Business Owners Resource Network

April 6, 2009

How Does A Buyer Decide What Business To Buy? What Business Owners Need to Know….Part Two

Filed under: 1,Business Brokers,Business Valuations — alieser @ 7:45 pm

 

In “How Does A Buyer Decide What Business To Buy?  What Business Owners Need to Know….Part One”, I addressed the impact that accurate record keeping and reporting has on the sale and value of a business.  In that blog, I suggested that the main reason a buyer chooses one business over another is the financial history. 

 

Once a buyer has seen the historical financial performance of a business, is comfortable that it meets his financial needs, and has determined that the data is reasonably accurate, his second concern is whether the business can sustain or improve that performance without the participation of the current owner. 

 

So, as a business owner, how should this knowledge affect your day to day operations?

 

As a business owner, it is important for you to set the stage for your eventual exit from the business.  This involves training employees so that they are capable of assuming some of your duties, especially those that involve interaction with customers.  Make sure that you are not perceived as the only “face” of the company. 

 

If it is normal in your industry to have contracts with customers, vendors or employees, implement these contracts long before you desire to sell as an indication to the buyer that each of these entities intends to continue their current relationship with your company.

 

Automate systems where logical to do so.  Spend some time documenting your procedures.   Clean house.  Perform maintenance.  To pay the highest price for your business, a buyer needs to feel that the necessary resources for him to be successful are already in place.  He needs to know that the business has been well tended and that it will not be complicated or require additional financial investment for him to step into your shoes.  Otherwise, the buyer will discount the value of your business to accommodate any additional cash outlay or effort that he perceives will be required to get the business to this level.

 

Stay tuned for additional tidbits on increasing the future value of your business.  Or feel free to call me or post questions or comments.

 

 

Anita Lieser, Senior Business Broker

913-433-2306

Sunbelt Business Advisors

7101 College Blvd. Suite 1650   Overland Park, KS  66210

 

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March 11, 2009

How Does A Buyer Decide What Business To Buy? What Business Owners Need to Know….Part One

Filed under: Business Brokers,Business Valuations — alieser @ 9:29 pm

As a part of my daily business brokering activities, I routinely talk to business owners who are considering selling their businesses.  I’ve detected a common misperception among these folks regarding the purchasing habits of business buyers.  “Just let me know when you have a buyer who is looking for a business in my industry,” they frequently comment.  Or, “I have a beautiful location.  Once a buyer sees it, it will sell itself.”  What they do not realize is that, unless the buyer already owns a business in a particular industry and is looking to expand through acquisition, buyers typically come to me not really knowing what kind of business they want to buy.  And, while the appearance of the premises does help to sell a business, I have yet to have a buyer make a buying decision only because the place looks good.  So what makes a buyer choose one business over another?  First and foremost, it’s all about the numbers.

 

As a buyer begins to investigate whether a business would be a good acquisition candidate for him, the critical question on his mind is, “If I buy this business, how much money can I make?”  Because no buyer has a crystal ball to know the future profits of a business, the financial history of the business is the key indicator of what a buyer can anticipate for future earnings.  And though the actual cash flow numbers are important, it is nearly equally as important to a buyer that the documentation supporting these numbers is reliable and easy to decipher.  Also, because savvy buyers understand the power of leveraging their money, a very large percentage of the transactions that we broker involve some sort of financing.  Therefore, three years of accurate historical financial data is also absolutely critical for a buyer to obtain bank financing. 

 

So, as a business owner, how should this knowledge affect your day to day operations?  Many business owners proudly explain to me that they have received the benefit of tax free revenues for several years by merely underreporting their revenues (or over-reporting expenses by including excessive personal expenses) on their tax returns.  As a business broker whose goal is to maximize the transaction value for my seller clients, I fail to understand their pride.  Business value and the amount that a bank will finance are based upon some multiple of the seller’s discretionary earnings as substantiated by tax returns.  Not reporting some earnings to Uncle Sam may save a business owner the tax burden of around 30% on those revenues.  The end result, however, may be a reduction in the value of the business of 100% to 300% or more of those revenues.  In addition, when a seller explains to a potential buyer that there are unreported revenues, buyers and bankers suddenly look at the business and its owner with a suspicious eye, wondering what other unexposed skeletons remain in the closet.  All financial information suddenly becomes suspect.  Frankly, my experience is that the buyer pool for a business with unreported revenues is reduced to a small fraction of what it could have been if the tax returns told “the whole story”, and lenders will only lend based on the cash flow shown on the tax return, no exceptions. 

 

So, if you are considering selling your business within the next three years and want to maximize the value of your business, the numbers of buyers who will consider purchasing it, and the opportunities for the buyer to find financing, the first step is to ensure that your tax returns give an accurate portrayal of the financial performance of your business.

 

Stay tuned for additional tidbits on increasing the future value of your business.  Or plan to attend the Business Owners’ Resource Network presentation, Not Just Surviving, But Thriving, on May 25 when one of my fellow business brokers, Joe Warner, will present information on this subject.  I welcome questions and comments.

 

Anita Lieser, Senior Business Broker

913-433-2306

Sunbelt Business Advisors

7101 College Blvd. Suite 1650   Overland Park, KS  66210

February 23, 2009

The First Step in Buying a Business

Filed under: Business Brokers,Business Valuations — alieser @ 3:58 pm

With layoffs and unemployment rates on the rise, many people are considering using their severance package to purchase a business.  Most, however, do not know where to begin the process.  They make an assumption that, similar to home buying, their first step should be a visit to the bank for loan pre-qualification.  In reality, lenders will consider both the buyer’s financial needs and capabilities and the financial strength of the business that they wish to purchase prior to making a loan commitment.  Therefore, most banks will want a buyer to have their business search narrowed to a particular business with an accepted offer on the table before they will qualify the buyer for a loan.

 

So, how do you begin the process of buying a business?  As a business broker, I meet with many first time buyers who have been searching the internet for businesses for sale, but are so confused by terminology and pricing that they fail to inquire for months or even years.  An initial no-obligation visit with a business broker can clarify a number of issues for a potential buyer, such as the size of business that you should be contemplating based upon your available down payment and income needs, what you should anticipate from a financing prospective, what “cash flow” means, and how “cash flow” is used to determine the value of a business.  This initial meeting will frequently conclude with a potential buyer completing a non-disclosure agreement (NDA) which will then allow the business broker to share information on any particular business listings that meet the buyer’s criteria.  Though business brokers are most often hired by the seller with the seller paying any broker’s fees, brokers typically are only paid when the business is sold.  Therefore, it is in the best interest of the broker and the seller for the broker to assist the often-nervous novice buyer throughout the process so that everyone is comfortable with the transaction, significantly increasing the probability of a successful transaction.

 

If you are interested in exploring the possibility of buying a business, pick-up the phone and set an appointment with a business broker.  This one hour investment of your time could save you months of “spinning your wheels” and could significantly streamline your road to entrepreneurship.

 

Anita Lieser, Senior Business Broker

913-433-2306

Sunbelt Business Advisors

7101 College Blvd. Suite 1650   Overland Park, KS  66210

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