The purchase of a business is one of the most important and risky transactions a person can go through. There are many steps that a prospective buyer must go through for the transaction to be successful.\u00a0 Anyone who has done this will attest to the fact that the process is long, challenging and stressful.\u00a0 However, on the other side of the coin, if a person finds a business that fits their expertise, creates a passion for the effort that\u2019s involved and provides positive post-debt service cash flow to cover their personal and business needs, then it is worth the effort.<\/p>\n
At Sunbelt Business Advisors, we have found that being brutally honest about the journey a buyer is going to go on pays dividends.\u00a0 Rather than lose heart towards the end of a deal let\u2019s find out early if a business acquisition really makes good sense for the buyer.\u00a0 To that end, here are some thoughts on what buyers should expect and the steps we recommend in purchasing a business.<\/p>\n
Perform a Personal Audit<\/strong><\/p>\n Many people we meet are interested in buying a business as a way to find a new job.\u00a0 Others have had a dream of business ownership for many years.\u00a0 Whatever the reasons, the initial questions are the same:\u00a0 are you willing to risk much, if not most, of your savings to put into the deal;\u00a0 will your spouse support the decision; are you willing to have the lender put a second mortgage on your home; do you have the skills necessary to manage and add value to a business?<\/p>\n There is a certain amount of safety in earning a paycheck from an employer, even if it\u2019s not a great situation.\u00a0 That certainty is significantly reduced when you are the boss.\u00a0 Are you jumping from the frying pan and into the fire?\u00a0 You need to look into the mirror and be very honest with yourself that you can handle the stress of the unknown.\u00a0 If you\u2019re married, you have to discuss the challenges honestly with your spouse and make sure they can handle the stress and uncertainty with you.<\/p>\n Can you defend your decision with parents, in-laws, friends and other advisors who are generally going to a provide risk averse perspective?\u00a0 If you can\u2019t then walk away.<\/p>\n This may sound trite and condescending, but we\u2019ve had deals break down close to the finish line when a buyer loses heart.<\/p>\n Investment Parameters<\/strong><\/p>\n Some folks who inquire about our listings believe there are deals out there that can be done without any cash investment.\u00a0 Let me assure you, those don\u2019t exist or at least we haven\u2019t found any.\u00a0 In general, here are some guidelines for what to expect when looking at a deal:<\/p>\n For the most part, conventional lenders need the entire deal fully collateralized.\u00a0 This is important to recognize when you are looking at a business where the price has been determined by a multiple of adjusted earnings.\u00a0 The price will always be significantly more than the value of the assets being purchased.\u00a0 That collateral shortfall, commonly referred to as goodwill, needs to be filled in by the buyer.\u00a0 This means pledging personal assets, home equity, stocks, etc. as collateral.\u00a0 We see these deals get done and are the quickest, least expensive ways to get a deal financed.\u00a0 Unfortunately, many buyers either don\u2019t want to risk all their personal assets or don\u2019t have enough to make the deal work.<\/p>\n As a result, SBA loans are used most often in the deals we work on.\u00a0 \u00a0A preferred SBA lender will loan on the goodwill if the business cash flows with sufficient debt coverage.\u00a0 For businesses with under $500,000 in uncollateralized value a down payment of at least 20% of the sale price will be needed.\u00a0 This can be a combination of buyer cash and seller note.\u00a0 If the uncollateralized amount is over $500,000 a minimum of 25% down payment will be required.\u00a0 Additionally, the bank will require some personal assets to be pledged.\u00a0 In general, most deals require at least a 10-15% down payment from the buyer.<\/p>\n Seller notes can sometimes be negotiated with an owner.\u00a0 As stated above, this can be used as part of the total down payment required for an SBA loan.\u00a0 In order for a seller to agree to take back a note they must have the utmost confidence in the buyer\u2019s ability to operate the business successfully and repay the loan.\u00a0 There are also cases where there is no bank lending involved and the entire transaction is made up of buyer cash and a note from the owner.<\/p>\n The bottom line is a committed buyer will need to put significant personal funds at risk in order to acquire a business.\u00a0 The decision to do so must be based on the strength of the business being acquired and the well-grounded confidence of the buyer in the skills they are bringing to the business.<\/p>\n Other funding sources can include family and friends.\u00a0 When this is the case it is our policy to meet with all parties to understand the level of commitment to the deal and willingness to loan the funds.\u00a0 Uncle Fred may have said he\u2019d support you after a few glasses of wine at Thanksgiving, but that commitment needs to be tested and confirmed before moving forward.<\/p>\n Buy a Business You Like and Can Manage<\/strong><\/p>\n In the initial phase of reviewing opportunities the first and most critical factor is being able to see yourself in the role of the owner and determining that you will look forward to going to work every day.\u00a0 As you are introduced to a business you need to understand the role and responsibilities of the current owner and how your skills will fit.\u00a0 In some cases you want to understand the limitations of the owner (adapting to technology, for example, or lacking a fondness for the business development process) and how you may be able to improve on those limitations.<\/p>\n While a prospective buyer needs have the broad skill sets necessary to be successful, they don\u2019t have to know everything about the business.\u00a0 A transition plan is built into every deal in order for the previous owner to transfer as much knowledge about the business as possible.\u00a0 This transition process is also focused on transferring customer relationships and having the previous owner show support of the new owner to the employees.<\/p>\n Next month \u2013 an overview of the step-by-step process of buying a business.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" The purchase of a business is one of the most important and risky transactions a person can go through. There are many steps that a prospective buyer must go through for the transaction to be successful.\u00a0 Anyone who has done this will attest to the fact that the process is long, challenging and stressful.\u00a0 However, […]<\/p>\n","protected":false},"author":51,"featured_media":11737,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"footnotes":""},"categories":[3,17],"tags":[],"class_list":["post-1864","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buying-a-business","category-general"],"acf":[],"yoast_head":"\n