Tips on How to Buy a Business and Entrepreneurship Through Acquisition

Generally speaking, buying an established business is considered less risky than setting up your own business from scratch. As an entrepreneur, you won’t necessarily need to come up with a unique business idea, sell investors on an unproven concept, or incur the costs & risks of building a business up from the ground level. This practice of acquiring an already established business is known as entrepreneurship through acquisition.

It’s Still Risky To Buy a Business

buying something that is already stable, and profitable doesn’t mean risk won’t still be a huge issue as with any form of business ownership and entrepreneurship. The large majority of businesses out there publicly listed for sale are riddled with issues you’ll have to find, fix and tweak to grow the business and determine the right price to buy a business. In 2019, we’ve seen a huge surplus of small business owners out there hoping to sell under-performing or unprofitable businesses, or businesses that have not yet been optimized for sale and to encourage new ownership. This can be a great opportunity to acquire and grow an existing business, but as an investment, the operational risk is absolutely still there.

So how do you buy a business? To avoid getting married to a bad deal, you need to investigate thoroughly the business opportunities you’re thinking of pursuing. And a well-thought-out approach is necessary for you to find and secure a good business. To help you buy a profitable, well-managed business at the right price, think through the following steps.

Identify What Interests You

Entrepreneurs hoping to buy a business typically focus on existing financials and current cash flow, but it’s equally important to align yourself with a target company’s culture & lifestyle goals. You’ll be considerably happier if you purchase a business that’s already aligned with your ideal work culture, and in an industry with which you care about and already have experience. The more informed and fluent you are with the model of a particular business, industry trends, products, or services, the more inventive and successful your expansion plans will be. Ultimately, it boils down to embracing your passions, skills, experience, and interests, and throwing yourself in head-first the moment transfer of ownership occurs.

Determine Whether It Will Succeed or Not

Other than money, you’ll be spending time, energy, and hair follicles. Take into account the time and energy requirements you intend to take on for the day-to-day management of your new business. Some managers would rather be “grinding” all time, with their employees, but most investment-focused buyers will favor delegation and putting a capable management team in place, while they can focus on oversight and growth through acquisition. The number of resources you’ll need to invest will be influenced by the people and procedures already in place on the ground, and your prior understanding of the industry & relevant players.

Think of Why the Owner Is Selling the Business

If you’re about to purchase an enterprise, you’ll need to know precisely why the business is no longer working for its recent owner. There are many reasons why a company owner might want to sell a business. And you must get an honest outlook of how the operation is doing—without the seller’s influence.

Keep an eye on the existing business debts, condition of the equipment, competition, location problems, inventory problems, and any brand problems. Also, ensure you are updated on the current business’s achievements, failures, future opportunities, and possible challenges. Apart from speaking to the current owner about these issues, also engage employees, existing customers, neighboring companies, residents, and any relevant person you can think of.

Find a Business That Meets Your Budget and Personal Needs

Strategies to find the right business on the market that fits your needs include classified newspaper ads, online business-for-sale websites, and working with a business broker. Bear in mind that business brokers representing existing businesses for sale lawfully represent the seller. For this reason, be careful about passing on sensitive, potentially compromising information to them. Nevertheless, a business broker can help you decide on the kind of business you need, screen companies to eliminate businesses that are unlikely to sell, and assist you with the paperwork and help with negotiations to get a deal done.

Take into account that, if you involve a broker, a commission of 8%-15% will typically be required (paid by the seller), which can be well worth it for a business broker who works hard to facilitate an optimal, pain-free transaction… As a buyer, you’ll want to hire a good accountant to appraise business financials and make sure the cash flow number you are negotiating is accurate.  It’s also critical to have a competent business transaction, M&A-focused lawyer to represent you in negotiations and keep you informed about how the transaction will be executed, and how the delivery of the purchase price will be paid out over time.

Do Your Due Diligence

Assemble as much data as you can before buying an enterprise. This is one of the most critical steps on your way to becoming a business owner. In this period, work with your lawyer and accountant to guarantee you get all the facts and figures you need before proceeding.  This will help you ascertain that the business owner isn’t out to sell a startup for the price of a well-established business with a track record of reliable profits, revenues, and paying customers. Be aware; the seller will most likely require you to sign a non-disclosure agreement. This safeguards the seller should you decide not to buy the business after reviewing the documents. Below is a buy a business checklist of the materials that the seller should have prepared for you:

• Contracts and leases

• Business permits and licenses

• Business Financials

• Environmental regulations

• Zoning laws

• Certificate of good standing

• Condition of the inventories

• Organizational chart

• Letter of intent

• Code

Signing the Sales Agreement

After due diligence, comes the final verdict; whether to buy the business or not. In case you decide to go ahead with the purchase, the sales agreement is the “strap” that binds it all together. The agreement will spell out the final buying price, and every item you are buying, including intellectual property, tangible assets, intangible assets, and customer lists. Make sure you have a good legal representative to help you piece this list together.

Value the Business 

Whether you do it yourself or hire a professional accountant or certified valuation analyst (CVA), being aware of how businesses are valued is important for any buyer. Note that, before a business is transferred to the buyer, both the seller and the buyer have to settle on an agreed-upon price based on revenues & cash flows of the business. Often, buyers and sellers have their own unique processes for zeroing in an agreed-upon financial value, and this forms the basis of their negotiations. Some of the most common models of valuation for an existing business include the market approach, asset approach, and earnings approach.

Raise Funding Needed to Buy the Company

As soon as you’ve settled on a price, the next phase is to get the money. There are numerous distinct channels through which you can access the cash you need to buy the business. Are you aware of the different means of financing a new business acquisition? Some common financing options to business buyers include:

·         Personal financing

·         Debt financing

·         Search fund

·         Seller financing

Closing the Deal

It doesn’t matter you’ve reached an agreement on the terms of sale and price; the transaction could still be torpedoed based on terms, and how compensation will be distributed over time. A buyer can walk away from a negotiation at any time if a deal isn’t working for all parties, or if a seller decides to get greedy or back-track on previously agreed upon negotiation items.

Transitioning the Acquired Business

Typically, the seller will help you for a period of time as a consultant while you get up to speed with the day-to-day requirements of running the business. Make sure you clearly outline the responsibilities of each party in a written contract, and how the training will be conducted. Transitioning to new ownership can be a rough time for existing employees, and you want that to go as smoothly as possible. As a new owner, put mechanisms in place to make sure the business transition goes smoothly for all parties involved. Create time and speak to key personnel, suppliers, and customers before assuming day-to-day leadership. Let them know your plans for the company’s future, and pay close attention to existing stakeholders’ feedback and opinions as you move forward with the business and make incremental changes to the model, processes, and team.

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An In-depth Step-by-Step Guide to Buying a Franchise

Approximately 1 out of 12 businesses in the USA is a franchise business. Opportunities like franchising and entrepreneurship through acquisition are some of the great ideas for business minded people looking to run a business without the struggle of creating a new business from scratch. However, establishing a successful franchise takes more than merely finding an ideal franchisor and financing your business. It is a complex step that requires careful planning and strategizing. You need to conduct comprehensive research, review the necessary documents, and follow the steps below.

Conduct Rigorous Research

Finding out the necessary information is the first step you should take when you need to buy a franchise. Thorough research will ensure that your venture into a field of your interest, within your budget and your qualifications. You need to ensure that you meet the basic requirements necessary to start a franchise and also assess your resources, skills, and interests. Your research needs to involve:

Talking To Franchisees

Take time to talk to current franchisees. Gaining an insight into their experience with franchising will help you avoid mistakes in yours, and examine what they did right and maybe use it for your business. Through franchisees, you will also identify the pros, cons, challenges, and hidden costs of running a franchise.

The Type of Franchise

Choosing the right franchise is an important step. To arrive at the right decision, you will need to examine your skills, the type of environment you want to work in, your interests, and your goals. Depending on your needs and budget, you can find companies willing to sell a start-up or already established business. You should also determine the amount of money you are ready to invest and the profits you would like to make from the franchise. This information will help you choose the right franchise.

The Qualifications Requirements

Franchisors set minimum requirements for their franchisees to protect their bottom line and ensure that the franchisees are qualified both financially and professionally. Qualifications vary depending on the type of franchise and the franchisors, but the standard requirements include a credit score, management experience, industry experience, net worth, outside income, and cash in hand.

Fill Your Initial Application Forms and FDDs

Once you have done your research and identified the franchise, the next step is to choose 1 to 3 companies to consider. These companies will give you a representative who will provide you with information about their company. You will also fill the first application forms and preliminary questionnaires. If the franchise is satisfied with your answers, you will receive a copy of the franchise disclosure document (FDD).

The FDD is a 50+ page document that indicates the fees you need to pay, your responsibilities as a franchise, information about the franchisor, and your responsibilities as a franchisee. Make sure you study this document to ensure that it is a good fit. The federal trade commission mandates franchisors to provide franchisees with the FDD at least 14 days before making any binding agreements.

Review The Agreement

If the franchisor decides that you are the right candidate to acquire their business, they will draft and offer a formal contract. Reviewing the agreement ensures that you understand everything before you sign it, so take time to read through the document and hire a franchise lawyer to help you better understand the terms of the contract. The contract gives you the legal right to own a franchise under its rules and regulations. The contract should indicate the rules on the transfer of ownership, royalty fees, hiring staff, protection of territory, pricing, suppliers, among others. Any promises made verbally also need to be put in writing, and any discrepancies between verbal and written terms should be clarified.

Investigate The Company

Once you have settled on a franchisor, you will then need to investigate the company. Buying a franchise involves developing a relationship with the company; it is vital to make sure that it is the right relationship, therefore, take time to talk to its executives, ask questions and also gather information about the company on your own.

Attending a discovery day is a good opportunity for the franchisee to get to know the franchise. It is an opportunity to learn about their culture and understand the people who will be working with you. Make sure you ask questions and voice your concerns during discovery day. A typical discovery day involves one-on-one meetings, interviews, a visit to the franchise location, and group presentations.

A discovery day is also beneficial to the franchise company. It allows them to get to know you better and assess whether you are a good fit for their company. They will also evaluate your level of enthusiasm and commitment at which will dictate their decision to sell a business to you.

Acquire Finances

You cannot run a business without finances. Before you buy a business, make sure you acquire finances to cover the costs of running a business. Franchisors may help arrange finances, but you will also need to qualify for financing on your own. A credit score of 700 gives you a better chance of securing funding. You can finance your start-up through SBA loans, traditional bank loans, search funds, rollover for business start-ups (ROBS), or a government grant.

Create A Business Plan

A business plan is not only a guideline for your business, but it also aids in acquiring finances. It keeps you focused, helps you achieve your goals, keeps you on the right track, and thorough market analysis gives you a better understanding of your market. Document every detail of your business to ensure that everything runs smoothly.  

A business plan shows investors that they are investing in a company with a vision and one which will last and grow. It helps them understand your vision and passions and shows where their money is going. Franchise opportunities require careful considerations, and creating a business plan helps assess your franchise's visibility.

Talk To a Franchise Attorney

If you are considering franchising, make sure you talk to a franchise attorney. These attorneys specialize in franchising, and they have a vast knowledge of franchising. A qualified franchise attorney will help you know everything that you need to know about franchising. This is because they know what to focus on in the FDD and the franchise contract; writing and working on similar documents gives them better insight. They know what to look for when reviewing the documents.

A good franchise attorney also helps the franchisee choose the best entity for their business. The right entity determines the legal rights and liabilities of the business and its taxation. You can also rely on your attorney for help when things do not work out as you expected. They also form an invaluable asset for the business as they can help negotiate the terms and conditions of the agreement and offer guidance to the vague aspects of the contract.

Picking a Location

Take into consideration the guidelines and recommendations of the franchisor to help you find an ideal location. In some cases, the franchisor may have strict rules for commercial real estate, including the number of parking lots, territory requirements, and the minimum squire footage.

Leasing a space is cost-effective, and less risky; however, if you intend to be in the place for more than seven years, consider buying your location. Whether it is leasing or purchasing a space, consider the safety of the area, the location of your employees and customers, the square footage, and negotiate the price. 

Acquire The Necessary Skills And Knowledge Of Running A Business

Before you open your business, take the opportunity to acquire the necessary skills and knowledge to run a franchise. Typically, the franchisor will provide training sessions that will tackle everything you need to know about the business, including the policies and guidelines, the products and services the systems you will be using. Working in a store is an ideal way of determining how a franchise works and whether your skills and personality match the company culture.

Open Your Business

This is the final step; it comes after you have finalized everything, and the franchisor representative approves your location. The franchisor will give you a hand during the actual opening. Marketing your grand opening is an excellent way to promote and market the business. It ensures that you build your customer base quickly. Before the grand opening, potential alert customers of the existence of your store, and you can also do a soft opening to identify and deal with the operation problems before the grand opening. The franchisor has pre-determined promotion ideas, signage, and ads for the grand opening in most cases.

It is worth noting that franchising does not eliminate the risks of owning a business. However, it allows the entrepreneur to handle the responsibilities that come with owning a business. It comes with an already Get Matched Now.

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What to Do before Selling Your SaaS Business

Are you thinking of selling your software as a service (SaaS) business? Remember, buyers most often buy SaaS businesses for financial or tactical reasons. Know what they want in an acquisition, and you will be in a better position to undergo the entire process without much difficulty.

Establish the Value of Your SaaS Business

It doesn’t matter if you are selling a SaaS business or a website; you need to find out the best price to sell your business. To know what you may receive in the market, you need to get a valuation of your SaaS business to be aware of what it’s worth. After that, start setting up your company’s prospectus, including the facts, figures, and numbers. Typically, this is done by computing the annual revenue generated by your SaaS business and doubling up that amount. Also, factor in the amount you’ll compensate the broker or marketplace you use to sell your SaaS business.

Put Your Books in Order

Recurring proceeds is one of the highest draws to a SaaS business. Nevertheless, in terms of increasing revenue generation, a growing business doesn’t guarantee that buyers will pounce on your deal.  Potential buyers are often not much intrigued by ‘what meets the eye’. Meaning, they would be more interested in finding out the fraction of your actually profitable earnings. For this reason, you need to compute costs, such as costs of acquiring customers, your rate of churn, your average growth rate, and more.

To put your books in order, you need to think about maximizing profits and minimizing expenses. Usually, it’s less costly to retain, serve, get existing clients to subscribe and renew than trying to attract new customers to swap the cash flow. Additionally, upgrade your systems time and again to help you lessen cancellations. One thoughtful way of minimizing costs is cutting down human assistance. Use tutorials, videos, and knowledge bases to reduce the need for interaction between humans.

Debug Your Source Code

It doesn’t matter your finances are in good shape. If your source code is disordered, jumbled up, or missing in documentation, potential buyers will be a bit skeptical about your business. In essence, your SaaS business source code ought to be clean, annotated, tested, and verified. It can be overwhelmingly difficult to sell your SaaS business if the source code doesn’t comply with the set standards and guidelines.

As well, a non-reliable, non-concise, overly complicated code can present you challenges as far as selling SaaS businesses is concerned. Being the business proprietor, you need to be familiar with all the entries and exits of your source code. For a reason, it will present fewer challenges to the buyer; in case they want to alter or upgrade the software. Aside from that, a well-documented source code lets the seller take over your business naturally.

Assess if You Need External Assistance to Sell Your SaaS Business

Note that, a reliable online business broker can help you get a valuation of your SaaS business. This is necessary so you are clear about what your business is worth. The good thing, you won’t need to meet your preferred business broker physically. Schedule time to chat with a reliable online business broker (website to advertise) to identify appropriate buyers. Of course, you need to have completed the valuation and prospectus before you start looking for buyers.

An extensively experienced online business broker can help you prepare and move you through the entire process of selling your SaaS company. More importantly, letting an expert online business broker negotiate the price with prospective customers on your behalf removes you from the equation. As a result, it eases the discomfort you might have when it comes to the actual transaction.

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Top 3 questions to ask a business broker in 2019 to sell a business

Business owners often make huge mistakes by attempting to sell their business on their own when not prepared to do so. What’s worse? Choosing the wrong business broker to sell your business because you weren’t prepped to ask her the right questions. Here are our top three questions to ask a business broker before selling your business in 2019:

1) How many businesses have you sold as a lead broker on the sale?

Resumes mean little, completed transactions mean everything. Get a list of completed transactions the broker has led in your industry, in your area, in your approximate deal size… everything.

2) Who is my potential target buyer?

Make sure the broker has a good plan for selling your business, and a reliable list of active buyers she plans to market the business too. Will she market individual buyers? Investment groups? Strategic competitors in your industry who might be actively looking for acquisitions?

3) Do you co-broker?

This is a big one business owners often miss when hiring a business broker. If a business broker will not agree to co-broker you might want to run for the proverbial hills as a potential seller looking to maximize interest and offers within a limited amount of time. A broker who refuses to co-broker (work with and share commission) with another professional representing a buyer who might be interested in your business is essentially limiting your selling opportunities in order to protect their own commission. We believe business brokers have a clear fiduciary responsibility to maximize interest, offers, and speed on behalf of their seller clients, to ensure the highest price and best terms for any business owner who has entrusted them to sell their business.

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Tips for negotiating a term sheet in 2019

Tips Negotiating A Term Sheet in 2019

Term Sheet Covers The Major Aspect Of A Deal

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 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.

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Why you need seller financing to buy your next business

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 

How common is seller financing?

Most sellers start out cold on the idea of seller financing because of the risk involved for them when it comes to the buyer actually paying them back for the loan, but it’s a great move for everybody involved when you consider the fact that this tool helps the seller attract potential buyers, and may even help the seller achieve a higher final price for his or her business. Seller financing can also help lead to a faster closing, which increases the probability of a transaction successfully closing.

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Why 2019 might be the best time in history to buy a new business

Buy A new business

Here is Why 2019 Might Be The Best Time

As we mentioned elsewhere, 2019 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 owners 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 the BizNexus Marketplace 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:

1. Buying Existing Businesses. -SBA

2. How to Buy an Existing Website: A Step-by-Step Guide. -Will Lipovsky

3. How to Find a Business Broker. -Entrepreneur

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Large Majority of Small Business Owners Completely Unprepared to Sell a Business in 2019

via GIPHY

A recent article in Globe & Mail details the fact that the majority of small business owners who are ready to sell their businesses in 2019 are completely unprepared to do so. With SO many other business owners out there planning to close up shop and sell their businesses for a nice exit in a baby-boomer-filled market, the statistics are mind-boggling considering we’re talking about the transaction of a lifetime, -literally. The author, Matthew Halliday states:

““Between 2012 and 2018, the number of businesses who just planned to close outright, rather than sell, tripled, from five per cent to 15 per cent,” says Corinne Pohlmann, senior vice-president of national affairs at CFIB. “What worries us is that they’re not finding buyers, and then their only option may be to shut down.”

Additionally, most entrepreneurs tend to put their businesses on the market long before they are ready – for example, without first bolstering lacklustre financial statements or securing relationships with long-time clients in writing. Few have formal succession plans, Ms. Pohlmann says, and many also tend to let their revenue slip in the years before a sale.

So, in that field of under-prepared businesses, it can be easier to stand out if an entrepreneur has the patience to proceed with the months – or years – of preparation needed beforehand.

The article emphasizes the importance of building the right team FAR in advance of the moment you’re actually hoping to sell. Preparation is key here…. If you do your research in advance and start identifying buyers early on in the process, you stand a MUCH better chance of being able to play multiple bids against each other when the time comes to sell.

Takeaway lesson? Put together your business exit dream team early on in the process, and let them keep the ball rolling and keep you from getting distracted with the day-to-day operations of your business.

To get matched with intermediaries that fit your geography, business, deal size, and more, head over to BizNexus and get your top three suggested intermediaries today, for free.

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