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 as compared to home buying and other common real estate transactions. Most buyers and sellers know 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 the fluff.
– Ed Smith, “Nevada’s Top 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 Utah and not those of First Choice Business Brokers LV101. 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 woven into a busy daily appointment schedule does not allow us to respond like Amazon Prime.
NON-DISCLOSURE AGREEMENT (NDA)
Buyers will be 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 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 TOP THE OWNER OR CHAT WITH THE EMPLOYEES!!
NO IDENTIFICATION INFORMATION
Generally, there is little identification information in any internet advertising. That’s because you need the required NDA as in #1. So please don’t call the broker an 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 NDA procedure! No Exceptions!
CURIOSITY & THIRD PARTY CALLS
Do not call a business broker just to find out “where it is” or other seeming simple answers to questions. Other than the most basic information, in order to receive details about the business, you 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 these people or 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.
YOUR REALTOR CANNOT SELL YOU A BUSINESS
Often business buyers think they can use the same realtor with whom they bought or sold their home to help buy a business for them. Business negotiations and sales must, by Nevada law, be conducted by a person with a real estate license and the required business broker permit. There are only a handful of licensed business brokers in the Valley compared to about 22,000 real estate licensees!
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. Good businesses attract a lot of attention 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 your broker!
LOW PRICED BUSINESSES
Businesses sold for under $50,000 often don’t even come with a P&L Statement. They are typically known as working asset sales wherein the income, if any, is not an issue. Higher priced businesses generally do come with CPA 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 value!
ABSENTEE OWNER BUSINESSES
The price range for these is usually $500,000+. Some Buyers think they can spend $60,000 to get a business that they don’t have to work in and that makes $100,000 per year in net income. Don’t kid yourself! Most small businesses require active hands-on operators to thrive. 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 lose the business!
EXECUTIVE SUMMARY INFO
The executive summaries or most other information packages about the business generally have P&L Statements, Federal Tax Returns, and Equipment List etc. 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 get on QuickBooks!
Some people ask for “audited financials” on the business. Ha-Ha! This will never happen with small business sales. That procedure is commonly used for publicly traded companies, banks, national franchise corporations, etc. Never the local pizzeria!
THE BOTTOM LINE
I suggest you never look at the bottom line on a P&L Statement or Federal Tax Return and believe that bottom line number is the true or accurate net income figure. Most small business owners look to reduce or even “zero out” the bottom-line profit number by using the many legitimate tax deductions and “standard deductions” offered by the IRS Code. Often much if not all of their profit is in many “add backs” such as their car lease payment for their vehicle or the paper loss created by the depreciation number (if any) on the first page of the tax return. Often it is the total amount of addbacks that create most of or all of the actual profit! You can chat with Ed Smith Business Broker.
Most businesses sell for a certain multiple (varies) plus replacement value of tangible equipment, location, franchised or not, and a host of other factors. There are NO comparable sales (comps) used in valuation like those used in residential real estate. Even the SBA doesn’t use comps, just 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 chisel another $10,000 or $20,000 of 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!!
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 an 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.
Probably about 90% of all businesses in America will not qualify for SBA financing. It is not because the business is bad, but more likely the paperwork including tax returns are in poor condition or the seller is writing off too much profit with too many add back expenses to suit the lender. SBA funding requires the Buyer to have direct experience in the business industry that they are buying.
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! Call Ed Smith Business Broker, 702-274-7320.
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 your broker! 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 for a living and they don’t! It 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.
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 that 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.
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 minimum of $10,000 or 10% of the offered price 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 10% of offer earnest money deposit check.
Upon completing negotiations with the seller and receiving the fully executed contract, the purchase process begins. Due diligence arrangements are made directly between buyer and seller. Upon approving and signing off of the due diligence contingency, application is made to the landlord for lease approval and if there is bank financing, then that application is submitted. If there are privileged licenses required such as beer & wine, liquor, gaming, used car dealership, used furniture or pawn shop, money lending etc. then theses applications are submitted as well and with the assistance of a qualified licensing professional. Upon the completion of these events, the sale closes.
Please be guided by the direction given by the business broker. Buyer-created variations are generally very destructive.
Business sales are relatively easy; only the people involved can make sales difficult.
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. Many people remember opening the escrow on their last home purchase with a $500.00 check. Forget it! Business brokerage is business and if you are serious, the 10% earnest money deposit will help assure that. 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!
Escrow companies (generally not title companies) perform the searches 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.
Most sales require a “Due Diligence” period wherein the buyer can review all financial documents generally going back 3 years if necessary. Some businesses aren’t that old 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 5 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. However, almost everything can be verified one way or another. Feel free to discuss this with Ed Smith Business Broker.
DUE DILIGENCE RECORDS
The Due Diligence financial records (not necessarily 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.
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 it is a new lease or an 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. Some lease approvals can be completed in a week or two, while others can take several months. The goal here is to get approved! No lease approval no sale! Ed Smith Business Broker helps you through this process.
Lease applications can be a multipage application plus other financial submissions to just 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 submitted. 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 $1,500. You are correct, this fee is nonrefundable. Normally application fees are split as closing fees between buyer and seller. 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.
Most of the time there is 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.
Generally, closing fees are split 50%-50% between the buyer and the seller. Closing fees are a general catch all definition wherein all the numerous search costs and document preparation, which can be extensive, are covered. However, business sales, formally known as bulk sales, are overall 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. This is a very inappropriate technique that wins you no points in business sales. 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 turn around 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 often 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.
E-MAILS NOT TEXTED MESSAGES!
Please use emails to communicate viable factual types of information, not text messages. Emails become part of the 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!