Buy a Business

Ready to Buy? Choose VR in Lynwood, Washington!

If you're looking for a small company to buy, you probably have a lot of questions. Questions like . .

• How do I get started?

• How do I find a really solid business?

• How do I get financial information from the seller?

• What is a business really worth?

• What strategy should I use when making an offer?

• What is the right price?

• Who will write the Purchase and Sale Agreement?

• When should I get a lawyer or accountant involved?

• How do I get the lease I want?

• How can I be sure this is the right business for me?

For answers to these questions or questions on other issues, call toll free 1-888-400-VRBB to schedule an appointment.

By working with VR in Lynwood, Washington you have the advantage of dealing with the largest and most experienced business brokerage organization in the world. We can introduce you to more good business opportunities than anyone.

How Can I Avoid Overpaying For A Business?

Secure an independent business appraisal in order to insure that you don't overpay. The financial institution, which will provide financing for you, will require one anyway.

We live in an era of globalization and all of us are affected by what happens elsewhere, particularly in our own country! It would be a mistake to ignore other economic markets, especially if using them would be to your advantage. Consequently, you need to use an appraiser who has national and international experience in order to take advantage of appropriate pricing policies supported by areas with different economies. A believable appraiser must have significant experience in all types of businesses with ample comparable data to support his/her decisions and extraordinary credibility to impress the advisors of all parties concerned.

In order for the appraisal to be credible and substantial to other parties in the transaction, the appraiser should be a totally independent third-party, who has no other business relations with either you or the owner. One of our colleagues recently surveyed appraisers who were challenged in business buy/sell transactions, and compiled the following list that a certified appraiser should be prepared to answer correctly:

• How many business appraisals did you do in the last year?

• What percentage of your time is spent in business appraising?

• What business appraisal designations/certifications do you have?

• What is required to retain these designations/certifications?

• How many methodologies did you use and what alternative methods did you consider?

• What articles and books have you written on the subject of business appraisals?

• Have you worked for this client before and in what capacity?

• By what professional practice do you claim this to be unbiased?

• Have you followed the departure provisions or does your report meet the standards as set by the Appraisal Foundation, as required by law under the Uniform Standards of Professional Appraisal Practice (USPAP)?

 

1) Buy an Established Business Instead of Starting One Up

If you want to get into business, let someone else take the risk and high cost of starting from scratch. A big advantage in buying an established business is that you, as the new owner, have immediate cash flow and two of the necessary components of success:

• A proven location (an established customer base)
• An established product or service

You don't have to build a business; you simply take over an established business and provide the third ingredient: Management.

2) Look for a Business That is Established, but Has Some Problems You Can Solve

Some buyers look for the "perfect" business (high profits, low risk, great potential, easy to run, no problems, etc.). If they can ever find a business like that, the price will be very high . . . and they will be competing with well-financed industry professionals and corporate buyers to purchase the business.

Other buyers look for very cheap businesses, often closed down or failing. These businesses are very risky and may involve significant additional investment to make them profitable. They are usually best left to industry professionals or corporate buyers who can afford the cost and the risk.

Most of the Main Street businesses VR sells are in the "Safety Zone." These businesses are priced lower than the "perfect" business (if it really exists!), but are less risky than the closed or failing business. The key is to look for a business that is established, but has some problems you can solve. That way the business will be affordable and you can take all the profit from the improvements you make.

3) Provide the Seller with What They Like to See

Buying a small business in not easy and you will have questions and concerns. Selling a business creates just as many questions and concerns for the seller. You can often get a significantly better price and terms by being aware of the seller's needs and removing some of his/her concerns and uncertainties.

Resume and Financial Statement - The more information the seller has on your experience, qualifications, and financial situation; the more likely he/she will accept the offer you make. When a seller extends financing to you, the seller is acting as your banker and he/she needs to feel comfortable with you. Remember, once the seller accepts your offer, they are committed; but typically you still have contingencies to remove before moving ahead.

A Fair Offer - A fair offer is one that realistically satisfies the needs of both you and the seller. Sometimes that results in an offer, which may be quite different from the seller's asking terms. We help develop a win-win offer. A word of caution: What about "low ball" offers? They quite likely will damage your relationship with the seller and could possibly reduce your chances of getting the business for a fair price.

Reasonable Down Payment - Every buyer wants to conserve cash, but a very low down payment can indicate a buyer's lack of commitment to the business. The number one concern of sellers is the safety of taking a note from the buyer. If the seller questions a buyer's commitment or seriousness about the business, the seller may not negotiate seriously with that buyer.

Quick Removal of Contingencies - It's to everyone's advantage to proceed through the contingency removal phase in a quick, but thorough fashion.

Financing Options

Financing a business purchase is very different from financing a home purchase. In a business purchase, both the business's and the buyer's financials are scrutinized to make sure the deal makes sense. Because lenders loan money based upon a borrower's ability to repay the loan, the cash flow of the business is a critical element in the loan decision. If the business doesn't generate enough cash flow to pay the loan and meet all of the Buyer's personal lifestyle needs, the lender will most likely not fund the deal. As a result, sometimes even a money-making business cannot be financed because the potential borrower has personal needs that exceed the income generated by the business's cash flow.

Lenders on real estate transactions typically lend based upon the value of the real estate. If a borrower defaults on a home loan, the lender can simply take the property back and sell it to cover their loan. Most business purchases, however, do not have significant assets, and it is common for the sale price for a business to exceed the value of its tangible assets by a significant margin - known as "Goodwill". Because most lenders have no recourse against tangible assets if a borrower defaults on a business acquisition loan, lenders routinely look for additional collateral for their loans. The Buyer of a small business seeking a loan to make the business acquisition must be prepared to make a significant cash down payment and pledge personal collateral like a home in order to satisfy the needs of the lender.

Here is an overview of what is typically available for business acquisition funding:

Seller Financing

Before the Small Business Administration (SBA), Seller financing was the only choice available to Buyers and Sellers. And even today, there are many reasons why Seller financing might be the right choice for a Seller. Seller financing offers reduced paperwork and reduced approval times, and terms can be structured to fit a deal instead of adhering to the "one size fits all" terms offered by the SBA. Sellers can structure significant tax savings by deferring income into future years, and Buyers can feel good about the Seller's confidence in them and in the business' ability to service the debt. However, Sellers will ALWAYS require a personal guarantee from the Buyer and retain a security interest in all of the business property transferred. One drawback to Seller financing is that Sellers will typically require a much higher down payment and a shorter repayment time than most lenders. Sometimes Seller financing can be combined with other types of financing. When this occurs, however, Seller notes are usually subordinated or secondary to the other financing which makes many Sellers reluctant to finance a large portion of the purchase.

SBA Guaranteed Loan

There is a lot of current confusion regarding the offering of business acquisition loans that are guaranteed by the Small Business Administration (SBA). If you are considering SBA financing, you should always look for a lender with SBA preferred status. Even this may not be enough in today's market. The SBA is under daily review with policy and procedure being written and re-written. At VR in Lynwood, Washington we have local SBA lenders that are on-top of this very volatile situation. What we do know for sure is that all loans over $350,000 will be required to conform to a valid third party valuation by certified appraisers.

At VR in Lynwood, Washington we have made every possible preparation for your lending success. SBA loans are typically amortized over 10 years and are priced at the prime rate plus a percentage depending on the strength of the borrower.

SBA loans require many different fees including packaging fees, loan guarantee fees, appraisal fees and others. These fees can add up to 2-4% of the loan's value; often these costs can be added back to the loan amount. Depending on the deal, down payments on SBA loans are between 10-30% of the transaction value. Most deals, however, fall into the 20-30% down payment range. SBA loans require personal guarantees, security interests in the assets, and real property collateral if the business assets do not provide adequate collateral.

Home Equity Loan

Since SBA compliance typically require a borrower's home as collateral, many business buyers elect to pull the equity from their homes. This is a popular route as HELOC's can be prepaid, require less in upfront costs and often may be repaid over more time. Some buyers are able to get enough cash from their home to cover the entire purchase price or a very substantial portion of the price while asking the Seller to carry a small amount. In today's market, Home Equity may be a challenge and so Sellers are now more willing to provide financing to a Buyer. The Seller will want to be in second position after your mortgage company.

ESOP Plan

Using Retirement Funds as Business Capital