Sunbelt Education Series: Buying a Business 2008 Sunbelt Education Series Buying a Business Day 3: Deal Mechanics

Sunbelt Education Series: Buying a Business 2008

Sunbelt Education Series

Buying a Business

Day 3: Deal Mechanics


Deal Mechanics

• Questions about recasting?

• Buyers and Sellers

• The steps from Letter of Intent to Closing


Reminders from week 1

• Money is seldom the first motivation to buy a business

• Neither the buyer /seller or their advisors know what the business

is worth, but all have an opinion

• Different buyers pay different prices for a business

• Transaction structure and financial requirements will vary

depending on the size and type of company involved

• Buyers need to find “all the right things wrong” rather than

searching for the “perfect” business

• Future value of the business depends on who buys it


Reminders from week 2

• Tax returns and income statements usually distort the

true earnings of the business. The impact can be

negative or positive.

• You must ask the right questions to get accurate

information

• Business Intermediaries use SDE to identify owner’s

benefit


Reminders con’t

• SDE is the amount of money the business generates to

pay debt service and provide wages for one owner /

operator

• The balance sheet is adjusted to the fair market value of

the assets to be transferred to the buyer


Why Do Owners Sell Their Businesses?

Reasons for selling – Usually “Human Reasons”

Health Divorce

Partner disputes Relocation

Death Burn out

Retirement

Other Reasons…

Losing Lease

Losing Money

Owner doesn’t like the business


Why do people buy a business

• Independence

• Challenge

• Personal Growth

• Financial

• Lifestyle

• Other?


Buyer / Seller relationship

• Different Goals - Sellers want to sell the business for the

highest price. Buyers want to pay the lowest price.

• How do we get to the “fair price”?

• Selling price will vary with buyer’s motivation to buy

and opportunity envisioned

• Selling price will vary based on the sellers’ reason for

selling


Steps in the process

• Identify a potential business -“All the right things

wrong”

• Meet the Seller and tour the business

• Complete a Letter of Intent with contingencies

• Due diligence

• Arrange financing

• Close the deal


The Buyer/Seller Meeting

1) Prepare yourself properly for the meeting.

• Answers and Research - You want to get enough answers and detail to your

questions so you can immediately focus on researching the business, the

industry, the competition, etc.

• Although the Internet allows prospective business buyers to do phenomenal

research quickly, in today’s environment, good businesses sell fast. As such,

you may not have a lot of time between a seller meeting and preparing an

offer. Obviously, you’ll want to do your homework before moving to an

offer so be sure to get enough information in your seller meeting to conduct

your research.



2) Visualize Yourself In The Business - If you take away anything from a seller

meeting, it should be the answer to these four questions:

– Do I like the business?

– Can I see myself running it?

– Do I like the seller?

– Do I trust them?

Note: Questions 1 and 2 are obvious. Questions 3 and 4 are critical. If you

like the seller and trust them, chances are you and they will be able to work

through any and all of the deal challenges that will arise. Trust is also

paramount. If not, you will always keep thinking they are hiding something.



3) Impress The Seller

If you have any chance of getting the seller to finance the deal, or bend more they

would normally on the deal terms, you need to leave them feeling that “you’re the

one” to buy their business. If they believe that you can not only get the deal done, but

also run the business successfully, they will go out of their way to make the deal

happen.


Buyer/Seller Meeting Questions

Questions to ask at the first Buyer/Seller Meeting:

• Tell me about your business?

• How did you get started?

• What services does your business provide?

• What do you do everyday?

• Why are you selling your business?

• What is it that you like best and least about the business?

• How long have you been considering selling your business?

• What keeps you up at night about the business?

• How much vacation do you take (not that you’re looking for time off…rather, you

want to know if they have adequate staff that will allow you time away)?

• What are the last three year's sales and SDE?




• Who are your biggest competitors?

• What are your industry trends?

• Is your market share growing, shrinking, or steady?

• Have there been any significant changes in your marketplace?

• What do you think I can do to increase sales and profits? Why are you not doing these things?

• Ask the seller if he/she has copies of any trade publications. They’re a great source for

additional information.

• Who are the employees? Any manager in place? Are there any employees that are critical to the

business?

• How many employees do you have?

• Will you agree to a covenant not to compete?

• Will the business sale include the transfer of real estate?

• What are the details of the lease? How long? Any options? Do you anticipate any problems with

the landlord assigning it to me or entering into a new lease?




• Don't you have children to transfer your business to?

• Are you the only owner?

• Who knows that the business is for sale?

• What is your timetable for completing the business sale?

• What are you going to do after we sell your business?

• How long will it take me to really learn this business?

• How long can I count on you to train me after the sale?

• What do you believe is the profile of the ideal buyer for this business?

• Do you anticipate any problems with me getting credit from your suppliers?

• Do any of your suppliers represent more than 10% of your purchases? If yes, who

are they?

• Who does the buying for the store?


Letter of Intent

The Power of the Letter of Intent

• A Letter of Intent (LOI) shows the Seller that you are seriously interested in

the business

• A Seller views a Buyer who submits a LOI as a serious Buyer and may be

willing to share additional details on the business and its operations

• A Buyer is protected using a “Buyer Friendly” LOI that has basic

contingencies that must be completed for due diligence

• Deposits are placed in a non-interest bearing escrow account


Common Letter of Intent Contingencies

Some common contingencies in the preliminary offer to purchase might include:

• Buyer to obtain financing on terms acceptable to buyer

• Buyer to make loan application within 5 days of acceptance of this agreement

• Buyer examination and approval of 3 years of financials and tax returns

• Buyer examination and approval of assets, inventory, and equipment list

• Seller is to give non-compete agreement acceptable to buyer

• Seller is to provide training period acceptable to buyer

• Buyer is to obtain lease of terms acceptable to buyer


General Due Diligence Topics

Buyers will inquire and inspect:

General Business Information Organizational Matters

Litigation Issues Regulations/Permits

Intellectual Property Financial & Accounting

Receivables Liabilities

Budgets & Forecasts Taxes

Contracts & Agreements Sales & Marketing

Insurance Employees

Environment Issues Real Estate

Customer & Supplier Relationships Equipment


Financing the Deal

3 Options for Financing the Purchase

• Your money - All or Part

• Bank financing - Conventional or SBA

• Seller financing – Seller Note or Earn Out


Using Your Money Wisely

• If you can buy a business with 100% payment; may

want to consider a larger business

• 20% or more down payment. Where does the other 80%

come from?


Truth About Lenders

• Banks - reluctant to lend to buy a small business

• Banks prefer to lend on assets versus goodwill

• Bank don’t know how to operate small businesses

• Banks view small business tax returns very

conservatively

• SBA lenders require detailed documentation, personal

collateral, and charge additional fees


Seller Financing

• May be necessary to complete the deal, however most

sellers want all cash at closing

• Seller believes in the business and the Buyer

• Seller has ongoing interest in the success of the business

• The key to owner financing between Buyer & Seller is

“Chemistry”


Seller Financing

• All cash deals are sometimes discounted from cash &

term deals

• Seller may benefit from tax effect of a seller financed

deal

• Properly structured, a seller can protect his business

until the note is paid


Asset vs. Stock Purchase

Advantages Disadvantages

No legal liability for the corporation prior to the purchase

No liabilities for employees

Costs paid for the assets are depreciable

"Clean" credit, reputation, workers comp, etc.

• No established credit • Rehire the employees • Negotiate transfer of

leases & contracts • New licenses • Operating Capital

Advantages Disadvantages

• Established credit • Many times, no or

minimal operating capital required

• Leases are in place • Contracts are in place • Employees are in

place with worker's compensation rate established

• Licenses are in place • No public notification

of the sale • No sales tax on the

FF&E • No deposits required • Corporation, tax &

employment numbers & documentation in place

• Legal liability for the corporation prior to the purchase

• Assets are normally fully depreciated

• Sometimes stock is a hard sell to CPA's & lawyers

Asset Sale vs. Stock Sale Stock Sale vs. Asset Sale


Closing

• Usually the Buyer’s Attorney will draft an ASSET

PURCHASE AGREEMENT

• Seller and Seller’s Attorney will review the document

and request changes, additions, or deletions. Buyer,

Seller and their Attorneys work out the language

NOTE : They do not change the deal, only protect their

client legally.


Business Structure

The type of business entity you choose will depend on

three primary factors:– Liability

– Taxation

– Record-keeping

Here's a quick look at the differences between the most common forms of business entities:


Business Structure

• A sole proprietorship is the most common form of

business organization. It's easy to form and offers

complete managerial control to the owner. However,

the owner is also personally liable for all financial

obligations of the business.


Business Structure

• A partnership involves two or more people who agree

to share in the profits or losses of a business. A primary

advantage is that the partnership does not bear the tax

burden of profits or the benefit of losses—profits or

losses are "passed through" to partners to report on their

individual income tax returns. A primary disadvantage

is liability—each partner is personally liable for the

financial obligations of the business.


Business Structure

• A corporation is a legal entity that is created to conduct business. The

corporation becomes an entity—separate from those who founded it—that

handles the responsibilities of the organization. Like a person, the corporation

can be taxed and can be held legally liable for its actions. The corporation can

also make a profit. The key benefit of corporate status is the avoidance of

personal liability. The primary disadvantage is the cost to form a corporation

and the extensive record-keeping that's required. While double taxation is

sometimes mentioned as a drawback to incorporation, the S corporation (or

Subchapter corporation, a popular variation of the regular C corporation)

avoids this situation by allowing income or losses to be passed through on

individual tax returns, similar to a partnership.


Business Structure

A hybrid form of partnership, the limited liability

company (LLC), is gaining in popularity because it

allows owners to take advantage of the benefits of both

the corporation and partnership forms of business. The

advantages of this business format are that profits and

losses can be passed through to owners without taxation

of the business itself while owners are shielded from

personal liability.


Closing day

• No surprises or new information. This should be a

formality, all the hard work has been done.

• Signing documents, exchanging money and shaking

hands.


Some thoughts to consider

• Self-employment is not right for everyone. The marketplace provides a balance

of owners to workers. Which are you?

• Knowledge is more important than capital when exploring business ownership.

• Business ownership requires a serious commitment on all levels. There are

financial, emotional and physical demands, so be sure that your family

understands and supports you.

• The longer you look, the less likely that you will buy a business. Don’t shop

yourself into paralysis.

• Chronic lookers have the wrong attitude. They spend their time looking for

what’s wrong and thinking the “next one” will be better. Instead, be open -

minded to opportunities that are presented. The decision is easier when you have

all the information you need to make a decision. FIND “THE RIGHT THE

THINGS WRONG WITH THE BUSINESS.”


Thoughts to consider

• The benefits of having a track record far outweigh any positive factors of

starting your own business. Over 50% percent of start ups fail in the first 3

years.

• If you’re serious, the goal will be to find a good business within six [6]

months.

• Find a good business ----- then improve it. Pay for the past but buy for the

future.

• Business ownership can provide freedom, security, independence, personal

challenge, growth and financial rewards.

• The only place where your job is truly secure is in your own business!


Final Thoughts

10 Commandments; for buying & owning a business

• Pay for the past, Consider the present, Buy for the future

• Buy a good business and make it better

• Have a plan and follow it

• Fall in love with the profit potential, not the product / service

• Do what you do best and manage the rest

• Use technology where ever and whenever you can

• Identify what factors drive the business (location, service, product, etc.)

• Be proud of the business, and have an effective introduction to explain your business to

others.

• Fix EVERYTHING that is not working to its optimum

• “What’s it worth to you?” - Only you know that answer


Goals for attendance

• Comfort with the process

• Remove emotions

• Analysis

• Gather knowledge

• Self-discovery

• Don’t know what we don’t know


Conclusion

Good luck in your business search!

If you have any additional questions, contact us at:

Sunbelt Cleveland Business Sales & Acquisitions

216-739-0272

[email protected]

Documents

Sunbelt Education Series: Buying a Business 2008 Sunbelt Education Series Buying a Business Day 3: Deal Mechanics