Buying A Business
Frequently Asked Questions
AZBBA business brokers frequently find themselves answering questions like the following:
When do I need to consult with an attorney?
It may be advantageous to consult with an attorney who is familiar with the business acquisition process early during the review of legal documents associated with the transaction. You will want the attorney to be available when needed and have the requisite experience to ensure that all the details are considered. Business brokers typically understand buy/sell contracts and normally prepare these documents. They also know when agreements are balanced and fair, and can identify issues that need to be addressed. Your attorney will be your advocate only, yet the seller’s interests must be balanced with those of yours, else the transaction will never get done. You also need be mindful that many attorneys are not qualified to give business advice much in the same way that business brokers are not qualified to give legal advice. In Arizona, the State Constitution permits business brokers, who are licensed by the Arizona Department of Real Estate, to prepare all legal documents associated with a business transaction so long as they do not charge a fee for such service.
How is the asking price of a business established?
Generally speaking, the business broker and seller establish an asking price based on what they think the business will sell for based on 1) market considerations, 2) a review of the financial records of the business, 3) the general health of the business, and 4) a prospective buyer’s ability to finance the business acquisition. The financial goals, personal objectives, and reasons the seller is selling the business are frequently considered in the asking price. Armed with this information, the business broker will draw upon his/her professional experience in the Arizona market place, business valuation formulas, published resources, expert opinions, and market comparables when recommending a realistic asking price to the seller. However, the final asking price is set by the seller.
How do I know if I am paying too little or too much for a business?
Many factors affect a buyer’s perception of value. It might be the quality of the books and records, past financial performance, the future growth potential of the business or a vast combination of other factors. But in general, the more cash demanded by the seller at closing, the lower the selling price and the smaller the cash requirements, or cash equivalents, of the seller the high the selling price. In many cases, the “deal structure” (the terms of the sale) will have more impact on selling price than anything else. Would you being paying too much after making a small down payment, if the business provides you with more profits than you thought possible even after adjusting for debt service to the seller or lender?
What does it take to be successful?
The lack of adequate working capital is one of the major reasons why new business owners fail. If you want to make substantial improvements and finance growth, you must have adequate financial reserves to be successful. Further, hard work and long hours will contribute to your success, but being the “everyman” in the business is no substitute for the need to spend time on fiscal planning and business development activities. One key to success is to work “on” the business more than you work “in” the business. The other key to success is to be a “doer”, not just a “thinker”. A conscious effort to balance the two keys to success will yield the best result.
I’ve found a business that I want to buy, now what?
The AZBBA broker will answer your immediate questions about the target business and how the deal is structured in the offering package. Different brokers use different approaches for introducing the seller to your interest in the business and, conversely, relating the seller’s requirements for working with you as a prospective buyer. Every deal is different, but usually your offer is made verbally following one or more exploratory meetings between you and the seller, and initial due diligence by you. Your offer typically includes selling price, financing terms, and conditions of the sale. The business broker facilitates communications between you and the seller until the terms of the sale are mutually agreed and a purchase agreement is drafted. Following that, the transaction follows a course dictated by the terms of the executed purchase agreement and ultimately culminates in the successful closing of the transaction.
Why do people really go into business for themselves?
Surveys taken to answer this question reveal the same answers time and time again almost in the same order of importance
to do my own thing and control my own destiny
don’t want to work for someone else
to better utilize my skills and abilities
to make money
That’s correct. To make money is fourth on the list.
What type of business should I look for?
You should consider those businesses that you would feel comfortable with owning and operating, and in which you have some experience that is relevant and transferable to the business you want to buy. Obviously, you should carefully evaluate your personal circumstances, your financial needs and objectives, and how you plan to maintain and grow the business going forward. One question you should ask yourself is “Do I see myself being in this business for the long run?
Why should I use a business broker to help me find a business?
An AZBBA broker can provide you with an entire collection of candidate businesses that meet your purchase criteria. Many times, the selected businesses would not have been a consideration of yours due to the lack of knowledge about the availability of some niche or unusual businesses. Besides the expertise and experience business brokers bring to the process, they are excellent sources of information about small business operations and about the communities in which they operate. Further, business brokers handle all the details of the business sale and will do everything possible to ensure that the transaction is on track to a successful completion.
What is an earnout?
Earnout financing involves a specified dollar amount, agreed by you and the 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 a company’s revenues, gross profits, or net income. Earnouts are often seen in transactions where the purchased company is in a turn-around situation or when buyers are purchasing on the future potential of the business, rather than on historical cash flows.