The How of Business Podcast – Buy or Sell Episodes
Episodes focused on helping you buy or sell a small business. Whether you are considering buying an existing small business, or you are planning to sell and exit your small business, these episodes will help you learn and position yourself for a successful purchase or sale.
A Guide for Buying a Small Business
Purchasing an existing small business can be a great option for budding entrepreneurs. Not only can it bypass the challenges of starting from scratch, but it can also offer immediate cash flow and a pre-established clientele. But as enticing as it may sound, buying a business requires careful scrutiny. Here, we outline the pivotal points to consider, the steps involved, essential team members you should involve, and the pros and cons of buying an existing small business.
Evaluating a Business: Key Considerations
1. Financial Health: Delve deep into the company’s financial statements, bank statements, tax returns, and debts. This will provide a clear picture of its economic stability. Get help from a CPA when analyzing the business financials. It’s usually best to by a profitable business.
2. Client Contracts: Examine existing contracts and customer relationships. Are there long-term agreements in place, or does the business rely heavily on a few clients? How critical is the current owner to maintaining those client relationships?
3. Reputation: What’s the public perception of the business? Online reviews and even local word-of-mouth can provide insights.
4. Inventory and Assets: Check the age, quality, and value of physical assets. Overvalued or outdated inventory can impact the purchase price. Clearly understand and list the specific assets included in the sale.
5. Legal Issues: Ensure there are no lurking legal disputes, unpaid taxes, or compliance issues.
6. Reason for Sale: Understand why the owner is selling their small business. Is it a personal reason, or are there insurmountable business challenges?
Steps to Buying a Small Business
1. Self-Assessment: Ensure you’re clear about your strengths, weaknesses, and the type of small business you’re interested in. It’s important to determine if you are ready to be a business owner.
2. Search: Use business brokers, networks, or online marketplaces like BizBuySell to find potential businesses for sale.
3. Preliminary Analysis: Once you identify a potential small business, conduct an initial assessment using the aforementioned evaluation points.
4. Make an Offer: If satisfied with your preliminary analysis of the business, submit an offer or Letter of Intent (LOI) based on your valuation and your budget.
5. Due Diligence: Deeply investigate all business aspects, from financial records to employment contracts. Engage a CPA and/or attorney to assist you with this due diligence.
6. Secure Financing: Whether through bank loans, private investors, personal savings, or seller financing, ensure you have the necessary capital.
7. Draft a Sales Agreement: This legally binding document will outline the terms of the sale, and it should be drafted and executed with the guidance of your attorney.
8. Close the Deal: Finalize the agreement, make payments, and assume ownership. The final closing transaction can be facilitated by an attorney or escrow agent.
Your Virtual Team to Help You Buy a Small Business
1. Business Broker: Helps you find a business to purchase, facilitates the buying process and provides valuable industry insights.
2. Accountant: An accountant or CPA assesses the financial health and ensures you get what you pay for. A CPA can also help you estimate and plan for the tax treatments and implications of the purchase.
3. Lawyer: Reviews and drafts contracts, checks for any legal encumbrances, and ensures a smooth transition of ownership.
4. Financial Advisor: Assists in determining how much you can afford and in structuring the deal, relevant to you personal financial position.
Pros and Cons of Buying an Existing Small Business
Pros include:
- Established Brand: Benefit from pre-existing goodwill, customer base, and supplier relationships.
- Immediate Cash Flow: No waiting period to turn a profit.
- Lesser Risks: Bypass many startup risks, such as market fit and operational setup.
- Existing Staff: Inherit experienced employees familiar with business operations.
- Seller Financing: Sellers are often willing to offer seller financing.
Cons include:
- Hidden Issues: Possible undisclosed problems, from employee disputes to customer complaints.
- Legacy Issues: Dealing with past decisions, whether they’re operational, financial, or related to company culture.
- Potential Higher Cost: Might be more expensive upfront than starting anew. You will likely pay a premium for a successful small business.
- Resistance to Change: Existing employees or long-time customers may resist changes or new directions.
Buying an existing small business can provide a head start in the entrepreneurial world. While it offers several advantages, the decision should be backed by rigorous research and with the help of a team of professionals. Understanding the intricacies, potential pitfalls, and ensuring you have the right support will pave the way for a successful small business purchase.
A Guide for Selling a Small Business
Selling a small business is a multifaceted endeavor. Whether you’ve nurtured your company from its inception or purchased it as an investment, the decision to sell is momentous. The process demands meticulous planning, strategic timing, and the right support system. In this guide, we’ll outline the salient points to consider, key steps, vital team members, and the pros and cons of selling your small business.
Preparing Your Business for Sale: Crucial Considerations
1. Financial Statements: Ensure your accounts are up-to-date and transparent. Potential buyers will scrutinize them to determine the health and potential of the business. Work with your accountant or CPA, well ahead of offering your business for sale, to clean up your financial statements and have them represent the most accurate and positive financial condition of your small business.
2. Business Valuation: Understand the worth of your business. This involves considering assets, liabilities, cash flow, market conditions, and comparable sales. You may consider enlisting the help of a CPA or Business Appraiser to help you arrive at a realistic market value for your small business.
3. Operational Efficiency: Streamline processes and systems to minimize or eliminate inefficiencies. A well-oiled operation is more appealing to potential buyers of your small business.
4. Legal Cleanup: Address any lingering legal issues, from unresolved disputes to lapsed licenses with the help of you attorney.
5. Physical Appeal: Just like selling a house, curb appeal matters. Refurbish, clean, and make necessary repairs to the business premises if appropriate.
6. Documentation: Prepare a comprehensive sales packet or pitch deck that includes a business overview, financial statements, client contracts, employee details, and other vital information to help sell your small business.
Steps to Selling a Small Business
1. Decision to Sell: Before embarking on the sale journey, be clear about your reasons and ensure it aligns with your long-term goals.
2. Preparation: Use the steps mentioned above to prepare your business for sale.
3. Market Analysis: Understand the current market conditions, industry trends, and comparable sales to set a realistic price. You should consider engaging a Business Broker to help you with this.
4. Listing the Business: Utilize business brokers, online platforms, or industry networks to market your small business.
5. Negotiations: Engage with potential qualified buyers, entertain offers, and negotiate terms. Your Business Broker and attorney can assist your through this process.
6. Due Diligence: Allow the buyer to validate all claims about your business. Be transparent and forthcoming. It’s critical that the have full access and that you disclose everything about your business to avoid any claims later.
7. Sales Agreement or Contract: This legal document, which should be drafted or reviewed by your attorney, will detail all aspects of the sale, including terms, conditions, and timelines.
8. Closing the Deal: Finalize all paperwork, transfer assets, and hand over the business. The final closing transaction can be facilitated by an attorney or escrow agent.
Your Virtual Team to Help Your Sell Your Small Business
1. Business Broker: Facilitates the sales process, offers industry insights, and brings a network of potential buyers.
2. Accountant or CPA: Helps present your financials attractively and transparently, ensuring the business is valued appropriately.
3. Lawyer: Handles all legal aspects, from drafting the sales agreement to ensuring a smooth transition of ownership. Never sign any agreement or contact without first having your attorney review it.
4. Financial Advisor: Offers insights on optimizing the proceeds from the sale concerning your personal financial goals and taxes.
*Pros and Cons of Selling an Existing Small Business
Pros:
- Liquidity: Convert your business into liquid assets, which can be invested or used as you deem fit.
- New Opportunities: Free yourself to pursue other passions, ventures, or even retirement.
- Risk Mitigation: If the industry is becoming uncertain or saturated, selling might be a strategic move.
Cons:
- Emotional Impact: Letting go of something you’ve nurtured can be emotionally taxing. After many years of operating a successful small business it may have become part of your personal identity, and you should not underestimate the emotional challenge of transitioning out of your business.
- Capital Gains Tax: The sale might result in a significant tax liability, especially if the business has appreciated in value. It’s important to consult with your CPA or Tax Attorney to estimate and understand your tax liability created by the sale of your small business.
- Lost Income: If the business was a primary income source, you might need to find new revenue streams post-sale.
- Post-Sale Regret: There’s always the risk of feeling the sale was mistimed or undervalued.
Selling a small business is as monumental as starting one. With the right preparation and team, the journey can be rewarding both financially and personally. Reflect on your motivations, understand the nuances, plan ahead, and make informed decisions to ensure the process is smooth and beneficial.