Site icon Small Business Consultant Services

How To Buy A Business Safely

How To Buy A Business Safely

One of the top questions people ask is how to buy a business safely. You can immediately reduce risk by buying an established business. This post details the steps to buy an established business for little or no money.

 

How to know if you’re an entrepreneur

Consider your personality and ask yourself if you’re suited to work hard for a long time before reaching your income goals. Take this Entrepreneur Quiz by clicking here

 

How to Establish Search Criteria

Most businesses for sale websites allow you to use filters to refine your search to companies that meet your requirements and are candidates for further review. Establish the following criteria before you perform a search.

Gross Sales: (range)
Number of Employees: (range)
Management in Place: (Y/N)
Industries: (you can target several)
Product Company: (Y/N)
Services Company: (Y/N)
Retail: (Y/N)
Zip Codes: (zip codes, county, state)

 

How to find the right business

Getting a steady stream of deals is essential in finding the right business to buy. Business for Sale Websites is an excellent place to search for companies to buy. Most business-for-sale websites allow you to add your criteria and set email alerts: Bizbuysell.com, Bizquest.com, and BusinessBroker.net. These are sites that will enable the use of filters. Also, use Linkedin, Accountants, Networking Events, Banks, Score, Letters, and Social Media. Use your creativity to create a steady stream of deals.

 

How to determine what any company is worth

Small businesses sell at a multiple of 2.41 to 3.43 times earnings, according to the latest Bizbuysell Insight Report. The median sale price of companies sold in the 3rd quarter of 2020 was $299,500, a 19.8% jump from a year ago. The Bizbuysell Insight Report contains informative data that every serious buyer needs to study.

 

How to buy a company with little or no money

A professional Business Plan is needed to attract money to buy a business with little or no money. The plan needs to show the financial benefits that an investor will see by contributing their capital. Following are examples of different deal structures that may be used to help construct a deal for your specific situation.

No Money Down

Offer to assume liabilities such as vehicle leases, equipment leases, utilities, taxes, credit card payments, etc. The remaining balance due on the purchase price is paid on a deferred consideration basis. This works about 10% of the time.

Using Existing Assets

Sell unused equipment like vehicles or equipment that aren’t frequently used. Look for machinery or any assets that don’t generate revenue or are underperforming. This works well with landscaping and construction companies but can work for any business with assets. You need to own the assets before selling them, so you may need a bridge loan to facilitate this strategy.

Seller Financing

Offer a down payment with the seller financing the balance with a seller note. The owner will only do seller financing if they believe in your ability to successfully run the business in a manner that allows you to service the debt.

Creative Offer

Supply free labor for a period to get a 20% credit towards the purchase price for a down payment. You can then go to the bank with a 20% down payment and get a traditional loan. Additionally, you become more bankable by having direct experience in the operation of the business.

Bring On Investors

Consider bringing in investors to contribute the required money in exchange for a share of the business’s profits. The investment return should be at least a 7% ROI to make it an attractive investment for your capital partner.

 

How to Understand the Balance Sheet, P&L, and Cash Flow Statement

 

Balance Sheet

A balance sheet describes a company’s assets, liabilities, and shareholders’ equity at a specific time. It is a financial statement that shows what a company owns and owes and gives insight into underperforming assets that can be leveraged for a possible acquisition.

 

Profit & Loss

The profit and loss statement is a financial statement that summarizes revenues, costs, and expenses during a fiscal quarter or year. The profit and loss (income statement) should be reconciled with tax returns.

 

Cashflow Statement

The cash flow statement summarizes the amount of cash entering and leaving a company. The cash flow statement measures the company’s cash to pay its debt obligations and generate profit expenses.

 

How to calculate the adjusted cash flow?

Adjusted cash flow is a company’s net earnings after expenses. It details the earnings before interest, depreciation, and taxes but includes add-backs for seller discretionary items and one-time expenses.

How to determine value if financial records can’t be trusted?

Use the asset value of any equipment and machinery plus consideration for goodwill. Also, consider multiple sales rules of thumb to calculate your offer with a 20% to 40% discount. Combine the average of these two methods to arrive at a fair price. Gross sales should be verified with three years of tax returns. Business owners are not likely to overstate gross sales on tax returns but commonly overstate expenses, which causes the under-reporting income for tax benefits.

 

Asset Sale Versus Stock Sale?

An asset sale should be the first choice as the transaction to buy a business. It’s simpler and cheaper to execute as the seller keeps their liabilities without exposing you to anything that pre-dates your ownership.
Asset sales offer the following advantages:

 

Advantages of An Asset Sale

Can offer depreciation & amortization tax benefits
Goodwill can be amortized over 15 years on business tax returns
More financing flexibility by assuming selected liabilities
Limited exposure after-sale reduces due diligence and transaction costs
More flexibility with employee decisions and staffing

 

When to Use a Stock Sale

A stock sale should be used when there is something of value in the business that you need going forward. An example would be a liquor license or a required permit to operate the business. This may be critical if you can’t get the authority to operate on your own or if it is cost-prohibitive. You may also be unable to get the license on time, disrupting business operations. The other reason to buy stock to own a company is you can do a more complex deal structure. Financing may be easier if you have the company’s credit history to get bigger loans approved. The advantages of a stock sale include the following:

 

Advantages of a Stock Sale

Maintain contracts with customers reducing revenue risk
Keep trade credits and predictable pricing and terms with suppliers.
Employees are less likely to leave as nothing has changed.

 

Choosing the Correct Business Entity

Choosing the right entity can have business and tax implications that should be considered before making a decision. Less complex deals should generally be done as an asset sale. Stock sales should only be made when there is a financial benefit of doing, so that is worth the additional time and expense. Due diligence needs to be more thorough because unknown liabilities become yours after closing.

 

How To Buy A Business and Turn It Around

 

What does it take to turn around a business?

The first step in buying a business for turn-around is to get it for the right price. There should be enough money in the discount so you can correct the wrong things. The most powerful strategy to improve a business is to look at what the top-performing competitors are doing and model their best practices. Underperforming businesses could be turned around if the following practices are followed.

Get Involved

Join organizations that allow you to introduce your company to the community, customers, and your peers. Consider joining the Chamber of Commerce, your trade association, and a BNI group. Commit to a networking event at least once per month.

Get Professional Help

Find a free SCORE mentor to get help in improving your business. Read at least one business book per quarter. Consider getting the audible version if you’re strapped for time. Google the ten best books for business owners to read now and add them to your reading list.

Sales & Marketing

Budget at least 10% on sales & marketing as a percentage of sales or the sales level you would like to hit. Include search engine optimization (SEO) and social media in your marketing plans. Map out your sales funnel and measure key metrics to determine your costs to acquire a new customer.

 

Get a franchise resale at a massive discount

I recently found a franchise resale that was opened in 2004 for sale. The asking price was $149,500, with gross sales of over $500,000. A new franchise averages $125,000 with zero sales. Franchise resales can be had a huge bargain, especially with a bit of negotiation. I also saw a landscaping franchise started in 2014 with an asking price of $115,000. Sales were about $410,000 annually. The same franchise new would be about $200,000. You get all the benefits of an established business with a strong brand at a discount.

 

What are the “right things wrong” that can make a business perfect

Many great businesses are available for sale that would make great acquisitions, but this article is about a less obvious place to find a great acquisition. Many businesses being offered for sale are lousy. Lousy companies have little or no stated income, and the owner wants an absurd price for the business. There are usually systemic problems with these businesses, like low sales, poor profitability, lack of systems, and little documentation, to name a few…

 

 

Buying a Lousy Company

You should consider lousy businesses because they are abundant and can be had for a great price. The acquisition requires patience and discipline, but this can be the most profitable transaction you can make with the least risk. You buy below or near asset value or in line with verifiable cash flow to make it a safe investment. You can sell the assets to recoup your investment should you change course. The reality is that most of these businesses will never sell and simply close their doors. These are true bargains if you can buy the assets and build a successful business around them.

 

Buying A Lousy Business Can Be Perfect If  It Has The Right Things Wrong

 

The right things wrong are the things that you can fix with your resources and skills. The most common problem with businesses is the lack of marketing and sales. Most businesses do an adequate job of delivering goods and services but fail to have systems to grow the business. When sales are poor, there is little or no money to address anything but day-to-day survival, which eventually leads to a distressed sale.

 

 

The Right Things Wrong

Look for businesses with the “right things wrong.” You can buy a business with strong marketing and sales and plug in your operational skills if you are a strong operations person. A company with good products or services with lousy marketing and sales needs an executive that can sell. Using this approach, you can get extreme bargains! Make many “aggressive” offers and exercise patience. Walk away from anything that isn’t a great deal. There are so many lousy businesses you will eventually get the business with the right things wrong. Plug in your skills and resources, and you will have a very nice business.

 

Buy A Business With Little Or No Money Webinar

We have regular webinars addressing the different topics related to buying an established business. Our live sessions are worth attending even if you have already gone in the past. New content is always being added as market conditions change. Stay up to date with the latest strategies by clicking here to register for our next webinar.

Exit mobile version