Buying a Business with ‘Absentee Owner’
One of the VR agents in North Carolina wrote a newsletter article about a question he gets asked every week. “Can you find me a nice absentee business I can buy?” Below are the points he gave on why you don’t see many absentee businesses for sale.
- While it sounds good in theory, businesses generally sell due to burnout when owners are tired of the responsibility of running a business. This burnout does not usually exist with an absentee owned business
- If a business is completely absentee and profitable, why would anyone sell it? Many baby boomers aren’t looking to sell their absentee owner business to retire, but rather want or need to keep it into retirement.
- In the case of a death, divorce, or emergency, most absentee businesses are sold quickly to a family member, employee or vendor so the odds are it will never make it to the market.
The truth is most businesses need owner engagement and involvement to be successful. However, there are always exceptions. Currently we have two businesses that are absentee owners. One of our absentee ownership businesses is a massage business in Wisconsin and the other is a staffing business in southeastern Wisconsin.
Bankers’ Objections in Business Acquisitions
A recent article from the International Business Brokers Association (IBBA) talks about the ‘Banker’s Dozen’ objections compiled from one of the top SBA lenders in the country. To have a successful and timely closing, start discussing documentation needed and addressing concerns early in the process.
Below are some of the due diligence items needed to avoid delays in getting a deal done.
Citizenship of the Buyer
- Early on determine the citizenship status of the buyer and obtain a copy of the documentation of proof.
- A buyer can secure SBA financing if they have a green card and are legal permanent U.S. residents.
Buyer’s Personal Credit Report
- A resume and Statement of Personal History questions are required for each guarantor. Knowing any issues early on give the bank time to clear through them during the underwriting. This will help avoid delays.
- If the buyer’s credit score is under 700, a written explanation should be provided.
More Equity in the Deal is Needed
- The Equity requirement for business acquisitions are changing with the release of the SBA’s new version of its Standard Operating Procedures (SOP).
- The SBA will be providing additional insight into these changes, the basic change is that the buyer must contribute at least 10% equity towards the entire transaction and there must be at least 10% equity on the post-transaction pro form balance sheet. A seller note can still be used and can provide for up to half of the required equity injection. However, the seller note must be on full standby (no payments at all) for the life of the SBA loan.
- If the buyer’s equity is coming from a gift, it will be required to have a Gift Letter with 2 months of bank statement showing the source of this gift.
Pledge of Personal Assets as Collateral
- If the business assets do not fully secure the loan, the SBA will require that any personal real property with lendable equity must be pledged as collateral. If your business plan and financial statements are strong, you might avoid putting up a lot of collateral.
Buying an Existing Business
Are you in the market to buy a business? Many baby boomers who own an established business are looking to retire. Many of these owners have grown the business but are realizing they don’t have the drive to expand and grow it. And they may have the staff in place to run it and want to give it over to a new owner who can make the needed changes for growth.
If you’ve been thinking of owning a business for a while, have you done your research? Learning as much as you can about the industry before looking at specific businesses. See what the market trends are for the industry and research competitors. This will be helpful as you start your search and look at prospective businesses.
You can start your search online. There are many websites with businesses for sale. Our website, Lakes Business Group has all our business opportunities and are updated in a timely manner. Bizbuysell.com is a good tool, too, to look for business opportunities.
Be ready to sign a confidentiality agreement. Most business owners don’t want it known that they are selling their business. At Lakes Business Group, we do not release any information about the business until we have a signed non-disclosure agreement on file from a potential buyer
Do you know the amount you can put down or put toward a business? Have you talked to a business consultant or banker about business loans (SBA)? Have your financials ready and available when you are ready to pursue a business since it will be required as part of the process. The owner wants to know when he gets an offer that the buyer is financially capable of buying the business. Sometimes, even before an offer, an owner will not show a business until he knows the person (or group) coming is financially able to make an offer.
Once you have a signed contract to purchase the business, be patient! This is the time you want to take the steps to fully complete the deal including all the federal and state licenses and registrations and other due diligence required to own and run this business. Our team has helped with hundreds of closings, so we can help you get through the process until the deal is done!
What Buyers Look for in a Business Opportunity
You’re ready to sell your business. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.
Buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business.
There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:
- Cost and Terms
What will it take to acquire the business? How much cash and how much debt? What are the deal’s terms and conditions?
Will the business continue to operate similarly after the sale? Much of the risk of buying a company relates to continuity. For example: The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain, The owner has special expertise that is undocumented and difficult to learn, Key personnel aren’t committed to staying, or Outside competition looms. Sellers armed with solid responses to these types of continuity concerns are more likely to get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence could be worth millions when you sell.
Are there unexploited opportunities? You may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer that believes it can increase revenues substantially will pay more for the business than one that believes the current owners have already maximized opportunities. What sellers should do?
It may seem counter intuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast that their company could run just fine without them or that there are plenty of opportunities they’ve failed to exploit. Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.
Taken from an article written by Peter C King, VR Business Brokers/Mergers & Acquisitions, CEO
Why a Business Broker – what do they do?
Most people don’t know what a business broker does. In fact, it is said 9 out of 10 people have no idea why the role of a business broker is so important in the successful transfer of a business from one owner to another. So how does having a business broker help in the sale of your business?
1- Confidentiality protects the seller from their customers, suppliers, employees and others from finding out their business is for sale until it has been sold. The potential buyers sign a non-disclosure agreement before knowing the name or location of the business.
2-Help provide a fair market value. Based on their experience from previous sales and knowledge of the market helps determine the highest purchase price possible.
3-Have experience in handling complex issues in the sales process and anticipating them before they arise.
4-Can help remove some of the the stress and emotional challenges in the sale of the business.
5-The business owner can continue running their business while the business broker handles the marketing and inquiries for the business transaction.
6-Prepare a professional marketing package to attract the best possible and qualified buyers.
7-Screen out the time wasters and unqualified buyers who will not be able to get financing..
8-Act as a referral source to other professional advisers used in the sales process, such as attorneys, accountants, lenders and others when needed.
9-Prepare all offers to purchase on proper legal forms without needing expensive legal staff to draw up the offer terms and conditions.
10-Assist in due diligence process in making sure the buyer is informed on all the financial aspects of he business.
11- Keep the process moving forward by coordinating the landlord assignment of the lease and other details before the closing.
12- At the completion of the sale, business broker’s get their ‘success fee’ for their efforts in getting the deal done.
If you are thinking of selling you business, contact our office by phone or email and one of our agents can help.
Purchasing a Franchise: Pros and Cons
Are you looking to buy a business? Have you considered purchasing a franchise? At Lakes Business Group, we have been able to get an up-close view of the pros and cons of franchise ownership. Some franchises are easy to work with and some have a lot of hoops to jump through and unexpected costs. Here’s what we’ve learned:
- Guidance and support of the franchisor
- Access to a recognized name/corporate level advertising
- Ability to obtain better employees because of recognized name
- Recipes/formulas for success have already been developed and outlined
- Training programs already developed for new employees
- Strict guidelines
- Limited products and services allowed
- Franchise fees/hidden fees
- Risk of franchisor or other business owners ruining the company’s reputation
Before entering into a franchise agreement, it is vital to have an understanding of the Franchise Disclosure Document (FDD) and heavily research the company you are buying into.
Our team at Lakes Business Group can help direct you in buying the right business for you.