Buying a business requires research
Up odds for success by doing your homework
SANTA ANA, Calif. - Dave Edmondson has bought houses and a business. A home purchase is a snap compared with a business, he said.
“With a business, you have to look at many, many variables,” he said. “You have to validate everything: the financials, the customer base, the markets, that the industry is going to be healthy in the future, employees.” In 2005, Edmondson, who lives in Yorba Linda, Calif., bought Cleanmore Maintenance, a Southern California cleaning and repair service, with the help of Bill Grunau, president of Pacific Business Brokers Inc. in Brea, Calif.
It took about eight months.
He says now that if he were to go through that process again, he would do even more due diligence.
While millions of people flirt with the idea of buying their own business, only about one in five who go shopping actually completes the purchase, according to the International Business Brokers Association. If you’re thinking about buying your way into business, you can increase your chances for success if you understand the challenges.
“Really understand what you want in general, like a restaurant or manufacturer, and how much money you can put down,” said Peter Siegel, owner of BizBen.com, a California businesses-for-sale Web site. “Any ambiguity shown to brokers or sellers and they will pass you by. Most brokers will only work with people they think are serious.”
Two economic factors are clashing in the buying and selling of businesses right now.
When companies are laying people off and the job market is weak, people without jobs are more likely to buy businesses, Siegel said. Some of that is occurring because of the struggling housing and mortgage industries.
However, business broker Grunau said sales are also affected by interest rates. “Two years ago (U.S. Small Business Administration guaranteed) loans were at 7.5 percent; now they’re at 9.5 percent to 10.25 percent.” With costs going up, sales might slide or, more likely, sellers will have to help finance the deal, he said.
Although brokers like Grunau have the same license that residential real estate agents do, few sell both houses and business, he said. A business sale is much more complicated.
The two industries differ in another significant way, he added. In about three-fourths of home sales, the buyer and seller have different agents. In eight out of 10 business sales, just one broker is involved.
Many buyers want to get a third-party valuation of a business before buying. That can cost $1,000 to $7,000, depending on the business, Grunau said, “and beware of business valuation scams.” BizBuySell.com and The Wall Street Journal have just introduced a free online tool to figure out approximately how much a business is worth, based on completed business sales on the site.
Most business sellers think their businesses are worth a lot more than they are. The amount can vary, depending on the type of industry and the strength of a specific business, Grunau said, but the overall market average for the past 20 years has been the seller’s discretionary cash — that is the total cash benefit the owner realizes from the business — multiplied by 2.37.
How that cash benefit is determined is just one of the tricky parts of researching a business purchase.
“There’s no perfect business,” Grunau said. “Most small businesses don’t have perfect books and records. Maybe the business needs better procedures or better employees.” Once the buyer and seller come to terms, “always go through escrow even if a broker isn’t involved,” Grunau said. “The escrow company will do all the legal notices to creditors. If you don’t, you may have a fight on your hands even years later if creditors come calling.” One of Grunau’s clients bought a print shop and two years later received a notice from Visa that the previous owner owed $10,000 on a credit card in the business name. “Because the sale had gone through escrow, the buyer didn’t have to pay,” Grunau said.
TIPS FOR BUYING A BUSINESS
Create your wish list, including types of businesses you want to buy, what geographic
locations, income you expect to earn, amount of cash you have for a down payment.
Look at some Web sites that have businesses-for-sale listings with nonconfidential information, such as mybusinessbroker.com and bizben.com.
Contact many business brokers and agents. Present yourself as a motivated, active buyer, not someone who’s just toying with the idea of buying a business.
Apply for financing to buy a business. Be prepared to sign nondisclosure agreements to receive information about companies in which you are interested. There can be legal liabilities in telling others information you learn at this stage.
Develop a team of advisers, including an accountant, an attorney, financial sources and a valuation expert to help in negotiating and evaluating a business purchase.
Visit the business in person. Be prepared to make an offer. Be patient. A search can take six to 12 months.
BizBuySell is the Internet's largest business for sale marketplace. Since 1996, BizBuySell has offered tools that make it easy for business owners and brokers to sell a business, and potential buyers to find the business of their dreams. BizBuySell currently has an inventory of approximately businesses - spanning 80 countries - for sale at any one time and receives more than monthly visits. The site also features an extensive franchise directory as well as an easy-to-use business valuation tool. Please visit www.bizbuysell.com for more information.
BizBuySell was founded in 1996 and in 2012 became a division of CoStar Group, Inc. (NASDAQ - CSGP) - commercial real estate's leading provider of information and analytic services. CoStar conducts expansive, ongoing research to produce and maintain the largest and most comprehensive database of commercial real estate information and offers a suite of online services enabling clients to analyze, interpret and gain unmatched insight on commercial property values, market conditions and current availabilities. For more information, visit www.costar.com.
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