Have you ever felt buyer’s remorse after a major purchase?
You’ve purchased a new refrigerator, but you’re not sure if it’s large enough to store food when you cook for guests. Maybe you bought a new car, and you’re not completely happy with the dashboard layout.
What about a business purchase?
When you buy a company, far more is at risk. The process can take months, and negotiations can be difficult. The purchase is a massive financial commitment, and you need a smooth transaction to generate sales and profits quickly.
To keep the buying process on track, and to minimize your risk, retain the services of a business broker.
Here are seven issues that can complicate a business purchase, and how a business broker can help:
1. Why Is the Business for Sale?
A broker can help to uncover the seller’s true motivations for the sale.
Business owners sell companies to fund retirement, or because the market for selling the firm is particularly attractive. Other sellers are simply burned out, and don’t have the motivation to operate the business moving forward.
An experienced broker can uncover motivations below the surface. Maybe the seller’s industry is changing, and the owner is concerned that he or she can’t maintain sales growth.
If your broker can uncover more information, you can negotiate a better price for the business.
2. Which Assets Are for Sale?
In some cases, the owner is not selling the entire business.
An equity sale means that the buyer is purchasing the entire business. A firm’s equity is defined as assets minus liabilities. If the owner wants to structure the deal as an asset sale, only specific assets are included in the transaction.
Assume, for example, that Julie owns Sterling Manufacturing, a firm that produces sporting goods equipment. She is selling her customer list, office building, and manufacturing facility, but is keeping some of her equipment to start another business.
A buyer will need to purchase equipment to operate Sterling after the purchase. Julie’s decision to sell specific assets impacts the business valuation and the ultimate sale price.
Your business broker will identify what the purchase includes. Brokers use metrics and online valuation tools to determine a business price. They analyze the sales of similar companies, industry trends, and market factors.
3. What Agreements Are in Place?
A broker can help you understand the impact of the seller’s contracts and agreements.
The business owner may have contracts with vendors, so that the firm has a reliable source for materials and supplies. Key employees often have employment agreements, and most businesses have lease agreements for buildings and other assets.
Your broker, along with an attorney, can explain which agreements must be changed before the sale can be finalized. It’s particularly important to review employment agreements. To motivate key managers to stay with the firm, you may want to offer deferred compensation incentives.
4. Moving Through Due Diligence
Your broker can manage the due diligence process, and keep the document review on track.
Brokers know what documents must be reviewed, including financial statements, contracts, marketing plans, and the organizational chart. The broker and your attorney can agree on a document review schedule with the seller to keep the process moving.
Business brokers can review the firm’s financial statements, and ask questions regarding business trends. If, for example, the accounts receivable balance is growing at a much faster rate than sales, the company may not have a formal system for collections.
The broker will ask the seller for disclosure of any business liens on company assets, and any pending litigation. If the seller owns any intellectual property, such as a patent, the asset must be disclosed.
Due diligence is time consuming, and you need a thorough process to make an informed buying decision.
5. Uncovering Business Value
An experienced broker understands the traits that make a business attractive to buyers:
- Competitive differentiation and uniqueness in the market
- Track record of sales, positive cash inflows, and net profits
- Recurring revenue streams with regular customers
- A profitable niche that is repeatable and teachable
- A unique product or service that grows profits
Your broker can point out these traits, and how each factor can grow your sales and profits. This knowledge will help you and your broker finalize a purchase price.
6. Final Negotiations
Selling a business can be an emotional experience for a company founder.
The business may be the owner’s sole source of income, and the seller’s largest asset. A founder may spend decades building a business, and selling the company can be difficult emotionally. The seller may hesitate, or ask for more time before signing the closing documents.
Experienced brokers understand these emotions, and can help move the sale to a successful conclusion.
Your broker and your attorney will also ensure that documents related to ownership, including title of assets, are provided to you.
7. Smooth Transition
Your business broker can also help as you take over business operations.
Discuss whether or not the owner needs to stay through a transition period, and for how long. If you’re having difficulty with contracts or other agreements, ask your broker for guidance.
Improve Your Odds
Purchasing a business requires a huge time commitment, and a large financial investment. To increase your odds of closing a successful purchase, hire a business broker.
Your broker has been through the buying process many times, and will keep the deal moving forward. A broker is a trusted advisor that will be with you until the deal closes.
The professionals at Raincatcher have years of experience advising business buyers. Raincatcher’s staff will assess the seller’s interest, and determine if the purchase price is reasonable.