Archive for category: What Buyers Need to Know

As brokers, we don’t often have to prompt buyers with questions to ask sellers.  They often come with their own lists, developed from curiosity and perhaps articles like these.  While each broker has different questions they like to ask sellers, there are a few that everyone who is interested in buying a business should ask.

Why?

There are many answers to why someone wants to sell their business, and there isn’t really any “right” answer.  There may be some “wrong” ones, though. There may be changes in the market which may make the future seem less bright for the industry.  There may be staffing issues. Perhaps a new competitor has moved in and sapped the last of the owner’s resolve. These are “wrong” only insofar as they aren’t the best reasons for the seller to sell.  But they represent great opportunities for the opportunistic buyer who has his/her eyes open but is also willing to put in the work if the business isn’t being handed over in ideal circumstances.

80/20 Rule

Tim Ferriss popularized and put into business context what had previously been known only to scientists and researchers as Pareto’s Principle: what are the 20% of activities that lead to 80% of the business income?  Or framed another way: what 20% of customer service issues take up 80% of your time?  There are many ways that a functioning business deals with these ratios. An informed seller has thought through these implications, though perhaps not in this ratio, and should be ready to give some answers (and corresponding strategies) to this question.

Staff

What is the cycle of acquiring and keeping good staff?  All seasoned business owners know that even the best, most aligned employees can move on after a number of years of good service. But there should be a history of employment that can give an incoming owner a roadmap to acquire new staff should the current employees move on with the outgoing owner.

If Not This, What?

If you didn’t sell the business, what would you do for the next two years?  Again, this might give you more insight into the personal life of the seller than the business, but good chances are that you’ll see an indication of either continuing on or push for growth.  If a business is in a position to sell, that means it’s healthy enough to support (or adapt to) an owner’s desire to work in more of a relaxed, lifestyle capacity or his/her desire to double or triple down and grow the business.  Follow up questions of why in either of these veins should give great insight into the fundamentals of the business.

The Daily Challenge

It’s often said that some business owners go to sleep with their businesses in their mind and wake up to those same thoughts first thing in the morning.  Even if a seller doesn’t think about his/her business this way, there’s a fundamental challenge to running the company. What is the most challenging aspect to running this business on a daily and ongoing basis?  The answer to this question should go right to the heart and mind of the potential buyer: do I have what it takes to do this?  Or even better, am I perfectly qualified to do this?

Now, enough of the questions, you might say, how about some answers?  We’ve got plenty of those here at Apex. Give us a call and give us a chance to answer!

In a previous article, we’ve made the case for buying instead of building.

However, you may be interested in buying a business run by a franchisee who has multiple locations in place. Every franchise is different as to what they expect from someone who is buying from an existing franchisee. 

Our goal in this article isn’t to explore those, but rather to discuss how running a franchise-type business is different from running an independent one.

Start with the Good News

We have discussed previously how important systems are to any business. In a franchise, those systems haven’t just worked one time…for one person…in one place.

They’ve literally been “field tested” many times, with many people, in many places.

They have extensive manuals for “how to run the business” which are written in the “for dummies” format.  You’re primed to open multiple locations in the future, thus expanding your cash flow against an existing back-office infrastructure.

You also have the power of an established brand and the ongoing publicity-spend pushed by the franchisor. Sure, you have to pay for part of that, but you often get a disproportionate benefit for this spend because of the lower costs. With many franchisees participating, better rates can be secured.

The “Bad” News

The “bad” news is that you have a limited sphere in which you can be creative. Unlike an independent business, in which you’re free to pursue new business opportunities or avenues of marketing, you generally have a rulebook which tells you what you may and may not do without consulting with the franchisor.  

This is only “bad” for those very creative entrepreneurs who buck at even the idea of running something by someone else in their own business. Whereas those who favor collaboration or who want ownership, but with a lot of help and guidance, can find great comfort in knowing they aren’t simply throwing spaghetti up against a wall.

However, these systems do come at a cost. You won’t be able to circumvent the obstacles the original franchisee went through just because you’re buying a mature, multi-unit operation.  

You will likely have to pay an upfront fee, demonstrate net worth, and pay ongoing royalties, the last of which you’re unlikely to have to do in an independent business.

What Matches You?

Ultimately, buying a franchise involves many of the same questions all potential buyers must answer. You need to begin with the end in mind and consistently ask yourself why you’re doing what you’re doing (in pursuing the purchase of a business) and how well this particular opportunity (the businesses you examine and screen) will aid you in accomplishing your why.

Our goal isn’t just to counsel you on the paperwork and financial questions, but on questions about personality as well. We have the experience to advise you on franchises vs independent businesses.  Give us a call!

In everything we do, often the sheer excitement of an event, experience or a purchase pushes out everything else, including good judgment.

That’s to be expected, and sometimes, can’t be avoided. But buying a business is such an important event that has the potential to affect so many other things in your life.

Because of that, it’s important to put euphoria and excitement in their proper places and ask some sobering questions of yourself on your business-buying journey.

1. Am I interested in this business solely for the cash flow or prestige?

Both cash flow and prestige are perfectly legitimate reasons to be interested in a business. Money is important, as can be the feeling of being affiliated with something of value or class.  

But on their own or even combined, they’re not enough to keep someone building a business in the medium to long-term. There needs to be at least one other thing that attracts you, be it a fascination with the industry, interest in the city in which a business is geographically sited, or a desire to challenge yourself with something new (just to name a few).

An additional reason beyond money and prestige will make sure that this new business adventure is a long-term play.

2. Do I really want to do this all day?

In his book Restaurant Man food mogul Joe Bastianich goes a long way to disabusing people of the “glamor” of the restaurant business by discussing the realities of the hours (18 a day), and the days you’ll work (weekends and holidays), and how much money you’ll make (20% blended margin even on the high end).  

He does this to discourage the dilettantes who like watching Food Network and think getting into the industry would be “fun.” If the business requires an active owner/operator, are you willing to sleep/breathe/dream about the business during a large part of your waking hours?

If not, you should probably pass.

3. Will demand exist in the coming years?

If you’re interested in growing a business, not just in maintaining cash flow based on a product that is headed for legacy country, you need to ensure that demand will continue to maintain, and even better, grow in the years ahead.  

Look at regulations, the competitive space, and your own costs of capital as part of a blended approach (that includes examining news and reports and talking with veterans of the industry) to get a solid answer to this question.

4. Why is the seller selling?

There’s nothing wrong with someone being “tired” – either in the sense of working in this particular business or industry or working in general. It will happen to all of us at some point. What we want to be wary of are sellers making decisions to sell for abrupt reasons.

Sometimes a family illness or personal emergency will precipitate just such an occurrence. This doesn’t mean a good transaction can’t take place.

It just means that because it was unexpected there are necessarily things that might have been missed, and both buyer and seller (but particularly the buyer, who will be left with the business when all is said and done) need to ensure that the business can indeed not just survive, but thrive with a new owner.

5. How much does the business depend on him/her?

At APEX we’re advocates of Michael Gerber’s famous phrase: “Work on your business, not in your business.”  This flows from a desire to transform a business from a handful of people who are relying on hustle and willpower to a well-oiled machine that relies on processes, not personalities.  

Ensure that the business isn’t overly reliant on the owner. If that’s the case, and the owner isn’t willing to make changes before the business sale to address the issues, consider negotiating a longer transition period or additional seller financing.

One of the reasons we exist is to help people navigate these and other key questions when preparing to make the life-changing decision of buying a business. We’re always here to answer your questions. Give us a call today at 913-383-2671!

We sometimes work with buyers who lose out on a great business because they’re hesitant to make an offer. Although we cover this topic when we begin working with a new buyer, the lesson sometimes gets forgotten when it’s crunch time. Here’s a helpful primer on the importance of this critical deal starter:

1.An Offer Is a Starting Point

We’ve refined a two-page offer form that has worked almost perfectly for us over the years. It lays out the expectations for how the deal will get done – the financing, leasing, timeline for due diligence, expectations for the seller, need for the asset purchase agreement, etc.

It’s designed to protect you – the buyer – in case you find out something you didn’t expect during the due diligence period. The offer usually comes with earnest money of $5,000 to $10,000 minimum.

2.A Deposit Shows You’re Serious

Putting money in escrow shows the seller you’re serious. It may even keep him from talking with competing buyers. Without it, how does the seller know to prioritize time with you to answer your questions and help you understand the business? He might otherwise write you off as a “tire kicker”.

Both the seller and the broker will take you more seriously and work harder for you when you have some skin in the game. By the way, the deposit is refundable.

3.It Opens Up the Books

You almost always have to put an offer on the table before you get access to the detailed financial information you need to make decisions. Sellers won’t take that risk without knowing you’re committed.

And the way you handle this part of the negotiation will set the stage for how you’ll relate to the seller throughout the deal and the transition. Starting off by demonstrating you’re serious can smooth the negotiations as the deal progresses.

4.An Offer Is NOT a Deal

While your earnest money backs up your intentions, it doesn’t represent a terribly large risk. Your business broker will typically keep the deposit in escrow, and it’s rare that the buyer doesn’t get that money back. In one case, Apex kept an escrow payment because the buyer backed out while driving to the closing and told us to keep the escrow!

As described in point #1 above, our standard offer document includes multiple contingencies that allow the buyer or seller to back out if the deal doesn’t proceed as expected. It saves both parties the cost of hiring a lawyer too soon. And it establishes the negotiating process right up to the much-more-detailed legal asset purchase agreement required to close the deal. This document also allows the buyer to start the loan application process.

If you find you’re truly interested in buying company, we hope these principles will help give you the courage to make a serious offer – before the deal slips through your fingers.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

Oh, how we love to work with first-time business buyers. Many have thought long and hard about the next phase of their business life. They’ve carefully assessed their capital and made a decision to invest their hard-won assets in the business of their dreams.

They’re ready to take the plunge. Their hopes are high. And their vision is often super focused on the business, career and personal life they’re going to have if they can just find that perfect business opportunity.

And then we set them straight.

While we don’t like to burst anyone’s bubble, we do try to give new buyers a reality check before they get started.

There’s Hair on Every Deal
That’s a pretty blunt way of saying that no deal is perfect. Any small business has an issue or two – whether it’s employees, customers, service levels, marketing or a dozen other things. But that’s actually where the opportunity for a buyer comes into play. If you’re willing to be flexible, you might find a great deal that plays to your strengths.

Do you have exceptional team management skills? Then maybe you can help a business struggling with staff issues. Would it be easy for you to put some marketing, social media or advertising in place for a business that has none? If so, you might be able to grow the business faster than the current owner can. Big, easy wins like these are often possible.

Be Ready to Work Hard
Some business buyers approach us with “passive” business ownership in mind. They don’t want to be involved in day-to-day management. But we see very few “absentee-owned” businesses. Owning a self-serve car wash is a great example. Even though it doesn’t require an attendant, the business will always have needs – from equipment repairs and supply deliveries to maintenance and cash collections.

Also consider that the current owner may have been running the business for several years before you buy it. What takes her 20 hours a week may well take a new owner 40 or more hours a week.

Keep Your Options Open
While it’s a good idea to start with some idea of the type of business you’re looking to buy, it pays to stay flexible; you may be surprised. One family approached us convinced they wanted to buy a Sonic restaurant franchise. We showed them some other businesses, and they ended up buying a brake service business.

It had everything they were looking for – a good history, solid financials and a convenient location. They even had a family member who could run it for them. It turned out to be a great deal, and they’ve been successful with it for 10 years now.

Know Your Requirements
While flexibility is important, there are some aspects of the process where we don’t suggest compromising.

• Get all the information you need and verify it.
• Work to develop a feeling of trust and solid communication with the seller.
• Know your finances. What kind of investment can you afford, and how much risk can you handle?
• Follow your values. If there are certain aspects of business you don’t want to be involved with, be sure to draw that line early in the process so you don’t waste your time.

Get Ready to React Quickly
Line up your ducks before you start looking so you can be responsive to an opportunity. If a business piques your interest, act on it. We have dozens of clients who were sorry they hesitated to make an offer on a business when they first had the chance. The good ones go fast!

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!