qualify under these rigorous SBA guidelines, but don’t bet on it. Seller Carry Notes are often used to help finance a business purchase wherein the seller will carry a minority portion of the purchase price as a loan for a few years with interest and principal payments paid out monthly. You will guaranty this note personally even if you have a Limited Liability Company (LLC) or Corporation.
Doing your “Due Diligence” is not difficult. Generally for smaller businesses “Due Diligence” often requires no more than a lined pad, a few pens and pencils and a calculator for smaller businesses. Your calculations for income and expenses, in most cases, are a little more than calculating the same scenario at home with your personal income and expenses. Of course, you might have a payroll, inventory and some extra operating expenses. The seller will assist you in demonstrating the “add backs/seller’s discretionary expenses” that add to the total Net Income. The Federal Tax Returns seldom if ever show a true profit, in my opinion. They are not designed to do that. They are designed to show gross sales or income and calculate Federal taxes payable based on gross income along with legitimate deductions and write offs etc. For “Due Diligence”, the vast majority of buyers seldom use an accountant as they aren’t going to do much more for you than you’ve already done with the arithmetic as described above. Also, they will almost never give you the old slap on the back with an “OK” to buy the business because of their own liability issues. Their review of the Tax Returns will verify gross sales or income and they can spot a “rat in the wood pile” in the Federal Tax Return. However, in many cases, they come up with more questions than answers because of the different ways accountants treat income and expense details. However, if you have any accounting questions, you should contact your accounting professional.