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• Business Plan Basics
• Buying Your Own Business
• Dispelling Three Business Buyer Myths
• Find the Right Business to Buy
• For Business Buyers and Sellers
• Frequently Asked Questions
• Seize The Moment
• Selling Your Business
• So You Think You Want to Buy a Business
• The Most Common Business Plan Mistakes
• The Time To Sell Might Be Right Now
• 12 Laws of the Business Buying and Selling Jungle
• Valuing a Business for Sale and Other Issues
• What Makes the Sale of a Business Fall Through
• Why Do Business Purchase Deals Fall Apart

Business Plan Basics

The best way to show bankers, venture capitalists, and angel investors that you are worthy of financial support is to show them a great business plan. Make sure that your plan is clear, focused and realistic. Then show them that you have the tools, talent and team to make it happen. Your business plan is like your calling card, it will get you in the door where you'll have to convince investors and loan officers that you can put your plan into action.
Once you have raised the money to buy, start or expand your business, your plan will serve as a road map for your business. It is not a static document that you write once and put away. You will reference it often, making sure you stay focused and on track, and meet milestones. It will change and develop as your business evolves.


Do I need a Business Plan?
Not everyone who buys, starts and runs a business begins with a business plan, but it certainly helps to have one. If you are seeking funding from a venture capitalist, you will certainly need a comprehensive business plan that is well thought out and contains sound business reasoning.
If you are approaching a banker for a loan to buy a business, your loan officer may suggest a Small Business Administration (SBA) loan, which will require a business plan. If you have an existing business and are approaching a bank for capital to expand the business, they often will not require a business plan, but they may look more favorably on your application if you have one.
Reasons for writing a business plan include:

  • Support a loan application to buy or start a business
  • Raise equity funding to expand a business
  • Define and fix objectives and programs to achieve those objectives
  • Create regular business review and course correction
  • Define a new or newly purchased business
  • Define agreements between partners
  • Set a value on a business for sale or legal purposes
  • Evaluate a new product line, promotion, or expansion

What's in a business plan?
A business plan should prove that your business will generate enough revenue to cover your expenses and make a satisfactory return for bankers or investors.

  • Executive Summary--features the highlights of your plan and sells your idea in two pages or less.
  • Company Summary--a factual description of your company, ownership, and history.
  • Products (or Services or both)--describes your products and/or services and how they stand out from competitive products and services.
  • Market Analysis-provides a summary of your typical customers, competitive landscape, market size, and expected market growth.
  • Strategy and Implementation-describes how you will sell your product, how you will put your plan into action, and establishes milestones.
  • Management Summary-provides background on the management team, their experiences, and key accomplishments.
  • Financial Plan-contains key financials including sales, cash flow, and profits.

What makes a successful business plan?

  • A well thought out idea
  • Clear and concise writing
  • A clear and logical structure
  • Illustrates management's ability to make the business a success
  • Shows profitability

How do I write a business plan?
Sitting down looking at a blank computer screen as you prepare to start your business plan can be daunting. You may want to look at some alternatives that will make the process a bit easier.

Hire a Professional
A professional consultant will create the business plan for you, but you still have to be prepared to think through your business and understand the underlying concepts in your business idea. You will have to work closely with the consultant to ensure that he or she develops a good plan that accurately represents your business or business idea.

Use Business Planning Software
A good business planning software package will provide you with an outline for a well-developed, objective-based and professional business plan. Software packages will remove the problem of starting from scratch by structuring your plan for you. The software should ask you the right questions that will pull out the most important underlying concepts within your business idea.

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Buying Your Own Business: Important Issues To Understand
by Tom West

Buying your own business can be a complicated procedure. Throughout the buying process, it's important to keep an open mind while searching for a business that will fit your needs, talents, skills and lifestyle. A business broker has many different types of businesses for you to consider; however, you need to remember that there is no such thing as that "perfect" business. Another vital thing to keep in mind is that at some point you must be able to make the "leap of faith" that separates you from being a "looker" to a "doer." This isn't easy, but it must happen if you are ever going to be in business for yourself. The following discussion of other key issues may help in the process:

Importance of Information:
Understand that in looking at small businesses, you will have to dig out a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don't overlook a "gem" of a business because you don't or won't take the time it takes to dig out the information you need to make an informed decision. Try to get a understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.

Negotiating the Deal:

Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his "story" may change when it comes time to put his words into action. The vast majority of small business transactions are financed by the seller. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.
Since you can't expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don't try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure...don't obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.
Furthermore, don't try to push the seller to the wall. You want to have a good relationship with him or her. They will be teaching you the business and acting as a consultant, at least for a while. It's all right to negotiate on areas that are important to you, but don't negotiate over a detail that really isn't key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.

Due Diligence:
The responsibility of investigating the business belongs to the buyer. Don't depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn't reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the leap of faith necessary to achieve business ownership. Outside professionals normally won't tell you that you should buy the business, nor should you expect them to. They aren't going to go out on a limb and tell you that you should buy a particular business; in fact, if pressed for an answer, they will give you what they consider to the safest one: no. You will want to get your own answers--an important step for anyone serious about entering the world of independent business.

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Dispelling Three Business Buyer Myths: What Do They Really Want and Why?
by Tom West

Myth Number One It's a faulty assumption that prospective business buyers know from the outset the exact kind of business they want to buy. Experienced business brokers and intermediaries have learned that most business buyers end up with what is sometimes a far cry from what first captured their imagination.

Take, for example, the old story of the buyer who saw (and probably smelled) a doughnut shop in his dreams. This was the business he was sure he wanted to buy--until he found out that someone, most likely him, had to get up at 2 a.m. to make the doughnuts a reality. It is important that, before falling in love with a business dream, prospective buyers understand the realities and think hard about their own personalities--what they like and hate to do. Obviously, if one likes a good night's sleep, the doughnut shop is not a good business to go into.

In discovering the right business for the right personality, here are some of the crucial questions a prospective business buyer might ask himself or herself:

Does the business look exciting and interesting to me? Do I feel that I can improve the business? Would the business offer me "pride of ownership"? Would I feel comfortable operating the business?

Myth Number Two Another old chestnut is that buyers will always choose the known versus the unknown. And it's true that some buyers may think they want the familiarity that comes with buying a business similar to the company they just left. However, the following real-life examples show what interesting turns the road to buying a business can take:

A former General Manager for one of the area's largest computer companies purchased a Learning Express retail store franchise. He's leaving gigabites behind to become an expert on children's educational toys and games.

An attorney who was formerly General Counsel for a large investment banking firm purchased the rights to Mad Science. With his purchase of this franchise, the attorney has switched from high finance to the advancement of children's appreciation of science through hands-on experiments for schools, scouting events, and other organizations.

A Human Resources manager for a large investment firm acquired the Connecticut and Rhode Island franchise rights for a retail concept offering gift items (e.g., unique gift baskets, cards, and flowers). In addition, this former manager will also be opening his own retail store for the sale of these items.

And finally, for something completely different . . . consider the former Manager for a Fortune 500 manufacturer who purchased a Langenwalter Carpet Dyeing franchise! This final example also points to another false assumption: that former big-business managers can't shake off the craving for status or image. In fact, surveys show that victims of corporate downsizing are willing to "get their hands dirty" and that they do not necessarily need to be a company's CEO.

Myth Number Three Another wrong theory about buyers is that money is the key motivator in their seeking to own their own business. In fact, if money is a buyer's main reason for desiring to own a business, a wrong-move alarm should go off before things go any further. Most studies indicate that money is somewhere below the midway point of the list of reasons people are interested in a self-owned business. Those who go into business for themselves and/or buy a business want to run their own show, be their own boss and build something for themselves. Money is the by-product (hopefully) of having the opportunity to achieve business success on their own terms.

A recent newsletter from a franchise consulting company contains comments from people who have just purchased franchises. These people provide resounding proof that money is not a major motivator. With franchises, they point out, money can't be an issue, because a new franchise has no income, only the promise of it.

If money doesn't provide the driving force behind buying a business--what does? The following survey shows the real reasons for wanting to be a part of the independent business scene:

1. Pride in service or product
2. Control
3. Freedom
4. Flexibility
5. Self-reliance
6. Customer contact
7. Income
8. Employee contact
9. Recognition
10. Privacy
11. Security
12. Status

No matter what the reason for buying a business and regardless of the type of business desired, savvy prospective buyers seek help from a business intermediary throughout the buying process. Although business brokers generally represent the seller, the buyer also reaps the benefits of expert guidance. The business broker will show the buyer businesses that fit the profile of the buyer's dream, but the broker will also introduce the buyer to new territory--and new possibilities.

And what about the buyer who dreamed of doughnuts? He is purportedly now content, testing the wares in the mattress section of his franchise furniture store.

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Find the Right Business to Buy
(Excepted in part from the book "Strategies for Successfully Buying or Selling a Business") - Russell L. Brown

So you're thinking of buying a profitable operating small business. Well, congratulations! Small business ownership and its operation can be one of the most financially rewarding and intellectually stimulating pursuits that you can follow in life. However, the actual process of purchasing an operating business is an extremely challenging and complicated undertaking and you'll want to be as fully prepared as you can be. You need to gather as much information as you can which will help you to find a suitable operating business for sale, to properly value the business, to successfully conduct negotiations, and finally, to actually close the deal and transfer ownership. The good news is that tens of thousands of small business sales occur every year with little or no real problems and the new owners and the sellers both realize their goals. But, you must be fully prepared and knowledgeable for this success to occur! In this article, I'll address the first aspect of finding a profitable operating business for sale; finding the right business for you!

The first step in this process is to find out whether or not you are truly a fully motivated buyer. Ask yourself these questions:

  • Do you know what kind of business you want to buy?
  • Are you "technically" qualified and experienced enough to run the business?
  • Do you have the temperament to deal with fickle customers, demanding creditors, and difficult employees?
  • Do you have the attention to detail that most businesses demand?
  • Can you deal with the bookkeeping requirements of the business?
  • Are you prepared to "eat, sleep, and drink" the business 24-hours a day, 7 days a week (because that's what it frequently takes)?
  • Can you deal with adversity without losing your cool?
  • Can you deal with uncertainty without losing sleep?
  • Are you a good "people person" who can successfully deal with both customers and employees?
  • Can you accept the potential significant financial loss that investing in the business exposes you to?

Next, you need to determine what your key reason is for buying and operating a business in addition to the obvious reason of making money:

  • buying a job to earn a living
  • acquiring an attractive lease or other real estate
  • buying prestige (many business owners are respected community leaders)
  • eliminating competition if you already have a business
  • buying a hobby or retirement occupation
  • seeking self-fulfillment and control of your own destiny
  • seeking an opportunity for a child or other family member

Now ask yourself, what is it that I really like to do, and what is it that I'm really good at? If you have determined that you are a truly motivated buyer and you know the reasons that you want to own and operate a business, then you should begin searching only for those businesses that match what you like to do and ones that match your skills, capabilities and knowledge.


There are many sources of businesses for sale and quite a few can be relocated, but to maximize your opportunity of finding the right business for yourself, you should be prepared to relocate to the business's location if at all possible. Some good sources of information about businesses for sale include:

Newspaper classified advertising under Business Opportunities

Classified ads in the Business Opportunity section of your local or nearby major metropolitan newspaper remain as one of the best sources of locating businesses for sale, especially for businesses priced under $1 million. Most newspapers have a particular day of the week that features the most active day for these listings; usually the Sunday edition. Because classified advertising is fairly expensive, most advertisements for businesses for sale don't run continuously. You'll need to constantly scan the listings for a substantial period of time to locate businesses that may be attractive to you. Unfortunately for potential buyers, many good businesses for sale never make it into the classified ads because of the concern on the part of business owners that their customers will learn that their business is for sale, which could hurt business sales. It is more likely that good businesses for sale can be found in the listings in the large metropolitan newspapers (greater anonymity) than in the local suburban newspapers where no matter how carefully the ad is written, people may determine the actual identity of the business.

One very good way of using the classified ads is to advertise for yourself as seeking a business for sale and detailing the characteristics of the business for which you are looking. Many business owners who are thinking about selling but have not formally decided to do so, scan the business opportunity section to get an idea as to what is available for sale and what the asking prices are for similar businesses to help them in their own planning. By advertising for yourself as a buyer, you may be able to find business opportunities available before the general market hears about them and consequently may be able to make a better deal. Some of the large metropolitan newspapers have "businesses sought" or "business wanted" sections that would be a good place to put your ad.

Also, keep in mind that many businesses can be relocated. So, if you are looking for this type of business, it may make sense to expand your search fairly widely within your region of the country. Some easily relocatable business types within a region are:

  • publishing
  • consulting (business)
  • distributorships
  • consulting (environmental)
  • some manufacturing
  • paging and cell phones
  • mail order
  • vending routes
  • telemarketing
  • trucking/transportation
  • export/import

Newsletters of various kinds (in-house brokerage publications, regional and national independent publications, etc.)
There are various newsletter type publications throughout the country that collect various business for sale information to present to potential buyers. These newsletters are usually excellent sources of reasonably up-to-date information on a broad array of businesses for sale. These newsletters take the following general form:

  • Local broker newsletters published by individual brokers that list only their listed businesses for sale.
  • Coalition business brokers who combine their listings together in a newsletter format within a specific market area.
  • Regional and national newsletter publishers that combine many listings in a range of categories across regional and national markets.

Business brokers (most reputable ones are listed in the telephone yellow pages and with the national professional associations)
Business Brokers are also excellent sources of information regarding businesses for sale which they represent. Unfortunately, for business buyers and sellers, there generally isn't a strong multiple listing service type of collection of businesses for sale as there is for residential and commercial real estate in many parts of the country. However, many business brokers do cooperate together on some basis, and they can always make a particular search for a buyer if a specific type of business is seriously being sought. Your local business broker should always be consulted when you're actively seeking a business for sale. But keep in mind the narrow view that some of them bring relative to the total market. It appears that more and more business brokers are now cooperating together in exchange of business listing information as a result of the ease of information transmission in the new telecommunication age (especially due to fax, e-mail, and the Internet).

Some other drawbacks with business brokers is that many are still commercial real estate agents at heart, and may be more versed in selling real estate situations rather than true operating business opportunities. Many business brokers will, in fact, be real estate agents because of the need for a state license to broker the sale of real estate.

Word of mouth through friends, family, and colleagues from all walks of life

Word of mouth is probably one of the better ways to find out about a good business for sale, but it's also the most unreliable relative to conducting a specific search. However, this method shouldn't be ignored. In a way, it's like looking for a needle in a haystack; but it sometimes works very well. You just can not sit back and let the information come to you. You should "put out the word" in your business, social, fraternal, and religious circles about your desire to purchase a business. If there are serious sellers in these groups, you may not know about it because of the need for confidentiality regarding a business for sale.

Magazines and other periodical publications

Magazines and periodicals are usually national in scope with long lead times for advertising, but they reach a lot of people. In general, they are not good sources of businesses for sale because most sellers and brokers do not list their businesses in them. However, you should scan the various magazines that specialize in entrepreneurial, business, or financial perspectives such as:

  • Inc.
  • Success
  • Entrepreneur
  • Opportunity
  • Small Business Opportunities
  • Kiplinger's Personal Finance

The Internet (but usually not under "business opportunities", but rather, "businesses for sale")
The Internet has become a great source of business listing information and is very useful in all parts of the country. To find information about businesses for sale just go to your favorite search engine, such as Yahoo.com, AskJeeves.com, or Google.com and conduct a key word search. The best key words are, "businesses for sale," "buy business," "sell business," or "buy sell business." It's usually best to use the advanced search capability on the search engines to better target the results you want.

I hope this information helps you in your search for the right business for you. Good hunting and good luck!

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For Business Buyers and Sellers: A Guide
by Tom West

Your best guide for buying or selling a business isn't words on paper--it's the competent presence of a business broker. Although business brokers generally represent the seller, the buyer also reaps the benefits of expert guidance. A business broker provides vital services for both parties and acts as the "glue" for holding together the pieces of the business sale process. Here's how a business broker will work with both the buyer and the seller:

The Business Broker and the Buyer

Business brokers prefer to talk to people in person, and the buyer is no exception. During a preliminary meeting in the business brokerage office, the broker will typically ask the prospective buyer questions such as these:

1. Do you have the necessary funds to buy a business?
2. Is the cash readily available?
3. What is your time-frame for buying a business?
4. What are your expectations about the purchase of a business?

After this fact-finding meeting, the broker can then show the buyer businesses that are both feasible and that fit the buyer's requirements. Further steps the broker will lead the buyer through are as follows:

Since sellers are (rightly) concerned about confidentiality, the broker will ask the prospective buyer to sign a non-disclosure or confidentiality agreement.

The broker will provide the prospective buyer with preliminary information about one or more businesses, including pertinent financial data.

The broker will arrange for the buyer to see businesses of interest.

Once the buyer has indicated strong interest in a particular business, the broker can then supply additional information and schedule further on-site appointments.

When the buyer is ready, the business broker will be the best source for answering questions, addressing concerns, resolving loose ends, and offering a business broker's unique expertise in the business sale transaction.

The Business Broker and the Seller: When it comes time to sell, one of the best decisions a business owner can make is to continue managing his or her business efficiently (and profitably), while depending on the services of a business broker to orchestrate the steps of the sale. To make the seller's job easier and more effective, the business broker will...

Determine the right buyer for a particular business. For locating and qualifying prospective buyers, a business broker uses computerized databases to access comprehensive lists of local, national, and international buyers...all to increase the chances of selling a business at peak value.

Advise the seller on pricing. The business broker is an expert in placing a realistic price on the business and incorporating intangibles; thus reducing the danger that every seller fears...underpricing the business. At the same time, the business broker can help the seller to understand that the selling price is dictated by the marketplace...not by a well-meaning accountant or friend who may have an unrealistic idea of what the business is worth.

Prepare a marketing strategy and offer advice about essential marketing tools, such as a business description memorandum; in fact, the broker will help the seller in all key aspects of presenting the business as effectively as possible. Later, the broker can also help in the structuring of the sale transaction.

Present offers and point out both strengths and weaknesses. The business broker will be a vital advisor during most stages of the negotiation, bringing to "the table" objectivity as well as negotiation skills developed through years of experience in the buying and selling of businesses.

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Frequently Asked Questions (Seller):
Selling your business is a major decision! You have devoted your time, money and energy to building, running and operating your business. It may well represent your life’s work. You have decided that now is the right time to sell, and you want the very best professional guidance you can get. This is when working in tandem with a professional business broker can make the difference between just getting rid of the business and selling it for the very best price and terms!

What can business brokers do – and what they can’t do?
Business brokers are the professionals who will facilitate the successful sale of
your business. It is important that you understand just what a professional business broker can do – as well as what they can’t. As your business broker we can help you decide how to price your business and how to structure the sale so it makes sense for everyone – you and the buyer. We can find the right buyer for your business, work with you and the buyer in negotiating, and every step of the way until the transaction is successfully closed. We will also help the buyer in all the details of the business buying process.

A business broker is not, however, a magician who can sell an overpriced business. Most businesses are saleable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for.

How long does it take to sell my business?
It generally takes, on average, between three to four months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner we have all the information to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business.

This theory often “backfires,” because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments.

Why is seller financing so important to the sale of my business?
Surveys have shown that a seller, who asks for all cash, receives on average only 70 percent of their asking price, while sellers who accept terms receive on average 86 percent of their asking price. That’s a difference of 16 percent! In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of selling increase dramatically and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.

What happens when there is a buyer for my business?

When a buyer is sufficiently interested in your business, we will help in the preparation of an offer or proposal. This offer or proposal may have one or more contingencies. Usually, they concern a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one) or other details of the business. The buyer’s proposal will be presented to you for your consideration. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer can withdraw it at any time.
We will submit all offers to you for your consideration. At first review, you may not be please with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some pluses to seriously consider.

There is an old adage that says, “The first offer is generally the best one the seller will receive.” This does not mean that you should accept the first, or any offer – just that all offers should be looked at carefully. When you and the buyer are in agreement, we will work with both of you to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process. You don’t want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn and signed. Once the closing has been completed, money will be distributed and the new owner will take possession of the business. As your business broker professional, we will work with you throughout the entire sales process.

What can I do to help my business?

You can cooperate fully with us and any other professionals that you are using. A buyer will want up-to-date financial information. If you use accountants, you can work with them on making current information available. If you are using an attorney, make sure they are familiar with the business closing process and the laws of your particular state. You might also ask if their schedule will allow them to participate in the closing on very short notice. If you and the buyer want to close the sale quickly, usually within a few weeks, unless there is an alcohol or other license involved that might delay things, you don’t want to wait until the attorney can make the time to prepare the documents or attend the closing. Time is of the essence in any business sale transaction. The failure to close on schedule permits the buyer to reconsider or make changes in the original proposal. And, finally, your team of advisors must all be working towards the common goal of selling your business for the best price and terms in the marketplace, and closing the sale as quickly as possible! Remember that, as your professional business broker we are on your side. Only by being as cooperative as possible with us can we best handle your business interests.

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Seize The Moment: Tips For Business Sellers
by Tom West

Those business owners who decide to take advantage of a favorable market should act quickly to launch the selling process. There are vital steps to take--and crucial realizations to face--in preparing for this all-important transaction.

1. Resolve current problems as soon and as thoroughly as possible. If the business is a partnership, both parties should be agreed about the major decisions to be made in the selling process. Hopefully, in cases where the business is a partnership, a buy-sell agreement is firmly in place.

2. Financial records must be accurate, up-to-date, and impressive indicators of the owner's business ability. Some buyers may be willing to buy potential, but they don't want to pay for it. In fact, sellers should be open about all aspects of the business that might affect the sale; otherwise, once the real facts are revealed (as they inevitably will be!), the sale may be lost.

3. Sellers must understand from the beginning that they may have to help finance the sale. The seller's business broker, in qualifying potential buyers, will also assess their financial credibility and their ability to run a successful business, thus helping to take the understandable fear out of seller financing.

4. Sellers should also seek the advice of a business professional in determining price. The business broker will apply industry-tested valuation methods, and will incorporate those intangibles to be ensure that the business will not be underpriced. At the same time, the business broker will point out to sellers how the price is dictated by the marketplace and that realistic pricing is an absolute must. Most buyers, faced with an out-of-sight price won't wait for it to drop--they'll just go elsewhere.

5. In marketing the business for sale, sellers benefit many times over from the guidance of a business broker professional. The business broker who lists the particular business for sale represents the seller and works toward completing the transaction in a reasonable amount of time and at a price and terms acceptable to the seller. The broker will also present and assess offers, and, at the appropriate juncture, he or she can also help in structuring the sale transaction itself. The broker and the seller become a team, involved in a relationship of mutual trust, with the common goal being the successful business sale.

If you have made the decision to sell your business, the wisest first move is to contact a qualified business broker professional, who can . . .

  • Advise you on pricing and structuring the sale of your business.
  • Prepare the marketing strategy, using professional resources.
  • Determine the right buyer for your particular business.
  • Educate buyers in the business-buying process.
  • Keep you informed about market reaction.
  • Present offers and point out strengths and weaknesses.
When it comes time to sell, one of the best decisions a business owner can make is to continue managing his or her business efficiently (and profitably), while depending on the services of a business broker to forge the steps of the sale. The business broker professional is an invaluable advisor during the entire process, offering both objectivity and negotiation skills honed through years of experience in the buying and selling of businesses.

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Selling Your Business?
Follow These Ten Commandments to Avoid Wrecking the Deal

by Tom West

1. Place a reasonable price on your business. Since an inflated figure either turns off or slows down potential buyers, rely on your business broker to help you arrive at the best "win-win" price.

2.
Carry on "business as usual." Don't become so obsessed with the transaction that your attention wavers from day-to-day demands, affecting sales, costs, and profits. Since the selling process could take as long as a year, the buyer needs to keep seeing a healthy business.

3.
Engage experts to insure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Expert intermediaries can channel the process and the parties involved to keep the sale within safely silent bounds.

4.
Prepare for the sale well in advance. Be sure your records are complete for at least several years back and do all pertinent legal or accounting "housecleaning"--as well as a literal sprucing-up of the plant or store.

5.
Anticipating information the buyer may request. In order to obtain financing, the buyer will need appraisals on all assets as well as information to satisfy environmental regulations (when real estate is concerned).

6.
Achieve leverage through buyer competition. This can be tricky; you are wise to let your business broker, as a third party, create a competitive situation with buyers to position you better in the deal.

7.
Be flexible. Don't be the kind of seller who wants all-cash at the closing, or who won't accept any contingent payments or an asset transaction. Depend on the advice of your intermediaries--their knowledge of financing and tax implications-- to keep the deal sweet instead of sour.

8.
Negotiate; don't "dominate." You're used to being your own boss, but be prepared to learn that the buyer may be used to having his way, too. With your business broker's help, decide ahead of time when "to hold" and when "to fold."

9.
Keep time from dragging down the deal. To keep the momentum up, work with your intermediary to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.

10. Be willing to stay involved. Even if you are feeling burnt-out, realize that the buyer may want you to stay within arm's reach for a while. Consult with intermediaries to determine how you can best effect a smooth transition.

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So You Think You Want to Buy a Business!
(excepted in part from the book "Strategies for Successfully Buying or Selling a Business") - Russell L. Brown

"Caveat Businessus Emptor" (Let the Business Buyer Beware)!
So you're thinking about buying an operating business! That's great because small business ownership can be one of the most self-satisfying and personally rewarding things you can do. But don't do another thing before you read this article! Don't make the same mistakes that many others have made when buying a business. Don't take the unnecessary risk of turning your dream into a financial and emotional nightmare!!

I've been a business broker for many years and I've successfully brokered the sale of hundreds of operating businesses and franchises. I'm always amazed at how completely potential buyers trust business brokers and sellers. I'll tell you straight out, business brokers and sellers are not on your side! Although most business brokers are ethical intermediaries, some are only interested in closing the deal, no matter what the consequences are to either the buyer or the seller. Remember, for a broker, if there's no deal --there's no commission! No matter how nice a business broker is or how helpful he seems to be, remember, it's the seller who pays the broker and it's the commission from the sale price that pays his bills. The higher the sale price, the bigger the commission. And if no sale takes place, no commission at all.

If you think the broker's going to hold your hand through the process, you're absolutely right. He's going to hold your hand all the way to the bank. The more the broker can convince you to pay for a business, the happier he'll be. Don't forget, whether or not the broker feels that you can succeed in this business or make a profit at it doesn't necessarily affect him. The primary motivation that affects the broker is the sale of the business and its price. There are many reputable brokers and sellers out there who will treat you in an ethical and responsible manner but you still have the problem that they represent the seller and themselves, not you. So what can you do to avoid making possibly the biggest financial mistake of your life? Get as much information as you can so that you'll know what to watch for as you negotiate to buy a business. Don't believe anyone without checking the facts and independently verifying them (the due diligence process). Here's some of the key things you should know before buying an existing business.

A Business is Worth Only Whatever Someone is Willing to Pay!

Valuing the business is not as hard as you think, but you should never rely on a broker's or seller's estimate as to what a business is worth. Remember that buying a business is fundamentally an investment and consequently the business is worth only as much as its ability to generate a profit for you based on how much money you must put into it. If you're going to work in the business as most people do, then the business should also pay you a fair wage in addition to the profit that it produces. The best way to determine a business's value is to work backwards from the available profit that a seller can prove to you. This will at least get you to a point where serious negotiations can then take place.

For example, let's say that a business has a total of $100,000 pre-tax profit (proven by IRS tax returns for at least the latest full year of operation), before allowing for an owner/manager's wage. You plan to work full time in the business (and believe me, you probably will!), and a fair wage for the work if you were to hire someone to do it is $40,000. That leaves $60,000 of available profit to work with. But don't forget to allow for the income taxes that you'll have to pay on this. The taxes will probably be about $18,000 depending on the state and city the business is in, plus other personal factors (figure at least 30%). That gets you down to about $42,000 of profits left to be able to either pay off the debt you incur to buy the business or to provide you with a reasonable return on your cash investment (if you're lucky enough to have enough cash to buy the business outright!).

There are many ways to work with this $42,000, but most people and organizations who lend money to buy a business, whether they're the sellers themselves or others, want to see a relatively short payoff term (let's say 5 years) and a fair interest rate on the money (let's say 10%). When you do the math to determine the value of $42,000 worth of yearly payments for 5 years at 10% interest, the amount turns out to be about $165,000. During negotiations you can vary the value of the business up or down fairly significantly by changing the time period used and the interest rate paid. However, this is the approximate total value of the business and a good starting point for negotiations.

When I say total value of a business, I really mean total. The total value and therefore the business's selling price must include all closing costs, assets, transfer and franchise fees, etc. Remember, a business is worth only as much as its ability to pay for itself over a reasonable period of time and then to produce a profit for you. Of course, if you change the time period for payoff of the purchase price, the interest rate, the anticipated taxes, the down payment and other factors, the price you can afford to pay for the business can go up or down substantially.

Most Sellers "Stretch the Truth" or Downright Lie About Unreported Cash Sales!

One of the biggest problems in the valuing of small businesses for sale is the frequent claim by the sellers that they are taking large sums of unreported cash out of the business and therefore, the "profits" won't support the asking price of the business. But "trust them" they say, the cash will be there for you! My advice is to ignore all claims of unreported cash income!! How do you know the seller is telling you the truth? If the seller will cheat the IRS, why won't he cheat you? And do you really think the seller will admit to you, a stranger, that he is committing what could be a criminal felony if he thought that it could be proven? If the business's reported sales and profits as evidenced by the IRS income tax returns don't support a reasonable asking price for the business, walk away. Find another business to buy that is run on the up and up. It's your money and time you are about to risk -- don't risk it foolishly.

Always Assume There are Skeletons in the Closet!

Other things that you must watch out for are the "skeletons in the closet." These are hidden problems that many businesses have and which may be motivating the seller to unload. You'll have to be sort of a detective to find these, but I'll list a few here so you get the idea of what to look for:

  • credit problems with banks and/or suppliers
  • personal affairs of the seller that may affect his ability to sell the business (e.g., divorce, death of a partner, argument with a partner, etc...)
  • historic downward business trends in the seller's particular industry
  • downward business trends for this business in particular
  • recent bad publicity, bad reports at the Better Business Bureau, etc.
  • expiring patents, licenses, franchise agreements, etc...
  • changing franchise terms that will increase operating expenses
  • an impending or actual zoning change that will hurt business expansion
  • major new competition (such as a new shopping center)
  • increasing difficulty or expense in getting raw materials, products, or services
  • the potential non-renewal of a major sales account
  • significant increases in rent to be expected (if the business space is leased)
  • unapproved existing variances in violation of zoning regulations
  • leases that are non-assignable or non-renewable
  • legal claims, encumbrances, and liens against the business
  • pending litigation against the business
  • state and/or federal law violations that will require a major expense to correct
  • poor management of capital assets requiring near-term replacement
  • obsolete machinery, overvalued inventory
  • partner and/or shareholder who may not concur with the seller's desire to sell
  • unpaid taxes (income, sales, FICA)
  • product obsolescence
  • potential major increase in product liability insurance
  • potential labor union or other employee related problems
  • inability of a buyer to replace a "superman" employee
  • non-compliance with environmental and/or safety requirements
  • recent suspension of a liquor license for regulation violations
  • need to hire a policeman to handle rowdy customers at certain times
  • etc, etc...

So What Should You Do?
Although buying an operating business is filled with many potential pitfalls, it is still one of the best ways for a beginner to get into business. An existing operating business has a proven track record, an existing customer base, a well known name, location, marketing and sales strategy, etc. If you buy the business properly, without overpaying and not taking on any fatal skeletons in the closet, you'll have your instant piece of the American dream to be your own boss and to control your own financial destiny. Get all of the information you can to educate yourself about what to look for and what to look out for. Study the particular business that you are interested in and don't let anyone push you into buying. Tens of thousands of successful business sales take place every year and the key to a successful transaction is information and knowledge on the part of the buyer and the common sense to apply it. One good way to get this information is to read Strategies for Successfully Buying or Selling a Business! Written by the author of this article.

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The Most Common Business Plan Mistakes

Often you may hear about what a business plan consists of. While including the necessary items is very important, you also want to make sure you don't commit any of the following common business plan mistakes:

1. Putting it off
Don't wait to write a plan until you absolutely have to. Too many businesses make business plans only when they have no choice in the matter. Unless the bank or the investors want a plan, there is no plan. Even if you are buying an existing profitable business a good business plan is crucial to continued success.

Don't wait to write your plan until you think you'll have enough time. "There's not enough time for a plan," business people say. "I can't plan. I'm too busy getting things done." The busier you are, the more you need to plan. If you are always putting out fires, you should build firebreaks or a sprinkler system. You can lose the whole forest for paying too much attention to the individual burning trees.

2. Cash flow casualness
Cash flow is more important than sales, profits, or anything else in the business plan, but most people think in terms of profits instead of cash. When you and your friends imagine buying or starting a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which equal profits. Unfortunately, we don't spend the profits in a business. We spend cash. So understanding cash flow is critical. If you have only one table in your business plan, make it the cash flow table.

3. Idea inflation
Plans don't sell new business ideas to investors. People do. The plan, though necessary, is only a way to present information. Investors invest in people, not ideas.

Don't overestimate the importance of the idea, particularly the importance of the uniqueness of the idea. You don't need a great idea to buy or start a business; you need time, money, perseverance, common sense, and so forth. Very few successful businesses are based entirely on new ideas. A new idea is much harder to sell than an existing one, because people don't understand a new idea and they are often unsure if it will work.

4. Fear and dread
Doing a business plan isn't as hard as you think. You don't have to write a doctoral thesis or a novel. There are good books to help, many advisors among the Small Business Development Centers (SBDCs), business schools, and there is software available to help you (such as Business Plan Pro, and others).

5. Spongy and vague goals
Leave out the vague and the meaningless babble of business phrases (such as "being the best") because they are simply hype. Remember that the objective of a plan is its results, and for results, you need tracking and follow up. You need specific dates, management responsibilities, budgets, and milestones. Then you can follow up. No matter how well thought out or brilliantly presented, it means nothing unless it produces results.

6. One size fits all
Tailor your business plan to its real business purpose. Business plans can be different things: they are often just sales documents to sell an idea for buying or starting a business. They can be detailed action plans, financial plans, marketing plans, and even personnel plans. They can be used to buy a business, start a business, or just run a business better.

7. Diluted priorities
Remember, strategy is focus. A priority list with 3-4 items is focus. A priority list with 20 items is something else, certainly not strategic, and rarely if ever effective. The more items on the list, the less the importance of each.

8. Hockey-stick shaped growth projections (flat to straight-up)
Have cash flow, sales and profit projections that are conservative so you can defend them. When in doubt, be less optimistic.

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The Time To Sell Might Be Right Now
by Tom West

A survey of business activity nationwide shows that many sellers are taking advantage of the window of opportunity offered by today's favorable marketplace. In this recent survey, almost one-third of business owners responded that they are considering the sale of their business. The first question one might ask, given the relatively healthy financial climate, is WHY? Selling when times are good? The answer, for many sellers, can be a resounding YES! Here are some of the reasons why, followed by tips for getting the process started.

The Buyers Are Out There:
The current economic upturn has depended to a great extent on trimming the corporate fat. Executives and middle managers out of work--and determined not to be "downsized" by big business again--are eyeing the advantages of being in business for themselves. Since 1990, the percentage has steadily grown of those corporate executives who leave jobs in order to become independent business owners. It isn't just the money they are dreaming of--it's the desire for more control over their lives.

How to find these buyers?
The business broker is the professional to whom sellers turn when looking for serious, "qualified" buyers. The business broker not only helps match the right buyer with the right business, but also educates the buyer in the buy-sell process, alleviating concerns and keeping the transaction in steady forward motion. With plenty of buyers to choose from in today's market, it's more important than ever to identify the time-wasters and those who think they want to buy but really aren't ready to take the big step.

It's Better To Cash-Out Than To Burnout:
Burnout can come with a business that's successful as well as one that's failing to grow. The right time to sell is before the syndrome becomes a threat to the effective management of a business. What are the warning signs of burnout?

That isolated feeling.
The burnt-out owner has been "chief cook and bottle washer" for such an extended period of time that even routine acts of decision-making and action-taking seem like Sisyphean tasks. These owners have been shouldering the burdens alone too long.

Fuzzy perspective.
Burnt-out owners are so close to their work that they lose perspective. Prioritizing becomes a major daily challenge, and problem-solving sometimes goes no further than the application of business band aids that cost money in the long run rather than increase profits.

No more fun.
Of course owning a business is hard work, but it should also include an element of enjoyment. The owner who drags himself or herself through every day, with a sense of dread--or boredom--should consider moving on to a fresh challenge elsewhere.

Just plain tired.
Simply put, many business owners burn out from the demands placed on them to keep their companies operating day after day, year after year. The schedule is not for everyone; in fact, statistics show that it's hardly for anyone, long-term.
The important point here is for business owners to recognize the signs and take action before burnout begins to hinder the growth--or sheer survival--of the business. Many of today's independent business owners feel they've worked hard, made their money and sense that now is a good time to "cash-out" and move on.

The Best Price Comes from Selling While Up:
Other than burnout and its consequences, there are other factors that can lead to the "forced sale" of a business. Compelling personal problems (a divorce or death in the family, poor health), shortage of capital or outright failure of the business, the lack of heirs to take over--these are the traditional examples. Instead of waiting for unfavorable conditions, potential sellers should keep a wary eye out for that all-important right time for putting their business on the market. When might that time be?

The Small Business Administration (SBA), in researching selling trends, reports that three to five years is a long enough stretch for many of today's business owners. One in every three plans to sell; many of them right from the outset. The business they've bought is not a legacy for their children--it's a shorter-term investment of their time as well as their money. The ability to present a healthy operation, with an owner in the position to "role model" its success are major advantages in the completion of a successful business sale. One of the surest ways to maximize the value of a business is not waiting too long to sell.

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12 Laws of the Business Buying and Selling Jungle
(excepted in part from the book "Strategies for Successfully Buying or Selling a Business") - Russell L. Brown

I've worked with many business sellers and many more potential business buyers over the years and let me tell you; it's never easy getting a deal accomplished! I strongly believe and firmly advocate that the absolutely best way for an entrepreneur to successfully get into business, or expand what they already have, is buy an existing profitable company. But there are many obstacles and pitfalls along the way that must be overcome. It really is a jungle out there!
To help those who are considering buying or selling a business, I offer the following overview of what I think are the twelve most important Laws of the Business Buying and Selling Jungle. These have been excerpted in part from my book, Strategies for Successfully Buying or Selling a Business, in which each Law is examined and discussed in much greater detail.

Jungle Law #1:
Lawyers Are Deal Killers!

There certainly is an important role for a competent commercial law attorney to advise and prepare the legal structure of a business purchase and sale transaction. The problems arise when lawyers see themselves as business negotiators whose mission is to get the "best deal" for their clients. They frequently forget that the "best deal" has to involve both parties, the buyer and the seller, and that compromise is usually the best solution. Lawyers generally have a very difficult time with compromise in this type of situation because they often see their role as advising their clients on how to get the better deal. Usually, an attempt at a lopsided deal for either party will result in "no deal" at all.

Jungle Law #2:
Caveat Businessus Emptor; (Let The Business Buyer Beware!)

As a matter of basic principle (and law in most States), all business brokers dealing with the public are bound to be honest and forthright in their conduct concerning the businesses that they represent for sale. But they also have a fiduciary relationship (position of trust) to uphold between themselves and their clients (the business seller, in most cases). They must present a business for sale in its "best light" without misrepresenting any significant facts but at the same time not pointing out all of the potential business pitfalls. This usually establishes an adversarial relationship between the buyer and the broker as well as between the buyer and the seller. The best course of action for a buyer is to trust only what they can verify during a rigorous due diligence process and the best approach on the part of the seller/broker is full disclosure of all pertinent information.

Jungle Law #3:
A Business Is Worth Only Whatever Someone Is Willing To Pay For It At A Particular Point In Time!

Buyers and sellers are natural adversaries; the sellers want as much as they can get and the buyer wants to pay as little as possible. The broker is intensely interested too, because the commission amount is usually based on a percentage of the total selling price. So, what process should you use to value a business? Forget about putting a value on the assets based on resale value. Forget about comparing the business to the one in the next town that sold for a particular amount. Forget about all the "rules of thumb" like X times earnings or Y times gross income or some dollar amount per account or any other shortcut formula. A business value, and therefore its selling price, only makes sense when it's based on the capitalized earnings stream. Capitalization is simply the process used to determine today's value of a stream of future earnings. In the case of valuing a business, "today's value" is the value of the business, and the "stream of future earnings" is the expected future years' profit of the business based on current earnings. Most small businesses sell for a price in the range of 2-5 times earnings before interest and tax expenses are deducted.

Jungle Law #4:
A Business Buyer Is Really Buying A Stream Of Earnings!

The assets of the business are just the tools of the trade that enable an earnings stream to be realized. Without the earnings stream, the business essentially has no value. You should note that in using this method, a business may actually be worth less than its fair market asset value or in many cases worth substantially more. A seller will be able to get the most they can for a business by showing a buyer the true investment value in the business based on provable earnings.

Jungle Law #5:
Ignore All Claims Of Unreported Income!

This is a very sensitive subject known as unreported (to the IRS) cash sales. Some business sellers may try to get you to accept their claim that they had significant amounts of cash income that did not show up on their IRS Tax Return and accordingly want you to include this phantom income in your valuation of their business. I highly recommend that you totally ignore these claims and deal only with the business's reported income. Who is to say if the business owner's claims are true? If the business owner will lie to Uncle Sam might they not also lie to you?

Jungle Law #6:
Most Sellers Are Fibbers! (Or They At Least Stretch The Truth)

Of course, this is not a completely true law of the jungle. Most sellers are honest people trying to get by in life like everyone else. However, a buyer should approach all information provided in the sale with some skepticism. Buyers are making a major financial decision and should carefully consider all information presented during a detailed due diligence process. If a buyer approaches the purchase of a business with a good healthy dose of "prove it to me," then it will be difficult for them to get burned.

Jungle Law #7:
If A Seller Really Wants To Sell, You Probably Shouldn't Buy!

Whenever you look at any business for sale, you should approach the situation with a great deal of caution. You should make it your business to verify all of the facts possible about the business, including determining the reason for sale. There are some very good motivations for sellers to sell and other ones that are not so good. Usually, the best reason for a sale from the buyer's perspective is the planned retirement of the owner or a sale necessitated by illness. By far, the best potential purchase is a long-standing single-owner profitable business where the owner is approaching (or at) retirement age and is generally reluctant to sell but realizes that he eventually has to.

Jungle Law #8:
99% Of Potential Business Buyers Never Buy A Business!

This alone may be reason enough for a seller to retain a business broker to represent him in selling the business. A professional broker knows how to sort through the many non-qualified potential buyers to get to the few who actually do have the means and motivation to buy a business. Once the unqualified potential buyers have been culled out, still only somewhere around 50% of these folks eventually buy a business. For this and many other reasons, I strongly recommend that sellers use a professional business broker to represent them in selling their business.

Jungle Law #9:
Always Assume There Are Skeletons In The Closet!

Most businesses have some negative feature(s) that the seller will be reluctant to talk about. You can be sure that any problems will come out later as buyers begin analyzing the business (due diligence), and it could kill the sale if the problems are perceived as cover-ups. This is because buyers will ask themselves (logically) "if they hid this fact from me, what else are they hiding?" If the negative aspect(s) is clearly presented and discussed with the buyer, it may not be a serious problem because the buyer may feel that it can be overcome, avoided, or changed. The seller should strongly consider this and determine all of the possible negative factors that could affect the sale of the business. If the problems are very serious and non-correctable, the business may not be salable.

Jungle Law #10:
Someone Will Always Get Cold Feet Just Before The Closing!

Closing the deal is always difficult, but usually the shortest part of buying or selling an operating business. After all, the valuations, investigations, and negotiations are complete and now it's a matter of getting everything into writing in a form that satisfies everyone so that the transfer of ownership of the business can take place. However, you can definitely count on someone getting cold feet just before the closing. Be prepared for this! The seller and buyer may both start to wonder if they are really getting a fair deal. The best way to get ready for this is to anticipate it happening and then to deal logically, reasonably and unemotionally with it at the time.

Jungle Law #11:
Negotiations Must Stop At The Signing Of The Purchase And Sale Agreement!

Once the Purchase and Sale Agreement has been signed by both the seller and buyer, there is an excellent chance that the sale will actually take place. But, there must be an end to the negotiation process or things will begin to unravel. The deal at this point is like a house of cards with many parts of the negotiated deal contingent on another part. Trying to reopen negotiations after a Purchase and Sale Agreement has been signed will most likely lead to a collapse of the entire deal.

Jungle Law #12:
After Buying A Business, Do Not Change Anything (At First)!
Of course, this doesn't hold true if you're buying a turnaround situation; but in general, if the business you are buying is profitable, leave it alone while you learn how to manage it in accordance with the status quo. One of the experiences I have had that best illustrates this point is as follows: One buyer of a fast food chicken franchise soon after the closing changed meat suppliers because he found that he could get the chicken at 10¢ a pound cheaper. What the new owner did not realize was that these chicken pieces were 25% larger than those provided by the original supplier. The problem with this is; the franchise doesn't sell chicken by the pound; it sells it by the piece. The new franchise owner completely wiped out his profit margin by paying a smaller price per pound but delivering to the customer 25% more chicken at the same retail price!

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Valuing a Business for Sale and Other Issues
Russell L. Brown

So you're thinking about buying or selling an operating business. Well, don't do another thing before you read this article! Don't make the same mistakes that many others have made when buying a business and turn your dream into a financial and emotional nightmare!

I've been a business broker for many years and I've brokered the sale of hundreds of operating businesses and franchises. I'm always amazed at how much faith potential buyers put in the business broker and the seller. I'll tell you straight out, the business broker and sellers are not on the buyer's side! Remember, for a broker, no deal -- no commission! So what can you do to avoid making possibly the biggest financial mistake of your life? Get as much information as you can so that you'll know what to watch out for as you negotiate to buy a business. Here's some of the key things you should know about before buying an operating business.

VALUING THE BUSINESS
Valuing the business is not as hard as you think, but you should never completely rely on a broker's or seller's estimate as to what a business is worth. Remember that buying a business is fundamentally an investment and consequently the business is worth only as much as its ability to generate profits for you based on how much money you must put into it. If you are going to work in the business as most people do, then the business should also pay you a fair wage in addition to the profits. The best way to determine a business's value is to work backwards from the available profits that a seller can prove.

For example, let's say that a business has a total of $100,000 pre-tax profits (proven by IRS tax returns for the latest full year of operation), before allowing for an owner/manager's wage. You plan to work full time in the business (and believe me, you probably will!), and a fair wage for the work if you were to hire someone to do it is $40,000. That leaves $60,000 of available profit to work with but don't forget to deduct the income taxes that you'll have to pay on this, probably about $18,000 depending on the state and city the business is in, plus other personal factors (figure at least 30%). That gets you down to about $42,000 of profits left to be able to either pay off the debt you incur to buy the business or to provide you with a reasonable return on your cash investment (if you're lucky enough to have this much cash).

There are many ways to work with this $42,000, but most lenders of money to buy a business, whether they are the sellers themselves or others, want to see a relatively short payoff term (let's say 5 years) and a fair interest rate on the money (let's say 10%). When you do the math to determine the values of $42,000 yearly payments for 5 years at 10% interest, the amount turns out to be about $165,000. This is the approximate total value of the business and a good starting point for negotiations.

When I say total, I mean total. The total value and therefore the business's selling price must include all closing costs, assets, transfer and franchise fees, etc. Remember; a business is worth only as much as its ability to produce profits for you. Of course, if you change the time period for payoff of the purchase price, the interest rate, the anticipated taxes, and other factors, the price you can afford to pay for the business can go up or down.

DEALING WITH UNREPORTED CASH SALES
One of the biggest problems in the valuing of small businesses for sale is the frequent claim by; the sellers that they are taking large sums of unreported cash out of the business and therefore, the "profits" won't support the asking price of the business. But "trust them" they say, the cash will be there for you. My advice is to ignore all claims of unreported cash income! How do you know the seller is telling you the truth? If the seller will cheat the IRS, why won't he cheat you? And do you really think the seller will admit to you, a stranger, that he is committing a felony if he thought that it could be proven? If the business's unreported sales and profits don't support a reasonable asking price for the business, walk away. Find another business to buy that is run on the up and up. It's your money and time you are about to risk -- don't be foolish.

SKELETONS IN THE CLOSET

Other things that you must watch out for are the "skeletons in the closet." These are hidden problems that many businesses have and which may be motivating the seller to unload. You'll have to be sort of a detective to find these, but I'll list a few here so you get the idea of what to look for:

  • credit problems with banks and/or suppliers
  • personal affairs of the seller that may affect the ability to sell the business (e.g., divorce)
  • historic downward business trends in the seller's particular industry
  • downward business trends for this business in particular
  • recent bad publicity, bad reports at the Better Business Bureau, etc.
  • expiring patents or licenses
  • changing franchise terms that will increase operating expenses for the business
  • an impending or actual zoning change that will make business expansion difficult or impossible
  • major new competition (such as a new shopping center or a new mega store in the area) being planned
  • increasing difficulty or expense in getting raw materials, products, or services
  • the potential non-renewal of a major sales account
  • significant increases in rent to be expected (if the business space is leased)
  • unapproved existing variances in violation of zoning regulations
  • leases that are non-assignable or non-renewable
  • legal claims, encumbrances, and liens against the business
  • pending litigation against the business
  • state and/or federal law violations that will require a major expense to correct
  • poor management of capital assets
  • obsolete machinery, overvalued inventory
  • partner and/or shareholder who may not concur with the seller's desire to sell
  • unpaid taxes (income, sales, FICA)
  • product obsolescence
  • potential major increase in product liability insurance
  • potential labor union or other employee related problems
  • inability of a buyer to replace a "superman" seller who has a unique capability for running the business
  • non-compliance with environmental and/or safety requirements
  • recent suspension of a liquor license for regulation violations
  • need to hire a policeman to handle rowdy customers at certain times

SO WHAT SHOULD YOU DO?

Although buying an operating business is filled with many potential pitfalls, it is still one of the best ways for a beginner to get into business. There is a proven track record, an existing customer base, a well known name, location, marketing and sales strategy, etc., etc. If you buy the business properly, without overpaying and not taking on any fatal skeletons in the closet, you will have your instant piece of the American dream to be your own boss and to control your own financial destiny. Get all of the information you can to educate yourself about what to look for and what to look out for. Study the particular business that you are interested in and don't let anyone push you into buying. Tens of thousands of successful business sales take place every year and the key to a successful transaction is information and knowledge on the part of the buyer.

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What Makes the Sale of a Business Fall Through?
by Tom West

There are myriad reasons why the sale of a business doesn't close successfully; these multiple causes can, however, be broken down into four categories: those caused by the seller, those caused by the buyer, those that just happen ("acts of fate"), and those caused by third parties. The following examines the part each of these components can play in contributing to the wrecked deal:

The Seller

1. In some instances, the seller doesn't have a valid reason for entering into the sale process. Without a strong reason for selling, he or she has neither the willingness to negotiate nor the flexibility to see the sale to a conclusion. Without such a commitment, the desire to sell is not powerful enough to overcome the many complexities necessary to finalize the sales process.

2. Some sellers are merely testing the waters. As detailed above, they are not at that "hungry" stage that provides the push toward a successful transaction. These sellers merely want to see if anyone wants to buy their business at the price they would like to receive.

3. Many sellers are unrealistic about the price they want for their business. They may be sincere about wanting to sell, but they are unable to be realistic about how the marketplace will value the business. The demand for their business may not be there.

4. Some sellers fail to be honest about their business or its situation. They may be hiding the fact that new competition is entering the market, that the business has serious problems or some other reason the business is not salable under existing circumstances. Even worse, some sellers do not disclose that there is more than one owner and that they are not all in agreement about selling the business.

5. A seller may decide to wait until a buyer is found and then check with their outside advisors about the tax and/or legal consequences. At this point, the terms of the deal have to be altered, and the buyer won't agree. Sellers should deal with these complications ahead of time. Nobody likes changes...especially buyers!

6. Sometimes sellers don't understand that almost all businesses are seller-financed. Buyers have to be able to make the payments while still making a living from the business. If the business cannot offer this necessity, no one will buy it.

The Buyer

1. The buyer may not have an urgent need or a strong desire to go into business. In many cases the buyer may begin with positive intentions, but then doesn't have the courage to make "the leap of faith" necessary to go through with the sale.

2. Some buyers, like sellers, have very unrealistic expectations regarding the price of businesses. They are also uneducated about the nature of small business in general.

3. Many buyers are not willing to put in the hours or do the type of work necessary to operate a business successfully.

4. Buyers can be influenced by others who are opposed to the purchase of a business. Many people don't or can't understand the need to be "your own boss."

Acts of Fate
These are the situations that "just happen," causing deals to fall through. Even considering the strong hand of fate, many of these situations could have been prevented.

1. A buyer's investigation reveals some unmentioned or unknown problem, such as an environmental situation. Or, perhaps there are financial deficiencies discovered by the buyer. Unfortunately, these should have been on the table from the beginning of the selling process.

2. The seller may not be able to substantiate, at least to the buyer's satisfaction, the earnings of the business.

3. Problems may arise, unknown to both the seller and the buyer, with federal, state, or local governmental agencies.

Third Parties

1. Landlords may become difficult about transferring the lease or granting a new one.

2. Buyers and/or sellers may receive overly-aggressive advice from outside advisors, usually attorneys. Attorneys, in their zeal to represent their clients, forget that the goal is to put the deal together. In some cases, they erect so many roadblocks that the deal can only fall apart.

Most of the problems outlined here could have been resolved before the selling process was too far advanced. There are also some problems that could not have been avoided...people do sometimes enter situations with the best of intentions only to find out that this is not the right answer for them after all. These are the exceptions, however. Most business sales can have happy endings if potential difficulties are handled at the appropriate time.

Business brokers are aware of the various ways a deal may fall through. They are experienced in resolving issues before the business goes onto the market or before a buyer is introduced to the business. To buy or sell a business successfully, sellers should resolve any potential deal-wreckers, following the advice of a professional business broker.

Although business brokers cannot provide legal advice, they are familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in the details of these transactions. These attorneys will usually be more efficient, and therefore more cost-effective, than the attorney who handles a general practice.

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Why Do Business Purchase Deals Fall Apart?
by Tom West

In many cases, the buyer and seller reach a tentative agreement on the sale of the business, only to have it fall apart. There are reasons this happens, and, once understood, many of the worst deal-smashers can be avoided. Understanding is the key word. Both the buyer and the seller must develop an awareness of what the sale involves--and such an awareness should include facing potential problems before they swell into floodwaters and "sink" the sale.

What keeps a sale from closing successfully? In a survey of business brokers across the United States, similar reasons were cited so often that a pattern of causality began to emerge. The following is a compilation of situations and factors affecting the sale of a business.

The Seller Fails To Reveal Problems:
When a seller is not up-front about problems of the business, this does not mean the problems will go away. They are bound to turn up later, usually sometime after a tentative agreement has been reached. The buyer then gets cold feet--hardly anyone in this situation likes surprises--and the deal promptly falls apart. Even though this may seem a tall order, sellers must be as open about the minuses of their business as they are about the pluses. Again and again, business brokers surveyed said: "We can handle most problems . . . if we know about them at the start of the selling process.

The Buyer Has Second Thoughts About the Price:
In some cases, the buyer agrees on a price, only to discover that the business will not, in his or her opinion, support that price. Whether this "discovery" is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of prime importance that the business be fairly priced. Once that price has been established, the documentation must support the seller's claims so that buyers can see the "real" facts for themselves.

Both the Buyer and the Seller Grow Impatient:
During the course of the selling process, it's easy--in the case of both parties--for impatience to set in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process takes time. However, it shouldn't take so much time that the deal is endangered. It is important that both parties, if they are using outside professionals, should use only those knowledgeable in the business closing process. Most are not. A business broker is aware of most of the competent outside professionals in a given business area, and these should be given strong consideration in putting together the "team." Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar, but these people may not have the experience to bring the sale to a successful conclusion.

The Buyer and the Seller Are Not (Never Were) in Agreement:
How does this situation happen? Unfortunately, there are business sale transactions wherein the buyer and the seller realize belatedly that they have not been in agreement all along--they just thought they were. Cases of communications failure are often fatal to the successful closing. A professional business broker is skilled in making sure that both sides know exactly what the deal entails, and can reduce the chance that such misunderstandings will occur.

The Seller Doesn't Really Want To Sell:
In all too many instances, the seller does not really want to sell the business. The idea had sounded so good at the outset, but now that things have come down to the wire, the fire to sell has all but gone out. Selling a business has many emotional ramifications; a business often represents the seller's life work. Therefore, it is key that prospective sellers make a firm decision to sell prior to going to market with the business. If there are doubts, these should quelled or resolved. Some sellers enter the marketplace just to test the waters; to see if they could get their "price," should they ever get really serious. This type of seller is the bane of business brokers and buyers alike. Business brokers generally can tell when they encounter the casual (as opposed to serious) category of seller. However, an inexperienced buyer may not recognize the difference until it's too late. Most business brokers will agree that a willing seller is a good seller.

Or...
the Buyer Doesn't Really Want To Buy: What's true for the mixed-emotion seller can be turned right around and applied to the buyer as well. Buyers can enter the sale process full of excitement and optimism, and then begin to drag their feet as they draw closer to the "altar." This is especially true today, with many displaced corporate executives entering the market. Buying and owning a business is still the American dream--and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.

And None of the Above:
The situations detailed above are the main reasons why deals fall apart. However, there can be problems beyond anyone's control, such as Acts of God, and unforeseen environmental problems. However, many potential deal-breakers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.

A Final Note:

Remember these three components in working toward the success of the business sale:
1. Good chemistry between the parties involved.
2. A mutual understanding of the agreement.
3. A mutual understanding of the emotions of both buyer and seller.
4. The belief, on the part of both buyer and seller, that they are involved in a good deal.

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