3 Vital Aspects Often Overlooked When Purchasing a Business
There is no denying that purchasing a business involves a multitude of considerations. The complex nature of this process makes it easy to inadvertently overlook certain essential aspects. This article aims to shed light on key areas that often remain unattended when buying a business. We will focus on three specific areas that require particular scrutiny.
#1 Legal Documents
While it might seem a given to thoroughly inspect all legal documents, many buyers tend to disregard the importance of some documents, deeming them irrelevant. The truth is, every legal document holds significance and potential implications. Thus, no document should be casually dismissed.
Every piece of legal paperwork, from trademarks and copyrights to lease agreements, demands a careful review before finalizing a purchase. The stakes are too high to neglect any potential issues lurking within these documents.
#2 W-2 and 1099 Forms
Another crucial aspect is verifying if 1099 forms were issued in lieu of W-2 forms. The IRS maintains stringent rules regarding these forms. No buyer wants to complete a business acquisition, only to unearth unresolved IRS issues.
Inheriting a business plagued by IRS complications is a situation best avoided. Thoroughly examining W-2 and 1099 forms can prevent such unpleasant surprises.
#3 Retirement Plans
Just as you must meticulously review all financial documents, including W-2 and 1099 forms, the same applies to retirement plans. You should not proceed with buying a business unless you are sure that the business’s qualified and non-qualified retirement plans are entirely compliant with the Department of Labor standards. Overlooking a company’s retirement plans can result in unforeseen expenses.
In conclusion, several potential issues can be inadvertently overlooked when purchasing a business. While we have highlighted three critical areas in this article, there are many more facets to consider. This fact emphasizes the vital role of a business broker, as well as other trusted professionals like attorneys and accountants, in thoroughly vetting any business under consideration. A key aspect of any business acquisition is exhaustive due diligence. While no business is devoid of flaws, an experienced business broker or M&A advisor can help you navigate these complexities and chart a successful path forward.
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The Significance of Skillful Negotiations in Business Transactions
The success of finalizing business deals primarily depends on expert negotiations. It’s therefore logical to focus on sharpening your communication skills and employing a Business Broker or M&A Advisor proficient in negotiation techniques.
Fostering Mutually Beneficial Agreements
Securing a mutually beneficial agreement for all parties involved is crucial, and several elements contribute to this. It’s critical to understand what the other party aims to achieve and ensure they feel they’ve accomplished their objectives in the deal.
A proven tactic is to guide individuals through a series of “yeses” by initiating discussions on topics and points where agreement is easily reached, then progressing from there. In the early stages of this negotiation strategy, yeses might stem from seemingly insignificant aspects. However, this step is effective in establishing a conducive atmosphere for forward progress, enabling agreement on more significant issues.
Ensuring Uninterrupted Information Flow
An uninterrupted flow of information is a vital aspect of the negotiation process. Hence, negotiations between buyers and sellers are best conducted through their respective brokerage professionals, rather than directly.
The reality is that direct communication between buyers and sellers opens the door for many variables and potential missteps, from ego clashes to misunderstandings. By opting for a competent Business Broker or M&A Advisor, you can trust them to optimize results.
Promoting Mutual Understanding
Encouraging the other party to keep the lines of communication open and demonstrating an understanding of their perspective and potential concerns can promote cooperation and preemptively mitigate resistance.
In essence, excellent negotiations derive from an appropriate strategy, thorough preparation, adequate education, enhanced communication, and an understanding of the other party’s needs. By fostering effective communication with the other party, alongside your Business Broker or M&A Advisor, you’ll boost the likelihood of attaining the cooperation you’re seeking. This, in turn, dramatically elevates the probability of achieving mutually beneficial outcomes.
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How Changing Market Conditions Can Impact Your Business
Recently, the International Business Brokers Association (IBBA) released its Q2 survey report, The IBBA and M&A Source Market Pulse. This survey features feedback from an impressive 301 brokerage professionals across 44 states with 266 transactions taking place in the quarter. The report had numerous key findings that will be of interest to those looking to buy or sell a business.
The Emergence of Covid-Proof Businesses
One key fact of interest is that a full 25% of businesses are still operating below capacity due to the pandemic’s enduring impact. The Market Pulse survey concluded that a quarter of all small and medium sized businesses are either in a position where they are temporarily closed or are operating below capacity. On the other side of the equation, the survey noted that 29% of businesses have either emerged as “Covid proof” or have actually benefited from the pandemic.
For sellers with Covid resistant businesses, now could be an excellent time to sell. For buyers, there are potential deals to be had, especially for those who are willing to look beyond the current pandemic fueled environment and towards the future.
Why are Sellers Selling?
The report also noted that burnout is a major factor impacting deal activity. Retirement continues to be the leading reason why businesses are selling, but burnout has become a quickly rising secondary reason.
The top five reasons that sellers are putting their business on the market are: retirement (35%), burnout (27%), health (15%), tax increases (7%) and general Covid fatigue (7%). The pandemic is still likely playing a role in the minds of many business owners who are looking to sell, which means that buyers could find good deals due to the pandemic. It is important for buyers to note that as pandemic conditions improve, many of today’s good deals will likely vanish.
While the IBBA and M&A Source Market Pulse report noted that over the last year it took longer for deals to close in most sections, there were exceptions to that rule. For example, in the $5 million to $50 million sector, there has actually been an acceleration. On average, deals in that range are taking a mere ten months to close.
Top Buyers in 5 Sectors
Sellers will be pleased to hear that the report concludes that buyers are indeed active, noting that in the Main Street market, personal services were trending. In the lower middle market, it was manufacturing and construction/engineering that dominated industry transactions.
The top buyers in the $0 to $500,000 sector were first time buyers (39%), in the $500K to $1MM range, the top buyers were first time buyers (37%), and in the $1MM to $2MM range, entrepreneurs (29%) lead the way. For the $2MM to $5MM range, it was first time buyers (36%) and serial entrepreneurs (28%) who led the way. For the $5MM to $50MM range, PE firms seeking a platform deal (33%) were the most represented group of buyers. It is interesting to note that with the exception of the $5MM to $50MM range, first time buyers topped the list.
Buyers and sellers will be pleased to learn that the IBBA and M&A Source Market Pulse report clearly outlines just how much the climate has changed from 2020 to 2021. Today’s market conditions are different than they were a year ago. If you’re looking to purchase a business, you can still find great deals. Those looking to sell should find increased interest from an array of buyers, especially first-time buyers.
Copyright: Business Brokerage Press, Inc.
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The 5 Must-Do’s When Considering Buying Any Business
There is no doubt that buying a business can be a very exciting idea; however, it is critical that prospective buyers don’t lose track of what is truly important. Let’s explore the five most important steps that any buyer needs to take when evaluating a business. The simple fact is that as a buyer, you have no choice but to look beyond the sizzle and work to find the steak. In other words, it’s essential to determine the true worth of a given business.
#1 – Evaluate What is Actually Being Sold
No buyer should assume that he or she understands everything that is, or is not, being sold when buying a business. One of the most important tasks for any buyer is to carefully evaluate the business under consideration and invest the time to understand what the business does and what is included in the sale. This is a task that your Business Broker or M&A Advisor will perform as well.
#2 – Understand Business Performance
Understanding the performance of a business can be more complex than it initially appears. On one hand, the numbers don’t lie, and it is possible to quickly evaluate the bottom line.
However, in the process of evaluating the business, you and your Business Broker or M&A Advisor might discover that there are many flexible factors that could quickly alter how well the business performs. For example, you’ll want to take into account the number of hours the current business owner is working and if key employees are contributing enough to the business. These are just two of a wide variety of factors that could influence overall performance.
#3 – Look at the Financials
Ultimately, there is no replacement for understanding the current financials of a business. Perhaps a business has all the potential in the world, and you can easily see that potential. However, remember that almost all buyers must obtain financing; this means that it is usually critical that the business has strong financials in its current state. Before considering any business, you and your team of professionals will want to carefully evaluate profit and loss statements, tax returns, balance sheets, and other important financial documents.
#4 – Evaluate the Business Plan
Understanding the current owner’s goals and what steps they’ve outlined to achieve those goals is a key step. As a new owner, you’ll want to know that there is a path forward for growing your business, and a business plan is essential for achieving that goal.
#5 – Look at the Demographics
One of the single best ways to grow your business is to understand your customers. For this reason, it is important that you have a clear understanding of the demographics of the business and why customers should remain loyal. If there are challenges on the horizon, such as an expanding competitor or new competitor entering the arena, then you’ll want to know this information as well.
Evaluating a business is not a simple process. Working closely with a brokerage professional who has years of experience in evaluating all types of businesses is essential. This is an excellent first step towards buying the right business for your needs.
Copyright: Business Brokerage Press, Inc.
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The Often-Overlooked Importance of Leases
When buying or selling a business, it is critically important that you evaluate the lease. It is a strange phenomenon that otherwise savvy business people will treat leases as a secondary concern. However, problematic terms in a lease can literally force you to pack up a business and move. This would not only be a jarring experience, but a very costly one as well.
Finding a good location is of paramount importance to both the profile and profitability of your business. You may feel that there are more important issues when buying or selling a business. But by the end of this article, you’ll see the wisdom in placing a lease near the top of your “to evaluate” list.
There are three different kinds and types of leases: a new lease, an assignment lease and the sublease. All three of these options are most definitely different from one another and can potentially impact your business in different ways.
The New Lease
A new lease, as the name indicates, is the result of a lease that has expired. That means that the buyer must work with the landlord to establish a new lease. Buying a business only to discover that you don’t have a lease and the landlord isn’t interested in keeping your business at its current location is most definitely a shock that no business owners want to encounter. Buyers should be one-hundred percent certain that they have a lease in place before they buy a business.
Assignment of Lease
The second type of lease is the assignment of lease; this form of lease is quite common. It involves the buyer of a business being granted the use of the location where the business is currently located and operating. Through the assignment of the lease, the seller is able to assign the buyer the rights associated with the lease. Of course, it is important to keep in mind that the seller is not acting as the landlord, but instead, simply has the ability to assign the lease.
The Sublease
The third option for lease is the sublease. The sublease is basically a lease within a lease, and it comes with some important distinctions that must be understood. A sublease generally requires the permission of the landlord and that permission should not be viewed as a “foregone conclusion” or “automatic.”
The bottom line is that no new business owner wants to discover that their new business doesn’t have a home. There are an array of very important issues to work out when buying a business, and it is critically important that buyers never overlook what kind of lease is involved. A savvy seller will highlight what kind of lease they have, especially if the terms are favorable. But buyers should always be proactive and ask questions about the status of the lease and make certain that lease terms are clearly defined.
Copyright: Business Brokerage Press, Inc.
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