BUYERS: We assist buyers step in the shoes of the seller and direct the sellers cash flow into the new buyers family income; oftentimes buyers are seeking to have a more secure method of earning a living, with the control of deciding their own destiny, without approval from the company headquarters on how they spend their day; refining and honing a skill that specializes in something the buyer has a passion for, oftentimes feels like its a profitable hobby that makes a good living doing something they own & control the outcome of each & every day. The time to buy a business and give yourself a 6-7-figure income, might be right now! Buying a business is a process that takes time. It can sometimes take years to find the right opportunity. When buying a business, you shall expect to sign a Non-Disclosure Agreement, disclose financial information about your ability to purchase and have a resume prepared (important for finance institutions also) showcasing your talents. There are some key steps to follow in the business search process:
Why do you want to buy a business. What work activities do you like. What lifestyle do you wish to pursue? This might not be a 9-5 work routine; you might be the first to arrive & the last to leave while protecting & developing your investment. Consider kids & family in your expectations. After your initial time, automate & enjoy a business that may run without you.
Determine what income you need to earn. Make sure your expectations are in line with the business financials and the cash flow return it can produce.
Compile your assets and liabilities. Identify the capital you’ll invest. Your Personal Financial Statement showcases your financial wherewithal; you’ll likely share this with the seller’s business broker. The Seller’s business broker will assess your abilities as a qualified candidate for the Seller.
Decide what industries you wish to understand & search for, what geographic area, and transaction size works best. Your motivation, lifestyle, expectations, financial statement, and résumé will help you develop your acquisition criteria.
There are pros and cons to both buying and starting a business. Seasoned entrepreneurs have discovered, the risk/rewa ratio favors buying an existing business.
Starting a business can pay great dividends, but 40% of new businesses fail in the first year and 80 percent fail within 5 years. Source: Michael Gerber, author of The E-Myth Revisited
Purchasing an existing business reduces the risk & creates opportunities for tremendous profit. Reasons to buy a business are denoted below:
Bank Financing: Buying an established business is less risky; you know the process & model is proven. Banks finance existing companies but rarely fund start-ups. Financing startups is often “your money, but existing businesses have a proven track record.
Brand: You’re buying a brand name. Marketing & networking was already done; this Branding transfers to you. When you have an established name in the business community, it’s easier to attract new business than with an unproven start up.
Relationships: You are buying an existing customer base and vendor base that took years to build. It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer.
Focus: When you buy a business, you start working immediately and focus on improving and growing it; the seller already laid the foundation and took care of the time-consuming, tedious start up work. Starting a new business means spending time and money on computers, phones, furniture & policies that don’t generate cash flow.
People: In an acquisition, the most valuable assets is the people who show up & make the business work. It took the seller time to find, develop and assimilate a company culture. With the right team, you can focus on growth. And trained people provide freedom to take vacation, spend time with family, or work on other business ventures. When start-up owners & contractors go on vacation, so does the business.
Cash Flow: Existing business sales are structured so debt service is covered with a reasonable salary, and a profit for growth. Start-up owners may “starve” for three years.
Risk:
BUYING A BUSINESS: Lenders believe it is cheaper & less risky, to BUY an EXISTING business than to start one; if a buyer pays $1M for a business with cash flows of $200,000-$300,000; the lending institutions have specialists that analyze the risk to support the purchase price. Why: You and the Bank both have years of historical data to make sound decisions on; this minimizes your risk of adverse consequence.
STARTING A BUSINESS: You save the front end purchase, but have no historical data to make true assessments on as you build it. Gaining customers is important, but gaining loyal customers is priceless. What if you run out of funds, while you’re developing customers, employees, vendors, figuring out the model, learning hard lessons, building your experience; finding the right mix means you must develop an unproven concept, and hope it works. You must figure every aspect just right: pricing-employees-vendors-customers who become loyal (more than just 1 order)-customers who pay-landlord-permits-inspections-buildouts-data systems-phone systems-bank accounts-creating a culture-work hours-etc. Meanwhile, you need to maintain cash flow and not run out of resources. The bank understands this is risky, so you will collateralize your house, kids college, 401k, etc.
Funding costs are low-at first, but as costs become realized later on (you have zero historical cash flow to analyze), costs become more than you planned. This is like a plane, taking off with an unproven flight path and calculating how much runway you need to build the speed. If your calculations are correct, you lift before the runway ends, if wrong-you crash and some liftoffs are hopes that don’t materialize. Then, who do you turn to, your friends, your family, your credit cards, your home, your spouse’s family, your kids college, etc. Starting a Business can work, but when you buy, you’re buying a proven concept that works and will meet the scrutiny of the bank who also has your back because they are betting on your success.
The small business markets have several creative tools for today’s business buyers. Denoted below are several creative financing options that you can consider:
SBA Loans – (bank guarantees) conventional bank loans may not be fully available, so buyers speak with the broker to line up a Small Business Administration (SBA) lender for your industry, which has several loan options. The SBA guarantees a portion of the loan; buyer pays an SBA loan fee to obtain loans that the bank wouldn’t do conventionally. If an SBA guaranteed loan goes into default, the SBA will pay the lending institution up to 75 percent of any deficit left after liquidating the collateral. . Several SBA changes to the Small Business Administration’s lending guidelines and standard operating procedures have been updated recently. The broker will assist you with this.
Seller Financing – Buyers & lenders often seek seller financing as part of their loan process. Herein, the seller holds a note at an agreed upon interest rate, amortization for x months. Or the note has a Balloon payment. Balloons yield faster sales, flexibility, tax breaks & financing protections. The right note structure can even change the debt into equity for financing purposes. Lenders obtain comfort knowing the seller has a vested interest in buyers’ success.
Earnouts – (turnarounds) Earnout financing involves a certain dollar amount agreed on by the buyer and seller to be paid to the seller based on the performance of the company after the transaction is completed. Earnouts can be structured in a variety of ways and can be based on different financial benchmarks such as customer retention, company revenues, gross profits, or net income. Earnout financing is often used for companies that are in a turnaround situation or when buyers are purchasing on potential, rather than on historical cash flow.
Mezzanine Financing– In M&A, mezzanine financing is another alternative for a buyer looking for capital where the financing package may include interest rates of 20 to 30 percent. The lenders in this situation are typically high net worth clients expecting a larger rate of return.
They lend in a junior position behind (subordinated to) the bank and seller financing. The loans have limited sources of collateral & higher interest rates. This financing might be used in funding goodwill or reputation in an acquisition.
Funding Scenario – In a million-dollar transaction, the buyer would be expected to have a 20 percent down payment. The seller may hold an additional 10 to 20 percent in seller financing, and the lending institution would offer a combination of conventional or SBA financing to cover the difference, depending on collateral available. A buyer and the lending institution must evaluate a company’s cash flow and determine if it is adequate to cover their debt service and provide a reasonable return on their investment. Lending institutions will also be examining whether a buyer’s coverage ratio, or excess cash flow after all debt is paid, is adequate to cover their needs.
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