Read the following and become a better business buyer!
Ed says to all buyers, “When in doubt, make the offer! All those great deals you hear about started with the buyer making an offer on the business being considered!”
There is a never-ending flow of people who would love to own their own business, large or small. Business purchases, sales, and business brokerage is not a familiar subject to the general public as compared to home buying and other common real estate transactions. Most buyers and sellers know very little about business brokerage, business sales and what is normally or commonly involved. The following, in a direct fashion, says it as it is without all the fluff. Ed Smith, “Nevada’s Top Awarded Business Broker!”
DISCLAIMER: These suggestions and opinions are offered solely by Edward J. Smith, Ltd. licensed real estate broker-salesman and licensed business broker in the State of Nevada and not those of First Choice Business Brokers Las Vegas. If you have any special questions about law or accounting or licensing, then we suggest you seek competent representation in those fields. Also, please be advised that important required processing of buyers with listings after NDA’s are signed and woven into a busy daily appointment schedule does not always allow us to respond immediately, please allow approximately 24 hours to receive the requested information.
NON-DISCLOSURE AGREEMENT (NDA) REQUIRED AND MUST BE SIGNED!!
Buyers are required to accurately fill out and sign an “NDA,” short for Non-Disclosure Confidentiality Agreement. Generally, the NDA makes NO financial requirement for upfront payment of fees etc. The seller doesn’t want his or her personal information shared with competitors and suppliers and employees. You will be asked not to consult with any of the above. All dialogue is with the broker and often with the seller. If there is a partner or relative involved, they will have to sign the NDA as well. No business information will be shared with you without the signed NDA. DO NOT VIOLATE THIS AGREEMENT! DO NOT WALK INTO A BUSINESS AND ASK TO SPEAK TO THE OWNER OR CHAT WITH THE EMPLOYEES!!
NO IDENTIFICATION INFORMATION IN ADS
Generally, there is little identification information in any internet advertising. That’s because you need the required NDA as in page #1. So please don’t call the broker and ask, “Oh, just tell me where it is so I can drive past it,” or “What’s the name of the company, I just want to know which one it is.” Follow the broker’s procedures and NDA requirements! No Exceptions!
THIRD PARTY CALLS
Do not call a business broker for your friend, relative or partner. The actual buyer must call so we may obtain information to help qualify him or her. Other than the most basic information, in order to receive details about the business, you friend, relative or partner will be required to sign an NDA. If the inquiry about the business is for you, please don’t have your spouse or your significant other or a friend call for information. You must make the call.
EMPLOYEES, SUPPLIERS, COMPETITORS, ETC.
Please DO NOT talk with any of employees, suppliers, vendors and competitor and other people involved with the day-to-day aspects of the business. There is a very high probability that they don’t know the business is for sale and you speaking with them can cause serious harm or damage to the business. This is a requirement in the NDA.
REALTOR & COMMERCIAL BROKERS CANNOT HELP YOU SELL YOUR BUSINESS
Often business buyers think they can use the same real estate or commercial broker with whom they bought or sold their home or from whom they leased some commercial space, to help buy or sell a business for them. Business negotiations and sales, by Nevada law, must be conducted by a person with a real estate license and the required business broker permit. There are only a very small number of licensed business brokers in the Nevada compared to over 25,000 real estate licensees!s!
LISTING ADS AND YOUR INTEREST
When you contact us about our listing ads, be sure to follow up with any particular ad interest as soon as possible. Please include the link for the listing to send us and this will provide faster service. The fastest service is by emailing your requests to firstname.lastname@example.org. Also, you can go directly to https://businessforsaleinlasvegas.com/businesses-for-sale. Good businesses attract a lot of callers and the early bird catches the worm! The best deals are obtained by making an offer and negotiating. Very few business listings sell for their listed price. Don’t be afraid to share your price thinking and feedback with Ed Smith, your business broker!
LOWER PRICED BUSINESSES
Businesses sold for under $60,000 often don’t even come with a P&L Statement. These businesses are typically known as working asset sales. Wherein the income, if any, is not an issue. Higher priced businesses generally do come with prepared financial documents (not audited). On these smaller sales, you are simply buying a location with historical and enterprise value. Typically the cost to purchase or replace the existing asset values for equipment in place can run 2-4 times higher than the asking price of the business for these lower priced listings. This is the obvious value! Trying to save even more money by negotiation a lower price can be risky as many a buyer has lost out to another buyer who saw the value of the business at the low listing price and bought it!
ABSENTEE OWNER BUSINESSES
The price range for these is usually $300,000+. Some Buyers think they can spend $60,000 to get a business that they don’t have to work in and that it makes $100,000 per year in net income. Don’t kid yourself! Most small businesses require active hands-on operators to thrive and the low price range businesses don’t earn that kind of income! If you buy a lower priced business and expect to run it long distance, or only be there once or twice per week, then prepare yourself to have your employees steal you blind and ultimately you could lose the business!
Please don’t call the broker until you have read the complete information package. These executive summary type reports or most other information packages about the business generally have P&L Statements, Federal Tax Returns, and Equipment List, Lease information and a lot of other valuable information. PLEASE take the time to review all pages. Very often is the case that the P&L’s are done by the seller. Some businesses don’t even have an accounting program and are completed on an estimated expense form sheet during the listing interview process by the broker. These estimates are usually relatively accurate and can be used for due diligence verifications. Surprisingly, most businesses do not have up to date financial paperwork and we are always attempting to update our files. After a long day of running the business, most sellers don’t go home and update QuickBooks!
Some people ask for “audited financials” on the business. Ha-Ha! This will never happen with small businesses. That procedure is commonly used for publicly traded companies, banks, national franchise corporations, etc. Never the local pizzeria! Please don’t ask!
Most businesses sell for certain net income multiples (varies) plus replacement value of tangible equipment, location, franchised or not, and a host of other factors. There are generally NO EXACT comparable sales (comps) used in valuation like those used in residential real estate. Although there are nationwide databases now available, they are not local the vast majority of times and the regional adjustment and the other adjustment entries are the complete opinion of the practitioner! The SBA relies primarily on cash flow, tangible values and a few other considerations. The buyers who get the best deals in business buying are the buyers who step up and make an offer. When a $150,000 business with that much value in equipment and fixtures alone is reduced to $69,000, buy it!! Too many buyers try to negotiate another $10,000 or $20,000 off the $69,000 just because they feel they shouldn’t pay full price when it is really half price! Meanwhile other more field savvy buyers spot the deal and gobble it up while you are trying to cut the price again. If you like the business buy it!!
BANK AND SBA FINANCING
For most small businesses you can forget about it! Banks, per se, don’t finance business sales like a home mortgage. The only general exception is the Small Business Administration (SBA) which is handled through a SBA approved bank or lender. There are a few business banks that will consider an “in house” business loan and you will have to use them for your business accounts. Most sales with financing are when the seller carries a promissory note for the buyer and the buyer will need to guarantee the note personally. Most seller financing is for a very small percentage of the sales price. Most SBA lenders are not approving restaurants and almost any business with very poor financial paperwork, a business that shows a very small profit with most of the business benefits being run as “add backs” which benefits the business owner but disappoints the SBA lenders. Probably about 90% of all businesses in America will not qualify for SBA financing. In addition, the banks and SBA lenders require the applicant to have prior experience in that specific type of business.
SBA AND BANK REQUIRED BUSINESS LICENSES
These financial institutions require that the buyer have the necessary perquisite experience in the business being purchased. In addition, if there are specific business licenses required such as a type of contractor’s license for example, the buyer will be required to have such a license or obtain one as part of the sale. This can be very time consuming in many cases. It is better that you keep your business selection to the type of business for which you are experienced for these special license required businesses.
CONNECT WITH THE SELLER
If you like the business and want more detailed information, brokers can arrange a telephone call, direct or conference, or an in-person meeting with the seller at the location or at the broker’s office. You should NOT discuss price or financing at that meeting. These price discussions are only done with the broker!
If you are an out-of-town buyer, it is important that you have automobile transportation while you are here in Las Vegas. If you drive in, obviously no problem. If you fly in, you must arrange for a rental car. We do not pick you up at airports or hotels. When visiting Las Vegas for business buying purposes, be sure to give yourself about a week. Do not arrive in town late Friday with a schedule to leave at the end of the weekend. Our office is closed on weekends, most business owners are not available and some of the businesses are closed.
ASK YOUR BROKER!
When you have questions (and everyone does) please email or call Ed Smith! Don’t get opinions from websites, relatives, friends and neighbors. They are well meaning but they just don’t know business brokerage. I do this as a fulltime career and they don’t! Buying a business is NOT like when you or they bought a house. When negotiating, remember with friends and relatives when you are buying you are spending too much and when you are selling you are selling for too little. Discuss this with Ed Smith Business Broker. Call 702-274-7320 or email email@example.com.
WHEN NEGOTIATING PRICE
When negotiating price between buyers and sellers, it is better to be less particular about an exact sales price number versus an approximate price range. Remember with businesses, sales prices vary much more than they do with home purchases and there are basically no comps! (aka comparable sales) Plus, the extra money that might be required to complete the sale will likely be returned in cash flow to you by the business sooner or later. Very reasonably price listings due to a motivated seller shouldn’t be over negotiated as you are not the only buyer reviewing that attractively priced business and the chance of loosing it to another buyer while you try to squeeze out a few more dollars from the seller, then another buy comes in and grabs the good deal at the low listed price. There is no, “I was first!”
EARNEST MONEY DEPOSIT (EMD)
When you first sign the contract to purchase, often called an “Asset Purchase Agreement” or “APA” you will be asked to put down a serious deposit such as 10% of the purchase price or $15,000.00, whichever is greater. Many people remember opening the escrow on their last home purchase with a $500.00 check. Forget it! Business brokerage is business sales and if you are serious, the required earnest money deposit will help assure the seller that you are serious. These funds are generally held in an escrow account. If the sale closes, the funds are applied to the purchase price. If the sales fall through by no intentional fault of the buyer, the funds are returned, less any minor hard costs (if any) incurred by the escrow company. This earnest money deposit must be given on or about the time the contract is signed or wired in the next day or two. Absolutely no exceptions!
PROOF OF FUNDS
Prior to entering a contract, you, as the buyer, will be required to provide the broker with proof of funds. This is a requirement in order to prove to all involved that you have the funds on hand to proceed with the sale. Generally, a copy or screen shot of a bank statement, stockbroker statement or other evidence of possession of enough cash required to complete the sale.
THE CONTRACT / ASSET PURCHASE AGREEMENT (APA)
Offers from buyers are generally submitted to sellers via a signed Asset Purchase Agreement or contract. The APA is written to include the buyer’s offered price and terms including a due diligence contingency and a landlord approval contingency. Other contingencies might address additional franchise approval or SBA financing approval. All offers generally have a $15,000 minimum or 10% if larger than the $15,000 minimum Earnest Money Deposit (EMD). You will be required to send us “proof of funds” at this point. These are any variety of financial statements showing the funds and with your account numbers blacked out for security purposes.
LOI - NON-BINDING LETTER OF INTENT
These are simple non-binding emails, letters or signed forms generalizing the buyer’s initial price and terms intention for a particular business. We use these occasionally if the buyer’s purchasing ideas vary a lot from the listing price and terms. The idea being to test the waters so to speak on the buyer’s terms and conditions. However, the vast majority of offers are presented to the seller in the form of a signed contract with a sizeable Ernest Money Deposit (EMD) check made out to the escrow company.
Escrow companies (generally not title companies) perform the searches for liabilities and liens and do the clearances typically required for a clean Bill of Sale which is issued at closing. Contracts generally provide for a clean lien free Bill of Sale. Escrow companies hold earnest money deposits, do all the disbursements, and supply the closing statements at the close of escrow. Pre-paid items such as rent, taxes, etc. are pro-rated, so you can close any day of the month, not just on the first or last day. Yes, you are required to use an escrow company to close the deal. Trying to save a few dollars by doing a private transaction can easily cost you in six figures because of fraudulent practices and undisclosed liens. Transactions are primarily closed on line with electronic signature programs.
Most sales require a “Due Diligence” period wherein the buyer can review all financial documents generally going back 3 years if necessary. Some businesses haven’t been owned that long and obviously there are fewer financial records. Usually, for smaller businesses, the last full year is most important along with the current year. Often the Due Diligence period is from 3 days to 15 days depending on the size of the business. This time period can be extended for more complex or larger businesses. If you complete and approve Due Diligence ahead of the deadline, you sign off that contingency at that time. Due Diligence records and receipts vary dramatically from almost non-existent to very poor at best with many small businesses and much more sophisticated financial paperwork with larger businesses. However, almost everything can be verified one way or another such as the tape from the POS machine showing every sale. Feel free to discuss this with Ed Smith, Business Broker. 702-274-7320 firstname.lastname@example.org
DUE DILIGENCE RECORDS
The Due Diligence financial records (not just the P&L’s or Tax Returns) are the private property of the seller and the review will generally take place at the home or office or other convenient mutual location. Please don’t ask that these records be shipped to your location or your accountant’s location. It probably won’t happen. Sellers traditionally and rightfully so do not allow these records to leave their possession. I suggest you don’t ask. Your CPA (if one is used) or bookkeeper can visit the location chosen for the review. If you are out of the area, then hire one in the area. The vast majority of financial information becomes the function of a pencil, pad and calculator along with adding and subtracting the various income and expenses and most buyers do it all themselves. These are simple businesses and usually easy to understand. The seller will be directly available to you to handle any and all questions. Please don’t look for perfection with smaller lower priced businesses.
LANDLORDS AND LEASES
An important part of the sale is landlord approval of the current lease with an assignment to you or a brand-new lease. It is totally the landlord’s call on whether the landlord offers a new lease or a lease assignment. Often leases are about to end so it part of our practice to have the landlord add extra options to renew during the future years. Local smaller landlords are generally easier to deal with as compared to the large national landlords and REITS. Most lease approvals can be completed in a week or two, while a few others can take several months. The goal here is to get approved! No lease approval no sale! Ed Smith Business Broker can guide you through this process.
LANDLORDS AND LESS EXPERIENCED BUYERS
Many less experienced or first-time business buyers are alarmed when they see the information requirements requested by the landlords. This is especially true of the larger national size landlords who own a large percentage of the commercial retail centers. As a buyer, the landlord could easily ask for your last 3 years federal tax returns, copies of banks statements, list of real estate owned, stocks and bonds statements in addition to a credit report. You will have to verify current income if not clearly stated as to the source. They will want a short history on experience for that type of business as well as a summary of how you plan to increase sales and promote the business. Typically, these lease applications can easily take 2-4 weeks and sometimes longer weeks for approval. Ed Smith, Business Broker stays in contact with the landlords on a regular basis in an effort to secure the landlord approval as quickly as possible.
Lease applications can be a multipage application plus other financial submissions to just basic financial submissions. Usually, landlords want a brief resume about your experience and skills. I suggest writing one as a draft suited to the type of business ahead of time. When filling out a balance sheet or application, it is important to show your assets and not limit what the landlord reviews. If the landlord feels you are a borderline tenant, they might want you to post more security and/or add another guarantor, such as a relative, to the lease. In many cases, you will be asked for an application fee ranging from a few hundred dollars to over $3,000. You are correct, this fee is nonrefundable. Normally application fees are split as closing fees between buyer and seller at closing. Anything pre-paid in full can be split and reimbursed at closing. You cannot close the sale without the written approval with the appropriate documents from the landlord. Please be expeditious about supplying lease application information to the landlord. IMPORTANT! If you need a privileged license as part of your purchase, such as an alcoholic beverage license, the lease must be approved by the landlord before that application can be submitted!
Most of the time there is little or no negotiation with a landlord for a sale of a business to a buyer who plans no changes. Buyers who plan a new concept “might” get some relief on the new concept costs if the lease is extended and there is some rent increase. If you buy an inexpensive or asset sale of a non-working business, that DOES NOT mean you will get a rent reduction from the landlord. You must have a signed contract for the business in order for a landlord to review your application. The goal is to get approved! A few dollars per month more or less is no victory or underwrites success for the applicant. You can talk about this with Ed Smith Business Broker. 702-274-7320
LEASE NEGOTIATIONS – FREE RENT AND FREE TENANT IMPROVEMENTS (TI’s)
Many business buyers automatically think that because they are a new store/new concept, that they are entitled to free rent for 1-6 months and/or TI money at so much per square foot. Sorry, but in over 90% of the times the landlord won’t give you one dollar! Why? Because he all ready has a good paying tenant in place who pays the rent every month so he asks himself, “Who needs you?”! They typically respond that if you have the money to buy the business then you should have the money to pay for your changes!
Generally, closing fees are split 50%-50% between the buyer and the seller. Please do not ask the seller to pay the buyers closing fees a part of your offer! This is considered a hostile negotiation term and I do not advise it at all! Closing fees are a general catch all definition wherein all the numerous search costs, document preparation and recordings, which can be extensive, are all covered. However, business sales, formally known as bulk sales, are overall much less expensive than real estate closings. Title companies don’t usually close bulk sales, escrow companies close bulk sales. Please don’t negotiate a business deal wherein you ask the other party to pay for all the closing fees. ALL FUNDS FOR THE CLOSING MUST BE WIRED IN AT LEAST 2 DAYS BEFRORE CLOSING!!!
INC & LLC ENTITY FORMATION
It is recommended for many reasons that you form an entity such as a corporation or limited liability company in Nevada for the ownership of your business. It is suggested that you do so immediately, so you have it on hand for whenever you buy and close the business sale. The contracts are generally typed with your name and or assigns. This allows the contract to be assigned to the entity should it not be formed at time of contract signing. Always pay the extra fee for the rapid turnaround service from the Secretary of State of Nevada. You can Google this site very easily and it is user friendly. Ed Smith Business Broker can help with suggestions.
Always try to return calls to the broker or agent as promptly as possible! They are very timely. If you change your cell number, please advise your broker as soon as possible. Please check your email very regularly as most correspondence is done through email. Texting is more for convenience and not official as emailing so email all important communications as they become part of the permanent record.
Please do not schedule any vacations when you have signed a contract to buy a business. Things happen very rapidly, and you will be expected to close when the paperwork is completed. If you have already scheduled a vacation or plan to be out of town for an extended period, then inform your broker ASAP!