The Essential Queries: 4 Questions to Consider Before Purchasing a Business

Investing in a business requires more than just a keen interest and available capital; it demands careful consideration and due diligence. As a prospective buyer, you want to ensure that you’re not overlooking any crucial details that might influence your decision or impact the potential success of your venture. Here, we outline four critical questions that every buyer should ask before committing to a business purchase.

• What Exactly Does the Sale Encompass?

In the excitement of buying a business, it’s easy to lose sight of the specifics—what precisely is included in the sale? Never assume that vital assets such as real estate, inventory, or machinery are part of the package unless explicitly stated. Ensure everything is clearly defined and documented to avoid surprises later on. Know what you’re investing in, down to the smallest detail.

• What Kind of Intellectual Property is Involved?

A business’s proprietary assets can often be the lifeblood of its operations. Be sure to inquire about any intellectual property that the company might hold. This could include patents, copyrights, unique formulations, or proprietary software. If these aren’t part of the sale, find out why not. These assets could be pivotal to the business’s success, and their absence might significantly impact its value.

• How Does the Business’s Growth Potential Look?

Before investing, evaluate the business’s potential for growth. Ask the seller for their growth strategies and projections. If the growth potential seems limited, it’s essential to discover this beforehand. Assess the necessary working capital not just for running the business, but also for implementing changes that could stimulate growth.

• What’s the Status of the Current Staffing?

Understanding the staffing situation is critical before buying a business. Determine the level of dependency the business has on the current owner or manager. How would their departure affect operations? Get a comprehensive overview of the management team—their expertise, experience, and their role in the business’s success. This will help align your expectations with the reality of the situation.

Remember, purchasing a business involves several moving parts and numerous variables to consider before you ‘sign on the dotted line’. These questions form a crucial part of the due diligence process. However, never hesitate to ask for clarity or additional information when necessary.

A thoroughly vetted business not only increases your satisfaction as a buyer but also enhances your chances of success. Making an informed decision is the key to a successful business acquisition, and asking these crucial questions is an excellent place to start.

Why Delegating is Key When Selling Your Business: Let the Experts Handle the Heavy Lifting

Selling a business is not just about striking the right deal, it’s a process that involves multiple moving parts. It requires expertise in fields as diverse as finance, marketing, negotiation, and law. If you’re planning on selling your business, it’s important to ensure that you don’t stretch yourself thin by trying to manage everything. Instead, let professionals handle the heavy lifting so you can focus on maintaining the day-to-day operations of your business.

Maintain Business Continuity

As a seller, your primary focus should be on ensuring that your business continues to function seamlessly. Many sellers make the mistake of getting so caught up in the sale that they neglect their current operations, leading to a potential decrease in sales and earnings. This can be a red flag for potential buyers. It’s crucial to maintain standard operating hours, keep inventory levels steady, and keep the premises in top condition.

Lean on Business Brokers and M&A Advisors

Professional business brokers and M&A advisors play a significant role in managing the sales process from beginning to end. Their goal is to keep the process on track so you can continue to run your business without distraction. Other professionals, like attorneys and CPAs, can also be instrumental in helping you navigate the legal and financial aspects of the sale.

Get Professional Pricing Guidance

Having a clear idea of your business’s worth and your expected earnings from the sale is important. However, the ultimate selling price is determined by what the market is willing to pay. Thus, getting a professional business valuation before setting your price can prevent overpricing, which could potentially slow down the process or even discourage buyers altogether.

Prioritize Confidentiality

Until your sales transaction is finalized, maintaining the highest level of confidentiality is paramount. If vendors or employees learn that you’re selling, it may create uncertainty that can harm the value of your business. Key employees might start seeking other employment opportunities, or vendors might decide to end contracts, impacting your business operations.

Strategize Your Role Post-Sale

One of the decisions you need to make is whether you’re open to staying on in a limited capacity after the sale. Many buyers are willing to pay more if the seller agrees to stay on for a specified period, as it lowers their perceived risk. Similarly, offering seller financing can increase your selling price, as it shows your confidence in the future success of the business.

Plan Ahead

The best time to prepare for selling your business is when there are no external pressures forcing you to sell. Preparing well in advance, by organizing documents, addressing any litigation or environmental issues, and cleaning up paperwork, can streamline the sales process when the time comes.

In conclusion, selling a business is a complex process that requires careful planning and execution. By entrusting professionals with the heavy lifting and focusing on maintaining business operations, you can ensure a smooth transition and get the best possible outcome from the sale. Engaging a business broker or M&A advisor well in advance can provide you with invaluable insights and support throughout the process.

Key Findings from the Recent BizBuySell Insight Report: A Brief Analysis

Whether you’re considering buying or selling a business, it’s beneficial to examine the BizBuySell quarterly reports. These documents, collated from approximately 50,000 businesses across the U.S., provide insights into sales and listing prices, successful transactions, and prevailing trends that could potentially impact your business decisions.

Prosperous Times for Sellers

The most recent BizBuySell report covering Q4 2021 indicated a flourishing market for sellers, with sales figures surpassing pre-pandemic levels seen in Q4 2019. This marked a significant rebound from the 2020 sales slump. Despite the usual fourth-quarter sales dip, 74% of brokers reported steady sales, a trend that appears to have persisted into early 2022.

Other noteworthy sales statistics include:

• 8,647 closed transactions in 2021, an uptick from 7,612 in 2020.
• A year-over-year sales price increase of 16%.
• Median cash flow growing 10% year-over-year.

Buyers Pursue Quality

When it comes to buyer preferences, 60% of surveyed buyers indicated that robust financials were a non-negotiable requirement when considering a business for purchase. This stands in stark contrast to the mere 18% of buyers who deemed discounted opportunities a top consideration.

Impact of Labor Shortages

The BizBuySell report also highlighted the pressing issue of labor shortages, with 64% of surveyed owners acknowledging its impact on their businesses. Business brokers concurred that labor shortage was currently the most significant challenge facing small businesses. Another related concern was supply chain disruptions, which 75% of business owners claimed had affected them.

Emerging Balance in Business Landscape

When brokers were asked whether they thought owners were more or less inclined to sell their businesses in 2022 compared to 2021, a growing sentiment emerged: they expected more businesses to be sold this year. While 2021 was considered a buyer’s market, brokers now perceive a shift towards a more balanced landscape.

In conclusion, the trends extracted from the BizBuySell reports paint an encouraging picture for sellers, with a strong market bolstered by high sales prices and steady transactions. Buyers, on the other hand, are increasingly discerning, prioritizing businesses with solid financials. Understanding these trends is instrumental in navigating the dynamic business marketplace, whether you’re a prospective buyer or seller.

Understanding the Dynamics of Family Businesses: A Roadmap to Success

Family businesses play a pivotal role in the economies of both the United States and the world. Currently, there are about 5.5 million family-owned and operated businesses in the U.S., contributing significantly to the nation’s wealth. However, despite their economic relevance, many of these businesses are not prepared for a profitable exit strategy, a factor that could significantly impact the owners’ financial returns for their years of effort.

Owners of family businesses typically have a strong emotional attachment to their enterprise’s legacy, often wishing for its continuity in line with their existing mission, vision, and values. However, these aspirations often hit a roadblock due to the lack of an established succession plan or an exit strategy. Studies reveal that around one-third of family business owners have no plans to retire, which often leads to a void in succession or exit planning. This lack of preparation becomes evident when the owner faces burnout, disability, or even death, leading to sub-optimal profits.

Pros and Cons of Family Business Transition

The lifespan of a family-owned business, as reported by Businessweek.com, averages 24 years. Approximately 40% of these businesses successfully transition to the second generation, but only about 13% make it to the third. The survival rate for fourth-generation businesses and beyond dips to a meager 3%. Despite these statistics, whether the business owner intends to sell their enterprise to a third party or keep it within the family, maintaining confidentiality and appropriate documentation is essential for a smooth transition.

Considering selling your business to a family member? You might want to weigh the potential disadvantages. Key among these is that family business owners often receive a lower value for their business than they would from an independent third party. If the sale involves retaining jobs and income for certain family members, the owner might have to negotiate an even lower price. Preparing the remaining family members to answer to new management is another critical aspect of the transition process.

Managing Multiple Owners and Decision-Makers

When multiple owners or decision-makers are involved in a family-owned business, and a sale to a third party is being considered, designating a single family member to handle negotiations is advised. Involving multiple decision-makers in the sale process can lead to complications for both buyer and seller. Often, diverging priorities among stakeholders can jeopardize the transition to new ownership. To ensure a smooth transition, all family members must agree on the price, terms, and conditions of the sale. This holds true even if some family members are merely employees or passive investors in the business. Internal disagreements can often derail a potential deal.

The Power of External Guidance

Enlisting outside help can significantly boost the likelihood of successfully transitioning a family-owned business. A third-party professional, not emotionally invested in the business like the family members, can provide unbiased guidance. Professionals like business brokers, M&A advisors, lawyers, and accountants can add immense value to the process.

The information in this article only skims the surface of the complexities involved in transitioning a family business to new ownership. If you’re contemplating this crucial step, don’t hesitate to seek advice and assistance. Proper planning today can pave the way for a seamless and profitable transition tomorrow.

Defending Your Business’s EBITDA: A Key Factor in Valuation

Often, business owners face a harsh reality check when they decide to sell their companies. One of the most common revelations is the vital role that financial data, specifically EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization), plays in the valuation process. Potential buyers will meticulously scrutinize this indicator of financial health through a Quality of Earnings Analysis Report (Q of E), and the financial reporting standard, General Accepted Accounting Principles (GAAP), can often diverge from a company’s usual accounting practices. Therefore, business owners need to be prepared for a possible shift in EBITDA figures when transitioning to GAAP.

Due diligence is an integral part of any acquisition process, and during this time, potential buyers will access several documents outlining your business’s financial and operational health. This necessitates the business owner’s commitment to time and transparency to uphold the accurate representation of their company’s EBITDA. Properly preparing your business for sale is not a trivial task, especially when aiming for a top-tier acquisition price that accurately reflects your business’s financial and operational health.

EBITDA is a commonly used metric in business valuation, often calculated as a multiple for deriving the business’s worth. In your business’s acquisition process, anticipate that buyers or potential investors will analyze your income statement for adjustments to reach an EBITDA figure that aligns with their understanding. Therefore, it’s crucial to defend the actual adjusted or normalized EBITDA which forms the basis of your business’s purchase price. The failure to justify even a $100,000 discrepancy in EBITDA at a 3x multiple could cost you a significant $300,000 in the acquisition price.

Three common EBITDA adjustments include:

• Conversion to GAAP Accounting: This adjustment can significantly impact the final figure.
• One-time Events: Events like legal expenses, PPP loan forgiveness, insurance settlements, and unique expenses associated with business growth can substantially influence the adjusted EBITDA.
• Personal Expenses: The business owner’s personal expenses, not part of the business’s future cash flow, can impact EBITDA.

Business owners should not overlook balance sheets when representing their business’s financial health. Small businesses often focus solely on profit, leading to infrequent balance sheet reviews. Balance sheets should be recast to ensure that potential buyers understand the assets and liabilities that will transfer with the sale. Any oversights can disrupt the negotiation process during due diligence.

For instance, many business owners retain more cash in their businesses than necessary. When a potential buyer sees this surplus, they might expect it to transfer with the business, unless they are willing to pay the equivalent price. The same holds for liabilities. If a business plans to operate debt-free post-sale, relieving the business of liabilities increases the business’s value based on the no longer required cash flow.

As a business owner planning to sell, consider the following points:

1. Ensure that managers and key employees can effectively run the business during the transition period.
2. Review your financials in anticipation of GAAP reporting requirements during due diligence.
3. Consider having a Quality of Earnings analysis performed before marketing your business to understand its financial health truly.

Selling a business is a process with several moving parts. Solid, well-organized financials and defendable EBITDA underscore the soundness and professionalism of a business, setting realistic expectations for buyers and investors.

In conclusion, it’s never too early to start preparing your business for sale, even if the sale is years away. By doing so, you safeguard your business’s value and increase the likelihood of a successful transition.