There are various ways to go about funding the purchase of a business. A strategic option would be to negotiate seller’s financing with the business seller to alleviate the burden of paying full price for the business upfront. Nate Goldstein from Vested Business Brokers explains how this works, particularly for small businesses.
An often overlooked option to help begin the journey towards buying your own business is to simply reach out to a business broker for guidance before you begin your search. If you can identify a quality business broker, which isn’t easy, this can be a way to help jumpstart your search and increase the chances of finding a successful acquisition. Brokers typically represent multiple deals within their category of expertise simultaneously, and if you’re able to establish a relationship with a productive broker you gain access to a continuous stream of deal-flow. The trick is to identify that unicorn broker.. The one who’s knowledgeable, productive, and won’t waste your time pitching you subpar, low probability deals for sale.
Speak directly with recent references.
Don’t even bother with a business broker if you can’t verify if they’ve historically done well by their clients on both the “buy” and “sell” sides of the transaction. Ask to speak with owners of businesses the professional recently helped buy or sell, and check for relevant reviews online. If you’re researching the professional’s profile online on his or her company site, LinkedIn, or Biznexus definitely prioritize DEAL experience over education, listed skills, or any other potentially biased information manufactured by the professional him or herself.
Make sure the professional keeps working for you.
Set communication expectations from the outset. A business broker is typically working with multiple buyers and sellers of businesses at one time, and communication can slip through the cracks. Set up a recurring weekly, or monthly meeting with the broker to review his or her listed deals. Even better, as you develop your relationship with the broker over the course of regular calls you position yourself in the front of the line to hear about the deals the broker may be working on, but hasn’t officially listed… Getting first crack at an unlisted deal is a great way to get a head-start on developing a relationship with the seller, and to potentially avoid a bidding war with competing buyers if you can negotiate terms before the competition gets wind.
Buying a business can be a very long, tough process, and having the right business broker there to help feed you potential deals, offer guidance and insight into market conditions can be a great help. Do your homework before your choose any professional to help you with the process, and make sure you’re clear on expectations and compensation from the outset. Standard shameless plug: We recommend you check the BizNexus directory before making contact with a potential business broker for any helpful reviews, ratings or content that could provide guidance.
A few useful links if you’d like to dig deeper on the topic:
How to Find a Business Broker. -Entrepreneur
As we mentioned elsewhere, 2018 looks like it might shake out to be the best year in a decade to buy a business in the United States. There are a few big reasons for this:
Loans are accessible and still historically dirt-cheap.
First-time entrepreneurs have access to up to $5 million in SBA loans from the government to help finance a new business acquisition.
With small business ownership set to skyrocket over the next 10 years, there’s rapidly increasing interest out there for buying and established, viable business.
New technology solutions continue to offer increasingly efficient ways to connect buyers and sellers of businesses, and to identify the right professional for you to do so.
So if you’re considering a jump into entrepreneurship, -buying an existing small business is absolutely an option you should consider. In his article for business.com, Looking Ahead: Buying a Business in 2017, Bruce Hakutizwi states:
Depending on your business strategy, industry, location, and other factors, there are more reliable and willing funding opportunities available to entrepreneurs right now than ever before. Between low-interest traditional business loans, government grants and loans, and a striking volume of venture capital available from individual angel investors, large corporations, and established VC funds, it’s easier and faster than ever before to fund a promising new startup or the expansion of an existing business.
As opposed to the relative risk of a brand new startup, obtaining funds to purchase an already established and successful business is even easier. This is doubly true if you’re purchasing another business that naturally extends or expands your own existing company or expertise since you can likely prove to the lender you’re up to the task of making the acquisition profitable. -Bruce Hakutizwi.
Buying a new business can be an exciting, rewarding and potentially life-changing experience for you and your family. Do your research before you choose any professional to help you with the process, and make sure you’re clear on expectations and compensation from the outset. And as always, we recommend you check our GuruSnaps directory to help vet financial services professionals, and for any helpful reviews, ratings or relevant content to help guide your way.
A few useful links if you’d like to dig deeper on the topic:
How to Buy an Existing Website: A Step-byStep Guide. -Will Lipovsky
How to Find a Business Broker. -Entrepreneur
If your broker is telling you that seller financing isn’t an option to buy an existing business that you like, I recommend you test that with the seller of the business personally.
What is seller financing? -It’s when the seller of a business acts as your bank. More often than not, when somebody is selling their business, they expect to lend you up to 50% of the business value in the form of a note, carrying interest and being paid off through the cash-flows of the business over a period of five to seven years after the purchase of the business.
In his blog, business broker guru Richard Parker explains:
While the terms can vary including interest rates, length and percentage of the total deal being financed, a general rule is for the seller to carry thirty to fifty percent at current interest rates plus a few percentage points over three to seven years.
The dilemma for many buyers however is never getting to the point of presenting sellers with an offer because they are often stonewalled by brokers or the seller’s legal/financial representative, or family members trying to dissuade them from carrying a note.
I can certainly understand a seller’s trepidation, but the reality is that if they truly want to sell their business, they have to participate in the financing. End of story. Otherwise, their business will be another one that remains on the market forever.
–Richard Parker, author of How to Buy a Good Business at a Great Price
A term sheet is a non-binding agreement outlining the basic terms and conditions under which an investment will be made. The term sheet acts as an outline for the parties involved so that once an agreement has been reached, a contract will be formed that adheres to the conditions defined in the term sheet.
A term sheet covers the major aspects of a deal, reducing the chances of a misunderstanding between parties. It also ensures that expensive legal fees attributed to drafting a binding agreement are not prematurely paid due to disagreements that arise. Here are some tips on creating an effective term sheet.
Numbers, Control, & Equity
The term sheet generally covers economic terms such as valuation and equity distributions to mitigate against a down-round or share dilution later. Things such as options or other equity incentives may be up for negotiation, as changes in options tend to change on a pre or post money basis. It also covers matters pertaining to control and voting rights, as investors enjoy having influence over managerial decisions as a way to control their investment and future liquidation options.
It Goes Beyond Valuations
It is easy to focus all attention on the pre-money valuation in a term sheet, as that defines the financing strategy of the startup moving forward. However, other topics such as governance and control should be equally considered. Investors can put in clauses giving them preference for the sale of a company or the issuance of preferred stock, giving them greater leverage over their investment and control over the company’s major decisions.
Retrofit Your Term Sheet
Not every deal or investor will be the same, which is why it important to draft a term sheet that answers to your specific needs, as well as those of the other party. Terms sheets are marginal, meaning that a win for you may mean a loss for the other party, vice versa. Hence, it is important to make sure that (1) you are aware and content with the terms laid out in your term sheet and (2) you leave room for changes or negotiation, as the term sheet is not the final contract, but a starting ground for securing your investment.
Perhaps “love” is a strong word. Perhaps “not be put off by” is more appropriate. Flat revenue refers to a chart’s depiction of the historical trend of a business’s revenue – flat revenue means that the trend line is nearly horizontal, stagnant, … flat. Some prospective buyers immediately move on to the next business to be considered when they see a flat revenue trend.
It actually might indicate a GREAT opportunity for growth potential under a new owner....
Why do I say that flat revenue deserves further investigation? Many times, revenue is flat simply because the owner has rationally chosen to avoid the expense, effort, and headache associated with growing the top line. Many small businesses are built to the point of satisfying the owner’s lifestyle, and once that goal has been satisfied, the barriers to moving beyond are too great. Maybe it’s learning about “all that SEO stuff,” maybe it’s the risk of conceiving a new product line, maybe it’s knowing that staff will need to be hired – for myriad reasons, the perceived payoff just isn’t worth it. And, there’s nothing wrong with that. After all, the owner is the owner.
But for a buyer, a business with flat revenue can represent a great opportunity. Maybe there are marketing channels that haven’t been explored. Maybe there are complementary products or services that could be offered. Maybe it’s simply having a willingness to commit more energy and effort to growth.
We often see this last idea bear fruit early on. One of my relatives bought a flat-revenue, simple service business about a year ago. Before doing so, I assisted her by doing a purchase price justification using a discounted cash flow model (I know … geek!). It showed that the seller had priced the business based primarily on a rear-view look, which is not uncommon, and that by growing revenue by just 3% per year, the present value of the business was more than the owner was asking. The buyer also had specific ideas about how she could grow by much more in the first few years after taking ownership. She scooped up that business, and after nearly a year, she is ahead of the former owner by 8%. Over the last six months, she’s ahead by more than 15%. How did she do it? Energy. Enthusiasm. Evidence-based decisions. Price increases. Pruning unprofitable customers. Firing. Hiring. Pay increases for staff. Embracing new marketing ideas. Learning “all that SEO stuff.”
Be aware that careless use of the discounted cash flow model mentioned above (one of the methods comprising the Income Approach for valuation) can lead one to an unrealistic expectation of value. Still, the Income Approach is arguably the best method for the valuation of businesses above a certain size, and certainly those with explainable growth prospects. In my practice, I will often help clients realize the benefit of having a professional valuation performed that uses the Income Approach.
I’m not saying that all businesses with flat revenue are great. I know of one auto-aftermarket business that had tapped its building’s capacity to service more customers. The owner had already incorporated round-the-clock shifts and optimized the floor plan. That firm simply could not expand without adding additional physical area, an expensive undertaking.
Still, when considering a flat-revenue business for purchase, take the time to do your own assessment of growth potential. Has the growth flattened just to serve the owner? Do you have specific ideas that will drive revenue up, or expenses down? Perform your own line-by-line analysis and calculation to determine what the business is worth to you. Yes, it can be a lot of work, but the potential reward can often be well worth the effort
-Ken Whitley, Business Broker at Murphy Business