FAQs – Buyers

Owners sell their businesses for many reasons, but the most common are:

• Retirement
• Burnout
• Health or medical reasons
• Partnership Split
• Relocation
• Lack of capital to grow or maintain the business
• Distance from home
• Location or lease terms
• The realization that they’re a poor fit to operate the business and want to see it successful in other hands.

This is a very personal question; only you know your greatest strengths, passions, and skills. Remember that the business must be something you can you work at daily, through good times and bad. Good advice often helps answer this question: once you’ve narrowed it down to a few choices, your family and trusted advisors may have good insight to share with you.

Buying a business can have several advantages over starting one from scratch:

• Cash Flow: If you’re a working owner and you purchase a company with existing cash flow, that often means you can draw a salary from the business right away. You won’t have to wait months or years to build a sufficient client base to feed your family.

• A Great Price: Businesses with expensive construction costs can often be purchased at a fraction of the buildout price. For example, restaurants cost between $250,000 to $1,000,000 to build a properly equipped and permitted space, but perfectly good locations are frequently available for a fraction of that price.

• Financing: Startup businesses have very high failure rates, so lenders are usually hesitant to finance them. This means owners typically invest their personal savings for months (or years) before seeing positive cash flow. Often you will invest more starting a business than buying an existing one!

To purchase a business, you will need:

• Relevant Experience: Some industries require highly specialized experience, training, or certifications, while others require none. However, Landlords, Sellers, and lenders favor Buyers with prior experience that is well-matched to the business. 

• A Solid Credit Score: Good credit positively impacts Landlord negotiations, financing terms, and opening accounts with new vendors. 

• Sufficient Net Worth: Sufficient funding is required to complete the purchase (or the down payment when financed), cover transaction and closing costs, and have enough remaining for working capital and a cushion for unforeseen events.

Most importantly, since each business has a unique recipe for success, you will need a good work ethic and a strong desire to succeed!

Solid financials, strong communication skills, good credit, and relevant experience.

There is no legal requirement that you have prior experience in order to purchase a business, but a good working knowledge of the business and its industry can contribute substantially to your success.

However, in practice, experience is often required. If there is a degree or license involved (ex: a dental practice), a Seller may expect substantial prior experience before even considering your offer. Landlords usually require appropriate experience before they will approve a Buyer’s tenancy, and lenders routinely require prior experience to approve financing.

Each opportunity has its own unique set of requirements, so experience requirements should be evaluated on a case-by-case basis.

Business information is sensitive and confidential. Released carelessly it can damage the Seller, their business, and the employees’ livelihoods. Non-Disclosure Agreements (“NDAs”) address this concern.

NDAs are documents where Buyers formally agree not to disclose to third parties any information shared by a Broker or Seller for the purposes of evaluating a business for sale. NDAs give Sellers confidence that prospective Buyers who receive their sensitive information are seriously interested and will respect the business’s privacy.

Brokers ask personal and financial questions to evaluate if a potential Buyer is well-matched and qualified to purchase the business they are inquiring about. Your Broker will (politely) ask questions about employment and entrepreneurial experience, about your finances and net worth, and questions to gauge your level of interest in the business. The Broker will use this information to determine whether or not you may be a good fit for the business, or just as importantly, spot potential issues to completing the purchase before you invest substantial time or money.

Accurate information is necessary for Business Brokers to effectively do their jobs, but rest assured that all personal and financial information is kept strictly confidential.

Businesses are priced based upon a multiplier of earnings, so the Seller’s Discretionary Earnings plays a large role in determining the value of a business. Other factors that impact a business’s value may include: industry, longevity, profitability, employee structure, assets, location and lease, condition of equipment, quality and diversity of accounts, clarity of the financial statements, patents or intellectual property, and the general state of the economy.

You can best be prepared by learning about the business you are offering to purchase. Carefully review any documents (information package, financial statements, lease, etc.) provided by the Seller; they contain valuable information. Have a thorough understanding of how the business makes money, and a clear vision of what your primary role in the business will be. Visiting the business and speaking with the Seller is often informative, so ask your Broker to arrange these discreetly. 

Lastly, if you have any questions, keep a running list, and ask the Broker! They are the best source of information on the business you're considering.

Typically, yes.

Most Sellers want to see the Buyer successful and are happy to train; it is usually a term of every purchase agreement. Seller training is always recommended, especially if a Buyer doesn’t have prior experience running that type of business. Specific training terms are negotiable and vary with each purchase.

Yes, typically Sellers agree not to compete with the business after the sale. Customary non-compete terms vary with each business and among industries, but often include:

• People: Non-Competes always cover the Seller(s) and often include any family members involved in the business.

• Duration: The term varies, but frequently lasts 3 to 5 years.

• Industry or niche: You can restrict Sellers from competing directly with you, but it is difficult to prevent a Seller from starting a business in a non-competing industry or niche.

• Geography: Non-Competes typically specify a geography where the Seller may not compete. The term largely depends on the area currently served by the business, and can range from small (ex: restaurants, a few miles) to large (ex: manufacturers or distributors often serve counties, states, or the nation).  

Non-Compete terms must be deemed reasonable to be enforceable in many states; complex ones are typically written by attorneys.

Employee retention is frequently one of a Buyer's top concerns, but it is generally not an issue. Most employees need their jobs and want to work; when treated well and led by fresh energetic management, employees tend to stay with the business. Treat the employees poorly, make outrageous demands, or slash wages and they will quickly become dissatisfied and look for employment elsewhere.

Occasionally Sellers will finance a portion of the asking price for the right Buyer; it is a fair negotiating point and can sometimes help complete a transaction.

Sellers are generally less likely to finance when their businesses are healthy, profitable, and have clean well-organized financials, or conversely when the business is an asset sale listed at a bargain price. The best approach is to simply ask the Broker if Seller financing is an option for a particular business.

Remember that many Sellers will review your financial strength similarly to a bank, so be prepared and have your financial position well-documented and ready for review.

The answer: it depends.

Buying the accounts receivable (“A/R”) usually means a Buyer will see cash flow faster. However, buying the A/R with the business usually increases the purchase price, so for any particular deal a Buyer must weigh the benefit of faster cash flow against spending additional capital.  Buyers typically do not purchase A/R in smaller transactions; A/R is purchased more often in larger transactions and when a lender is involved.

Every Buyer's first priority should be to have sufficient cash reserves to cover working capital requirements; lack of available cash is the number one reason businesses fail.