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When it comes to buying a business, nothing is more important than the factor of due diligence.  For most people, this investment is the single largest financial decision that they will ever make.  And with this important fact in mind, you’ll want to leave absolutely no stone unturned.

Let’s examine the three most commonly overlooked areas when it comes to buying a business: retirement plans, 1099’s and W-2’s, and legal documents.

1. Examine All Legal Documents

While it may sound like a “pain” to investigate all the legal documents relating to a business that you are vetting for purchase, that is exactly what you have to do.  The very last thing you want is to buy a business only to have the corporate veil pierced.  Everything from trademarks and copyrights to other areas of intellectual property should be carefully examined.  You should be quite sure that you receive copies of everything from consulting agreements to documentation on intellectual property.

2. Retirement Plans

Don’t forget about retirement plans when you’re buying a business, as this mistake can quietly translate into disaster.  Before signing on the dotted line and taking ownership, be sure that both the business’s qualified and non-qualified retirement plans are 100% up to date with the Department of Labor and ready to go.

3. W-2’s and 1099’s

If 1099 forms were given out instead of W-2’s, you’ll want to know about that and be certain that it was done within the bounds of IRS rules.  Imagine for a moment that you fail to do your due diligence, buy a business and then discover that you have problems with the IRS.  No one wants IRS problems, but a failure to perform due diligence can quickly result in just that.  So do your homework!

Never forget what is at stake when you are buying a business.  If there has ever been a time to have laser-like focus, this is that time.  There can be many skeletons hiding in a business, and you want to be sure that you protect yourself from any unwanted surprises.  Not performing your due diligence can lead to a shockingly large array of problems.  One exceptional way to protect yourself is to work with a business broker.  A business broker knows what to look for when buying a business and what kinds of documents should be examined.  There is no replacement for the expertise and experience that a business broker brings to the table.

Copyright: Business Brokerage Press, Inc.

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The odds are that you’ve put a great deal of yourself into your business.  Inevitably, the day will come when you have no choice but to walk away from your business and begin a new chapter of your life.  Quite often, businesses are transferred from one family member to another.  In this article, we will examine 5 of the key factors you’ll want to consider when transferring your business to a family member.

Factor #1  Gifting Can Have Numerous Benefits

Will you be selling your business to a family member or simply gifting that business?  Gifting comes with several major advantages, for example, this approach can reduce your real estate taxes.  Also, the gifting process can allow you to maintain a level of control if the agreement is written properly.

Factor #2  The Buy-Sell Agreement

Don’t overlook the importance of the buy-sell agreement, which works to put everything in writing.  You may be tempted to forgo a contract since you are dealing with a family member, but this is a mistake, no matter how close you might be with your loved ones.  A buy-sell agreement adds clarity to the process, which can help to keep confusion levels low and the chances of success high.  When the time comes to transfer your business to a relative, you’ll want an expert to create a document that outlines all relevant details.  It should feature everything from the value of the business and the amount being paid for the business to who will be kept on the payroll to what level of involvement you’ll have once the process is finished.

Factor #3  Seller Financing

Seller financing is quite common among sellers, and when relatives are involved it becomes even more common.  One option is to consider a private annuity.  A private annuity allows for payments to be spread out for many years and can even extend until the end of your life.

Factor #4  Considering the Self-Cancelling Installment Note

In the installment note, it is possible to feature a self-cancelling clause, which can definitely benefit your family in the future.  This part of the paperwork will confirm that if you were to pass away before all the payments have been made, the remaining debt can be attached directly to your will.  If you are a parent selling a business to a child, then one of the key benefits of an installment note is that it keeps your other children from paying excess income tax on your estate.

Factor #5  Transferring a Business to a Relative and the IRS

You can expect the IRS to take a second look when you sell a business to a family member.  The IRS does this to make sure that everything is above board, due to the fact that many past business owners have acted in an unethical manner.  You’ll want to be very sure that every aspect of the sale is done professionally and that you have all your paperwork in order.

A business broker can help you deal the unique particulars that come along with selling a business to a relative.  Every business is different, and every sale is different too.  A professional business broker can help you avoid common mistakes and pitfalls.

Copyright: Business Brokerage Press, Inc.

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There are two key ingredients when it comes to selling a business: professionalism and confidentiality.  If either of these two ingredients are lacking, then you’ll most likely run into problems.  Sadly, many sellers see their deals fall apart due to a breach of confidentiality.  You certainly don’t want to be among their ranks.

The simple fact is that a breach in confidentiality can negatively impact everyone from suppliers and vendors to creditors.  For example, vendors could change their terms and this, in turn, could have a major, negative impact on cash flow.  There can be a chain reaction of events that spirals out of control.

The potential negative outcomes of a breach in confidentiality are quite numerous, for example, employees and customers alike could begin to worry about the future of the business.  Employees could begin to worry about the safety of their jobs and begin looking for a new position.  Dangerously, this situation could lead to changes in management and the loss of key employees.  Likewise, customers, fearing instability with the business, could also decide to take the business elsewhere, leading to revenue problems.

Yet another complicating factor comes in the form of the competition.  If the competition hears that your business is up for sale, they could sense blood in the water and look to steal your customers.

Ultimately, a breach could give potential buyers cold feet.  At this point, it should be very clear that protecting confidentiality is a must.  One of the single best ways to ensure that confidentiality is maintained is to opt for an experienced and proven business broker.  Business brokers understand the simply tremendous value of keeping things under wraps.

It may be tempting to try and sell your business on your own, but it is vital to understand that doing so can damage your businesses’ reputation.  A good business broker knows how to shield your business from breaches of confidentiality.  By working with a business broker, not only are confidentiality agreements signed and taken seriously, but also you’ll know that prospective buyers are vetted and fully pre-qualified.  According to an article on Inc.com, broker feedback has revealed 9 out of 10 interested parties who respond to “business for sale” ads are not qualified to make the purchase.  Why would you want to risk giving away key details to these parties?

In short, you’ll have a much better idea of who you are dealing with and how serious they are about buying your business.  At the end of the day, there is no replacement for maintaining confidentiality.

Copyright: Business Brokerage Press, Inc.

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You should never forget that your partnership agreement is, in fact, one of the most important business documents you will ever sign.  Many people go into business with loved ones, relatives or lifelong friends only to discover (once it’s too late) that they should have had a partnership agreement.  A partnership agreement protects everyone involved and can help reduce problems that may arise.  Outlining what will happen during different potential situations and events in a legal framework can help your business keep running smoothly.

What Should Be in a Partnership Agreement?

Every business is, of course, different; however, with that stated, any partnership should outline, with as much clarity as possible, the rights and responsibilities of all involved.  A well written and carefully considered partnership agreement will keep small problems and disagreements from evolving into more elaborate and serious concerns.

There are times to take a DIY approach and then there are times when you should always opt for a professional.  When it comes to partnership agreements, it is best to opt for working with a lawyer.  Finding competent legal help for drafting your partnership agreement is simply a must.

What is Typically Addressed in a Partnership Agreement?

In theory, a partnership agreement can cover a wide-array of factors.  Here are a few points typically addressed in partnership agreements.

What Questions Will a Good Partnership Agreement Address?

1. Which partner(s) are to receive a draw?
2. How is money to be distributed?
3. Who is contributing funds to get the business operational?
4. What percentage will each partner receive?
5. Who will be in charge of managerial work?
6. What must be done in order to bring in new partners?
7. What happens in the event of the death of a partner?
8. How are business decisions made? Are decisions made by a unanimous vote or a majority vote?
9. If a conflict cannot be resolved when must the conflict be resolved in court?

Thanks to partnership agreements, all partners involved can proceed and start a new business with fewer areas of concern.  The simple fact is that without a partnership agreement, your business can face a range of disruptions; these would be disruptions that could ultimately spell doom for your business.

Copyright: Business Brokerage Press, Inc.

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No one works forever.  Regardless of how much you love your business, sooner or later you will have to step away.  Owning a business can be very demanding.  This fact can be doubly true for owner-operators of businesses.  The simple fact is that you’ll have to embrace retirement at some point.

Most business owners have never sold a business before and may not know what to expect.  The good news is that prospective buyers usually like the idea of buying an established business directly from a business owner.  It is key, however, to do everything possible to make selling your business, as well as the transition period, as easy for a buyer as possible.

Prepping your business for sale has many diverse parts that need to be taken into consideration.  Prospective buyers want to feel as though they will have a seamless transition, so it’s in your best interest to evaluate what steps you need to take to make the transition smooth.

You are the world’s greatest expert on your business.  As a result, you are perfectly positioned to evaluate your business so as to ensure that it is both appealing to a prospective buyer and ready to sell.  Let’s take a look at the steps you can take to ensure a smooth transition.

The Top 4 Transition Tips

1. Automate as many processes as possible.

In this way, prospective buyers are less likely to be intimidated by the level of work involved in owning a small business.  The odds are good that many of your prospective buyers have never owned a business before.  One of the best ways to not scare prospects away is to make owning and operating your business as streamlined as possible.

2. Work with your employees, key customers and vendors to ensure a smooth transition.

Anything that can cause a potential disruption may scare off prospective buyers.  Put yourself in the shoes of prospective buyers and think about what may cause you concern if you were evaluating a business.  Once you locate those areas of potential concern, do what you can start to remedy them well before placing your business on the market.

3. Pick out your “second-in-command” before you sell your business.

Having a competent and proven “right hand man or woman” that can step in and essentially operate your business is a very attractive asset to have in place when it comes time to sell your business.

4. Consider working with a business broker.

Brokers are expert in the art and craft of buying and selling businesses.  They will be able to help you evaluate your business and address areas that need improvement so as to ensure a smooth transition.

Taking these steps will not just make your business easier to sell, but it will also shorten the amount of time it takes to sell.  The last thing you want when you are ready to sell your business and retire is for the selling process to drag on forever.

Copyright: Business Brokerage Press

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Many people know that owning a business isn’t for them.  But for others, the appeal and lure of owning their own business can be powerful indeed.  If you are uncertain as to whether or not this path is for you, there are a few simple questions you can ask to gain almost instant clarity.  In this article, we will explore those key questions and help you determine if owning a business is in your future.

1. Are You Dedicated to Growing Your Income?

Quite often people like the idea of making more money, at least in the abstract.  But when presented with what it takes, many people realize that they don’t want to do what is involved.  Owning and operating a business can be a lot of work and it’s not for everyone.  Yet, those who embrace it can find it rewarding in a variety of ways.

Being a business owner is radically different than being an employee.  As an employee, you simply don’t exercise much control.  Summed up another way, your financial fate is clearly in the hands of someone else: your employer.

However, owning a business means that you can take steps to control your own financial destiny.  You can make decisions that will, ultimately, boost the success of your business and in turn increase your own income.

As an important note, statistics from 2010 show that the longer you own your business the more money you, as the business owner, will make.  It is typical for those who have owned a business for ten years or more to earn upwards of six figures per year.  If you have had more than one year of experience in running an organization, the yearly salary will likely range from $34,392 to $75,076.  However, if you’ve owned your business for more than a decade, you will likely earn more than $105,757 per year.

While there are no guarantees, owning a business can be a path to growing one’s income and wealth.

2. Would You Like Greater Control Over Your Life?

Many opt to start their own business because they want more control.  Business owners realize that unless they own their own business their financial fates rest in the hands of someone else.  Some people are comforted with this feeling or don’t see a way around it and others are not so comfortable with the realization.  If you want greater control over your life, then owning a business might be for you.

Owning a business increases the amount of control a business owner has over his or her life in many ways, not just financial.  For example, business owners have more control over how they spend their time, where they work, when they work and who they work with on a daily basis.  Instead of being part of a business, you help create, mold and shape it.  Clearly, this is a lot of work and it isn’t for everyone, but again the rewards can be diverse and great.

3. What is Your Personality Like?

Owning a business translates to great control, but that control comes with a degree of risk.  In the end, you’ll have to determine how comfortable you are in dealing with risk.  As a business owner the “buck” stops with you.  You’re risking your time, effort and, of course, money.  You also don’t get a paid vacation, sick days or any of the other benefits so often associated with being an employee.

Other traits identified during a study by the Guardian Life Small Business Research Institute showed there are other ideal personality traits for business owners.  These traits include collaboration, curiosity, focus on the future, and being self-fulfilled, tech savvy and action oriented.

Thinking about these three key questions is the perfect place to start when contemplating opening a business.  Additionally, working with a business broker can help you gain clarity and determine if owning a business is right for you.

Copyright: Business Brokerage Press, Inc.

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Banks love collateral and for a very simple reason.  If you have collateral, then the bank has something it can take if you fail to repay your loan.  At its heart, collateral is a remarkably simple concept.  However, unfortunately, many people who want to start a business lack it.  All of this leads us to the simple question, “Can I start a business without a collateral.

1. Try the SBA

There are ways that you can start a business without collateral, but you will need some amount of money.  The larger the business, obviously the more money you’ll need.  Those interested in the zero collateral route will want to take a look at the SBA’s 7 (a) program.  This program incentivizes banks to make loans to prospective buyers.  Through this program, the SBA guarantees an impressive 75% of the loan amount.

Of course, the buyer still has to put up 25% of the money in order to buy the business, but for those looking to own a business without having to put up collateral, the SBA’s 7 (a) program is an impressive option.  Perhaps best of all, the cash buyers used can come from investors or even a gift, helping to make this program a potentially great one for first time business owners.

2. Think about Seller Financing

Another option is seller financing.  Sellers frequently get involved in financing.  When a seller is motivated to sell, due to retirement or some other factor, things can get interesting.  Most sellers do agree to offer some degree of financing, so asking for selling financing is not unheard of or insulting to a business owner.  Prospective business owners may even be able to combine seller financing with the SBA’s 7 (a) program.  Correctly used, this path could provide a powerful and useful option.

Speaking of retiring, according to The International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project, 33% of deals now take place when owners are retiring.  This clearly demonstrates how it is in the best interest of many sellers to consider seller financing.

While the SBA’s 7 (a) program is potentially very useful to buyers, it is important to note that under the program, the seller cannot receive any payments for two years.  Working around this potential problem may very well require some creativity and effort on the part of the prospective buyer.  In the end, it may be necessary to offer the business owner some incentive in order to justify waiting two years for his or her money.

Attempting to buy a business without collateral may, at first, sound like too large of an obstacle to overcome.  However, these kinds of purchases really do happen all the time.  By staying focused, persistent and understanding your options, you will increase your odds of success.  Finally, get as much professional help as possible.  Prospective business owners should consult with S.C.O.R.E., experienced business brokers and others to learn the best way to buy a business without collateral.

Copyright: Business Brokerage Press, Inc.

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Placing a price on a privately-held company is usually more complex than placing a value, or a price, on a publicly-held company.  There are many reasons for this fact, but one of the top reasons is that privately-held companies don’t have audited financial statements.

Why are Audited Financial Statements Lacking in Privately-Held Companies?

Preparing an audited financial statement is expensive and, as a result, many companies that have not gone public simply forego the expense.  On the other hand, publicly held companies reveal much more information regarding their finances as well as a range of other kinds of information.

Compared to a privately-held company, a publicly held company can often seem like an “open book.”  Buyers are left with the proposition of having to dig out a lot more information from a privately-held company in order to assess whether or not a valuation or price is accurate.

What Can You Do to Overcome this Factor?

You, as the seller, can help streamline this process.  By having as much information available as possible and having your accountant make sure that your numbers are presented in a manner that is easy to understand and follow, you will increase your chances of selling your business.

Experts agree that there are several steps a seller of a privately-held company can make when he or she is establishing a price or a value.  First, use an outside appraiser or expert to determine a value.  Next, establish what your “go-to-market” price is.  Third, know your “wish price.”  A seller’s “wish price” is the price that he or she would ideally like to see.  Finally, it is critical that sellers establish the lowest price that they are willing to take.  You should know in advance how much you are willing to sell for as this can help a negotiation move along.

The Marketplace Will Ultimately Decide

It is common that the final sale price for the company be somewhere between the asking price and the bottom-dollar price established in advance by the seller.  Yet, it is important to note, that on occasion a selling price may, in fact, be lower than any of the four we’ve outlined above.  At the end of the day, the undeniable fact, is that the marketplace will establish the final sales price.

Here are a few of the areas that you can expect a buyer to review when establishing the price that he or she is willing to pay: stability of the market and stability of earnings, the potential of the market, product diversity, the size of the customer base, the number and seriousness of competitive threats, how broad the customer base is, the relationship with suppliers, the distribution network in place, needs for capital expenditures and other factors.  The more favorable each of these points are, the more likely it is you’ll receive a higher price.

Copyright: Business Brokerage Press, Inc.

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Are you looking for a way to perfect your presentation?  Understanding what the typical serious buyer wants will help you get your business ready for selling.

Let’s turn our attention to looking at what these types of individuals and entities really want.  After all, your time is precious.

1. An Interest in the Industry

First, prospective buyers will want to have a better understanding of your industry.  Any serious buyer will want to understand the industry as a whole, as well as your existing customers, prospective customers and the strengths and weaknesses of your business.  Key factors, such as threats from competition, will also be a major factor for prospective buyers.

2. Seeking Knowledge about Discretionary Costs

Secondly, expect buyers to take a long look at discretionary costs.  Sellers will often look to reduce their expenses in a range of discretionary areas including advertising, research and development and public relations; this is done to help make a business appear more attractive to a buyer.  However, it is important to note, that a savvy prospective buyer will notice reduction in discretionary expenses.

3. Inquiries about Wages and Salaries

Wages and salaries is another area that receives attention from buyers.  If your business is paying minimum wage or offers a limited retirement program then employee turnover is likely to be high.  Buyers may be concerned that employee stability may be low, which, of course, can potentially disrupt business.

4. Questions about Cash Flow and Inventory

No serious buyer will ignore the issue of cash flow.  Any prospective buyer will want to know that the business they are considering buying will continue to generate profits both now and in the future.

Inventory is another area that will not be ignored.  If your business is carrying a large amount of antiquated, unsalable or simply unusable inventory, then expect that to be factored into a prospective buyer’s decision-making process.  It is best to disclose such inventory instead of hiding it, as it will be discovered during due diligence.

5. Seeking Capital Expenditure Details

Finally, capital expenditures will be examined by buyers.  You can expect buyers to carefully evaluate machinery and equipment to ensure that there will be no expensive surprises looming on the horizon.

These give areas are definitely not the only areas that buyers will explore and investigate.  Everything from financial agreements and environmental concerns to government control will be examined in depth.  You should invest some time thinking about the situation from the perspective of a buyer, as this will help you discover many potential problems and try to secure viable workarounds.  Working closely with a business broker is another way to ensure that you can successfully anticipate the needs of buyers.

Copyright: Business Brokerage Press, Inc.

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