How to Buy a Business Not for Sale
It never hurts to ask: How to buy a business that’s not for sale
If you want things to happen, make them happen.
I can’t think of a saying that better captures the spirit of buying a business.
And here’s why.
Consider that not every business is listed for sale at the very same time. Along similar lines, the specific business you might be interested in might not be for sale at all. The motivation to sell and the timing, for that matter, differs so greatly among business owners.
The nature of the process is unpredictable, but with a little creative thinking and perspective, you can achieve your goal of business ownership as, sometimes, the best opportunities come from the most unexpected of places.
Being part of hundreds of creative deals and transactions over the years, we’re sharing some of our insights and inspired ideas to help you take the next step.
Target the business you want.
Research and profile the business you’re interested in. Years in business, number of employees, competitors, industry trends or challenges, customers and brand or market reputation; and so forth. Gather as much helpful data and information you can to understand the opportunity, challenges, weaknesses and strengths of the company.
Alternatively, create a list of businesses you might want to pursue if it’s too early for the above details.
Reach out to the business owner and pitch yourself when the time is right.
Make contact with the business owner and schedule a time to meet in-person for coffee or lunch after sharing your genuine interest in his or her company, as well as desire to possibly purchase it. Use this time to better get to know the owner on a personal level, specifically to see if you share the same vision, goals and ideas for the company.
Create a business plan.
Something to keep in your back pocket until the time is right—create a business plan focused on positively elevating the existing foundation of the business. For example, you might discuss the benefits and potential of breaking into a new market or targeting new industries to grow the business. Avoid highlighting significant changes as this might deter the owner from furthering a discussion around a sale if they sense a new owner might break down the company they built from scratch. Tread carefully and respectfully.
Get yourself a solid acquisition team.
Round up the right players to make the deal happen. You’ll need:
- A credible and knowledgeable business broker with a solid and proven track record of successful transactions. Expertise in and with the particular business you’re interested in is also a positive.
- A highly-recommended attorney that specializes in business transactions.
- An experienced accountant that can review the business’ financials for the last five years.
- If any financing is part of the deal, start discussions with your local bank for a conventional loan or if a Small Business Association Loan is the need, you can research top banks that offer this type of loan support. Your broker might also have recommendations to share with you based on past customers and experience, good or bad.
Conduct a business valuation to validate the price of the business so you can make an offer.
Your business broker will tell you a business valuation is the first, most important step to ensure you’re offering an accurate price for the business. In other words, the true and accurate market value and worth of the business.
We can share our experiences, answer questions and provide insights to help you on the buy / sell journey. Reach out to our broker team at 262-347-2083 or visit lakesbusinessgroup.com to learn more.
Key Partners involved in a Business Transaction
Unknown to many buyers and sellers—especially first-timers—is the number of parties involved in the overall buy / sell transaction. The key partners involved in a business transaction certainly differ depending on how complex or easy the deal—so we’ve started by outlining roles involved in “traditional” deals.
A typical buyer profile might include individuals like first-time buyers, companies interested in merging, and / or private equity groups actively seeking acquisition opportunities.
Retirement, boredom, new opportunities or relocation are just a few of the reasons former business owners decide to list their businesses for sale. Some sellers might be focused on urgency and selling quickly while others’ interests lie in finding the right ownership style or cultural fit.
A business broker acts as the liaison between the buyer and seller, as well as the other partners part of the overall business transaction. He or she facilitates and coordinates deliverables across the partners in order to reach the finish line (a sale).
Accountants play a critical role in helping sellers’ produce accurate and up-to-date financials as part of the due diligence process. Buyers also might rely on his or her accountant to cross-check profitability and other key data and numbers that might indicate a business’ value (or lack thereof).
Should a buyer decide to purchase a business with a loan, buyers will select a bank to partner with—whether conventional, SBA or another loan option. The loan process should become part of the transaction timeline as there’s oftentimes several steps required in getting approved, which impacts the overall deal.
Buyers and sellers obtain their own, personal attorneys for protection—to ensure both parties understand all of the ins and outs of the agreement.
Life Insurance Broker
When there’s high financial stakes, buyers will be required to ensure life insurance will cover the cost of the business in the event of unfortunate circumstances such as illness or death.
Appraisers & Environmental Groups
When real estate is involved, especially in the instance a bank supports the loan, appraisers and environmental groups likely get involved to appraise (and therefore, approve) the value of a property, while also making sure there’s no faulty issues or concerns that might impact the price of the business (and therefore, loan approval). Gas stations are often subject to environmental groups’ arduous checklist, as one example.
Curious as to how the transaction process typically works? Our broker team is always available to answer your questions. Reach out to Tim Bullard and we’ll connect you with an experienced broker.
Funding Options to Finance Your Business
How do I buy a business?
What type of financing options are available?
What if I don’t have cash or enough personal equity to make a purchase?
Financing is one of the most frequently talked about topics among buyers and our broker team, especially first-time buyers navigating the buy and sell process.
Whether your unique transaction requires a singular loan to purchase the business, or a multi-funding approach, there’s more lenders and funding opportunities available to potential buyers than ever before.
Starting with the most popular or more commonly known, here’s our list of funding options that will help you fund the business of your dreams:
Of all of the financing options available to potential buyers, seller financing is the most flexible. Also known as owner financing or seller carryback, the buyer and seller enter into an agreement much like a banking relationship. An amount is agreed upon and with this, the seller carries the note and the buyer agrees to pay the seller back—with interest—over a certain period of time. A quicker turnaround time for both parties, more fluid terms for the buyer, as well as a key financing strategy when traditional loans aren’t available and / or seller financing can be used to offset any limitations related to conventional loan options.
More widely known, traditional term or conventional loans are supported by private lenders as opposed to the government and with this, typically require a more significant personal and financial investment. A few examples include a 20-30 percent down payment, shorter and more stringent terms and a favorable credit score of 700-plus, among others.
Small Business Association (SBA) Loan
The Small Business Association partners with other lenders in order to offer small business owners’ government-backed loans with more flexible repayment terms, down payment requirements and lower interest rates. There’s a variety of SBA loans to choose from, each with their own set of unique qualifications. While the process for getting approved requires extensive documentation and paperwork before funding is released, an SBA loan is one of the best formal loan options available to tap into.
Buyers can finance their business purchase by leveraging existing retirement funds without risk of any tax or other penalties. There’s three different ways to achieve this, including a rollover, borrowing against and / or cashing out [your 401k].
Home Equity Line of Credit (HELOC)
Taking a second mortgage out on your home—or a Home Equity Line of Credit (HELOC)—will give you equity toward the purchase of a business. Following a proper business valuation to determine the cost of the business, you should take the next step in finding out [how much equity] you have available to you.
Consider reaching out to your current banking partner to gather some additional information and insight or, let our team answer your questions and provide creative solutions to your financing needs.
How to Choose: Startup versus Established Business
If you’re considering owning your own business, whether the startup route or an established business, you know one thing’s for sure—entrepreneurism is the right move for you and your career.
Identifying the right path starts with a few qualifying considerations—i.e. your current lifestyle, goals, financial situation and appetite for risk, among a few others.
Understanding how and where these two business opportunities differ is a great place to start your research.
Why an established business?
- It’s proven. In other words, it’s a well-oiled machine that’s already working and functioning—from people to processes to operations.
- It provides existing clientele. Much like the above, you’re stepping into existing relationships and simply maintaining and managing them. This allows you to build off of a solid foundation and quickly expand and grow.
- It generates immediate cash flow. While the price tag of buying an established business is higher compared with a startup in some instances, buying existing clients translates to immediate revenue. Several studies show that startups, in comparison, fail within the first five years (sometimes three depending on the industry) and may or may not turn a profit in this timeframe.
- It allows for easier financing. Given all of the above—particularly taking into consideration it’s a business already making money, (i.e. good debt)—banks and investors are more likely to fund and support it. This is especially key as startups are far riskier a venture given their uncertainty.
- It’s less risky than a startup. More financial stability and a proven track record of continued business truly separates an established business from a startup.
Why a startup?
- You’re okay with uncertainty. Startups give entrepreneurs the ability to drive change and implement their own ideas and processes—all while building a company and processes from scratch. There’s multiple paths and opportunities to explore with no limitations, which can be exciting and fulfilling.
- You have financial backing. A brand-new company is going to require capital to get off the ground. Knowing this, it’s critical to think realistically and have a plan B in place in terms of funding and financial support as startups can be financially unpredictable and your next paycheck isn’t a guarantee.
- You thrive in fast-paced settings. Unlike corporations or established businesses, in some instances, you chart your—and your employees’ course. You can be fluid, flexible and agile in a startup setting and can operate (and make changes) on a dime—from operations to processes to pricing. This can be extremely compelling to customers in industries like IT & technology when products and services change so rapidly.
- You enjoy long hours. With no established brand or industry awareness, you’re ready to put your passion, ambition and motivation to work in order to bring your ideas and company to life. In addition to this, as you’re responsible for shaping and creating the structure or shell of your company in its infancy stage, you’re ready to invest in long hours to create results—especially in the beginning.
Not sure where your skillset or background might align? Considering furthering a discussion with our broker team. Free and no-strings-attached.
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Owning a Business
Realize that not everyone is cut out to be a business owner: If you haven’t already considered and explored whether you are suitable with running your own business, take the time now. Some people are better off financially (and happier) getting a paycheck from someone else.
Get your finances in order: Before taking on a new venture, make sure your personal money matters are set straight.
Know which hats you wear best: After purchasing a business, there is much to learn and many new skills to acquire. Gain the background needed to oversee all the angles of the business and then determine what tasks you should outsource or give to employees to manage.
Pay attention to your customers: No matter how busy you are, especially in the early years of owning the business, be sure to spend at least a quarter of your time with customers. What are they thinking? Are they happy with the service/product you’re providing? To make the right business decisions, you need to understand the customer’s point of view.
Keep your focus on the people: Whatever happens to a business, happens at the hands of the people who work for it. It’s the people that makes the company.
Develop a passion for learning: As you grow the business, you need to change and grow with it. Marketing is one area that needs to be checked monthly on what’s working and what’s not working. To continue building the business with new customers, you need to learn new ways to get the word out.
These are just a few tips to start considering as you begin looking at your goal of becoming a business owner. The team here at Lakes Business Group is available to answer questions you may have as you begin the search for the right business to own.
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
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
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
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?
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.