BayState Business Brokers Blog

How to Get Paid More for Your Business By Selling to a Strategic Buyer

Posted by Marc Gudema on Thu, Jan 15, 2015 @ 04:14 PM

In my last blog, I explained what the strategic value of a business is.  The strategic value of a business is the extra value of a business – beyond its financial value – to a particular buyer.  The problem is knowing who those buyers are and getting them to pay you, the seller, for the strategic value.  A buyer recognizes that they are bringing the strategic value to your business so they don’t want to pay you for it unless they have to do so to buy the business.  We use the M&A Process to get you, the seller, paid for the strategic value of your business.  Here is how it works.

The first step in the process is developing a professional presentation for the buyer which will explain the features, benefits, and potential strategic value of your business to them.  When we contact the buyer, we want to be sure they recognize the financial and strategic value of your business so they are willing to pay for them.  You know your business very well, but the buyer does not.  Some of the best buyers, such as Private Equity Groups, may look at many potential businesses to buy.  They need to quickly be shown the benefits of your business so they take the time to look at it further.  In most sales, we will not set a price for the business.  We are dealing with buyers who will make their own determination of what the business is worth to them.  Setting a price will put a cap on potential offers.

The second step in the process is to develop a list of potential buyers.  This is an important part of the process.  It takes a lot of time and creativity to create this list.  Some potential buyers are competitors or other companies in the industry who would benefit by purchasing the selling business. We want to not only contact potential industry buyers, but ones that may be in related industries or suppliers.  We want to contact all businesses that could find strategic value in buying your business.

You may be questioning whether the identity of your business will be kept confidential.  We understand that if it was known by your employees, suppliers, or customers that your business was for sale, it could damage your business.  In our marketing, we take steps to make sure that your business is not identified by its location or characteristics.  We screen buyers to be sure we are dealing with genuine buyers.  You can be part of the screening process.   The identity of your business is kept confidential until a potential buyer signs a confidentiality agreement.

auctionIn addition to the potential buyers we identify, there may be potential buyers that we don’t identify.  We reach them through working with buyers’ representatives and Internet advertising.  Today, it’s an International market and the beauty of the Internet is that it reaches this potential market.

The next step in the process is to contact the potential buyers about your business and initiate an auction process to receive offers.  Part of the process of identifying potential buyers is to identify who to contact.  In a smaller company that is likely to be the owner.  In larger companies, there may be officers who review potential acquisitions.

The use of the word “auction” may scare you.  I am not referring to the Ebay type of auction or public auctions that you may have attended.  This is a private auction.  The only participants are those who have been screened and signed confidentiality agreements.  The goal is to receive multiple, competing, offers.  There is a deadline for buyers to present offers and the offers are not revealed.  You choose the best offer.

This blog was just intended to be an introduction to the M & A Process.  The purpose was to show you how we can get buyers to pay you for the strategic value of your business to them.  Without using this process, it is likely that a seller will receive much less for their business than is possible.  Contact us to discuss your specific situation and get your questions answered.

Tags: m&a, strategic value,

When you sell your business, what is its strategic value?

Posted by Marc Gudema on Tue, Nov 25, 2014 @ 02:01 PM

If you are thinking about selling your business, you may have heard that you can get more for it if you can sell it to a strategic buyer. That is probably right, but it raises some questions: What is the strategic value of your business? How do you get paid for the strategic value of your business? How do you find the best strategic buyers?

The first issue we should clarify is what is, and what is not, strategic value. Strategic value is not valued as an asset of the business when you sell the business. Many business owners recognize that a business buyer can take advantage of opportunities, within the business, that the current owner is not developing. This could be adding to the sales or marketing effort or investing in new equipment or other internal changes to grow the business sales and profits. This is not considered strategic value. A buyer may be willing to pay more for your business for its growth opportunities, but this is not considered strategic value.

42-16353593Strategic value is the value of the additional sales and/or profits another business achieves by buying your business and by their ability to develop the tangible or intangible assets of your business. For example, if you have a new product and the potential buyer has a much larger sales force and marketing capabilities, they may be able to develop sales of the new product that are much higher than your business can. Another feature that may create strategic value is your market – your customers, location, market niche – that the buyer doesn’t have. By buying your business, they may be able to increase the sales and profits of the combined businesses beyond just the total of the two. The strategic buyer may achieve higher profits just by eliminating your business as a competitor and eliminating duplicate costs.

The problem with determining what the strategic value is in these examples is that its value is determined by the characteristics of the buyer. For example, in the case of your new product being developed by a buyer, the strategic value depends on the buyer’s capabilities. A regional player will be able to develop it less than a national player. The buyer who gets the most value from the product could be in a related industry and your product will give them an entrée into a new market that they can sell other products into.

It is difficult to calculate which  buyer would gain the most strategic value from buying your business and how much the strategic value is to each. You may be able to make an estimate. For example, in the case of the new product, you may know what the size of the market is and what the profit margin is for the product. This gives you an estimate of the potential sales and profits. Of course, a buyer may calculate these differently and they may not be able to gain all the potential sales. They may be more conservative in their estimates.

The next question is how do you get paid for the strategic value when you sell your business? Buyers are not likely to pay you any more for your business than they need to. If you are dealing with only one buyer, and they know that, they may not pay you any premium for the strategic value. If you are not represented by a qualfied intermediary, they may recognize that you don’t have the knowledge to know what your business is really worth to them and they not make the best offer. In my next blog, I’m going to discuss how to get paid for the strategic value when you sell your business.  Contact me and we can discuss how we can get you the best price for your business.

Tags: sell a business, m&a, strategic value,

It’s Not Just About the Money, How Good of a Business Buyer are You?

Posted by Marc Gudema on Fri, Oct 31, 2014 @ 10:36 AM

Although the money in a business offer is an important consideration for most business owners selling their business, it is not the only factor.  If the owner decides that the likelihood of getting that money (closing on the deal) is not good, then they may accept another offer.  Here are some factors that affect how owners, and business brokers, evaluate buyers and the offers they present.

One of the most important things to do if you are buying a business is be open, honest, and forthcoming about yourself and your financial situation.  You want the business seller to be this way.  You need business_broker_-_young_woman_-_Copyto be also.  Problems in your financial history may not be a deal-breaker if you explain them.  But, being unwilling to provide information about you and your financial situation is likely to cause a business seller and business broker to be unwilling to deal with you.

You also need to be someone that is not too hard to work with.  Getting a deal done is usually a matter of give and take.  If you’ve shown an attitude that everyone better do things your way or else you won’t pursue the business, you are not likely to get the result you want.  Typically, the first step in the process is signing a Confidentiality Agreement.  Most business brokers will consider a few edits to their Confidentiality Agreement.  But, if you are re-writing it, that is not a good way to start. The business broker and seller are questioning that if you are this difficult to get started with, how hard will you be down the road in reaching agreement on an offer and a purchase and sale agreement?

Make sure that the information you request to present an offer is reasonable. Keep in mind that the owner is busy operating their business and responding to requests from other buyers. Request the minimum you need to present a business offer.  Also, this is not the time for due diligence.  Make an offer assuming that the information you are given is accurate.  If during due diligence, you find it is not, that is the time to revise or terminate the deal.

This leads to another thing to keep in mind.  Time is important.  Business brokers have a saying “Time kills all deals.”  What that means is that the longer it takes to get a deal done, the more likely it is that it won’t get done.  There are some good reasons to move as quickly as possible to present an offer to buy a business.  The most important one is that, if you are pursuing a desirable business, there will be other buyers.  Another buyer may move quickly.  I’ve had more than one very good buyer meet with an owner and then present an offer and negotiate a deal on the same day, Another reason to move promptly is that, if you take weeks to present a business offer, the seller gets the impression that you move slowly and it will take a long time to finalize a deal with you.

Here is the last thing to keep in mind.  There are many buyers and business brokers want to work with ones who are likely to buy a business.  All of the issues I’ve mentioned in this blog influence whether a business broker will be willing to work with you and show you businesses to buy.  As I wrote at the beginning of this blog, the price you are willing to pay is not the only factor to be considered.  All of the other factors affect how likely you are to close on a deal and how attractive you are as a buyer to business sellers and business brokers.

See all of the businesses we have for sale.  Contact us for help to buy a business.


Tags: buy a business

How to Choose an SBA Lender to Buy a Business

Posted by Marc Gudema on Tue, Aug 19, 2014 @ 02:56 PM

Getting the financing to buy a business is a contingency in most business sales.  Choosing the right SBA lender can make the difference between getting that financing or not.  Many buyers believe that all SBA lenders are about the same.  They choose an SBA lender that is located near them or at the bank where they have been banking.   This can be a big mistake.  There are big differences in SBA lenders.  Here are the attributes that you should look for in an SBA lender.

SBA Preferred LenderThe most important attribute that you should look for is that the lender is an SBA Preferred Lender (PLP) in your state.  The local SBA website lists the SBA lenders and shows which are preferred lenders. A PLP can approve your loan without needing to submit it to the SBA.  This speeds up the process.  A bank needs to be have done a sufficient number of SBA loans and done it well enough to get this status from the SBA.  This shows you that you are working with a bank that is a more experienced SBA lender.

In addition to PLP status, you should look into other attributes of the SBA lender.  Find out how many SBA loans the lender has done recently and whether they are lending to your type of business.  This shows you two things – how experienced they are at doing SBA loans and whether they lend for your type of business. The local SBA office regularly publishes a list of the largest SBA lenders.  Keep in mind that SBA lenders are loaning money for more than just business purchases. 

You should also keep in mind that while all SBA lenders have to meet the SBA requirements, each one has their own requirements to obtain a loan.  Lenders differ in the down payments they require, what types of businesses they will lend to, whether they require collateral and how much, the borrower’s credit score, and other factors.  In your initial investigation you should contact more than one SBA lender to see which one is best for your situation.

Another question to ask the lender is where the loan is underwritten.  Jennifer Mason, of FTUB, states that this is important “especially if there is real estate.  In the Northeast, we have a lot of property that is high priced. . . a lender from a newer area of the country is going to have a tough time with the real estate valuation. . . all of our SBA loans are underwritten at our headquarters in Boston”

In addition to choosing the best SBA lender for you and your situation, you should choose a good SBA loan officer.  This is likely to be someone that specializes in SBA loans and has several years of experience in SBA lending.  There are a number of benefits to working with an experienced SBA loan officer:

  • The SBA rules change frequently, typically a couple times a year.  A loan officer that specializes in SBA loans should be aware of these rule changes and be sure you and your loan meet them.  This is one area in which an experienced SBA lender can assist to make sure the transaction is being structured in a way that meets SBA requirements.

  • Michelle Orr of Wells Fargo  recommends choosing an SBA loan officer “that is responsive to your questions and provides answers in a timely manner. . . a loan officer that goes above and beyond to make the process simpler for you. ie…pre-fill applications and provides a complete list of what is needed for approval.”

Most of our business sales are financed by SBA loans.  We know several good SBA lenders.  If you are buying one of the businesses we have for sale, ask us for a list of SBA lenders that we have worked with.  They meet the criteria in this blog.

Tags: how to get a loan to buy a business, sba loan, sba lender

How to Buy A Business - Be Prepared for the Competition

Posted by Marc Gudema on Wed, May 28, 2014 @ 02:32 PM

When you are making an offer on a business, don’t be surprised to find that there are other bidders.  In many of our business sales, we are receiving multiple offers.    This is a common occurrence in sales of larger businesses by investment bankers and the buyers are familiar with how to handle the situation.  Many individual buyers that we deal with are not. 

First of all, don’t drop out.  If you drop out, you won’t buy the business.  Competition is a fact of life.  When a buyer complains about the competition, I ask them if they would rather buy a business that no one else wants.  Ask yourself what bothers you about the process so you can better handle it.  Are you concerned about being used to get a better offer from another buyer?  Is the loss of control of the process bothering you?  As the only buyer, you have more control.  The power shifts to the seller when there are multiple bidders.  If this is a good business that you would like to buy, learn how to navigate this different terrain.  Here are some tips on how to do so.

  • Find out the process that the seller and business broker are using.  Is this a formal auction where all “best and final” offers are submitted at the same time? Will an LOI be negotiated with the one, “best” offer?   Or, is the seller acting on each offer as it is received and accepting the first offer that is acceptable?   Or, are they negotiating with several buyers who made the best offers?  Or, is some other process being used?  You need to know as much as you can about the rules of the game.

  • Find out what is important to the seller.  The decision about which offer to accept is how to buy a businessrarely only about who offers the best price.  What other terms are important to the seller?  Third party financing?  How long the seller will have to stay on after the closing?  Speed and certainty of closing?  Keeping the employees?  Find out what is important to the seller and create your offer with these in mind.

  • Stick to the terms of the offer you present.  Nothing kills a deal faster than asking for a lower price or other revised terms.  Unless you find clear reasons to do so in your due diligence, and this information was not disclosed earlier, stick to the deal you negotiate.

  • Be a reasonable, personable, person.  Nice guys don’t finish last; jerks do in this process.  All things being equal, it’s more likely a seller will sell to someone they like rather than someone they dislike.  They are also more likely to be helpful to them after the closing to be successful with the business.

  • Move quickly.  In most deals, speed and certainty of closing is important to a seller.  By moving quickly, you show a seller that you are more likely to move quickly to close the deal.  Accordingly, have the deadlines in your offer, such as for due diligence or obtaining financing, be as short as you can work with.  The best way to move quickly is to be prepared by the time you make the offer.  Line up your attorney and accountant.  Know the financing sources you will go to.  Have other needed services lined up.

As you can see, dealing with a situation where there are multiple buyers is more complicated for a buyer.  Understand that the seller’s business broker represents the seller.  In this situation, you may wish to use an experienced buyer’s broker to handle the process for you.

Tags: buy a business, business broker, how to buy a business

Should your business broker use an auction to sell your business?

Posted by Marc Gudema on Wed, Apr 23, 2014 @ 11:42 AM

An auction process is frequently used to sell middle market businesses (those with sales of $5,000,000 to $1,000,000,000).  The primary reason for using an auction is to raise the selling price of the business.  An auction is rarely used in the sale of smaller businesses.  Would it be a good practice to use the auction process to auction a smaller business for sale?

The auction process I’m discussing is a private auction process.  In the sale of some large,
well-known businesses – such as professional sports teams – the auction is made public.  The auction is publicized to reach as many potential buyers as possible.  In these sales, the public disclosure will not hurt the value of the business.  In the sale of most privately owned businesses, the owner does not want public disclosure of a potential sale because it would hurt the business.

A private auction can be conducted in many different ways.  Here are the usual steps in the process when used to sell middle market businesses:

  1. Identifying potential buyers.  Because of the likely selling price of the business, the buyer is more likely to be a business entity than an individual buyer.  The M&A advisor identifies all the potential buyers for the business.

  2. After identifying the buyers, contact will be made with all of the ones that might haveauction business for sale an interest in buying the business.  The identity of the business will be kept confidential.  The buyers will be informed that an auction process is being used, the steps in the process, and when bids will be due.

  3. After executing confidentiality agreements and showing financial qualifications, the buyers are given another report about the business, disclosing its identity and giving more details about its business and finances.  The buyer will then be asked to present an “indication of interest”.  This is a range of the price that this buyer would pay.

  4. The buyers willing to offer the highest price range, and who are likely to present a final offer, will be given the opportunity to meet with the owners, see the business, and given additional information about the business.

  5. The chosen buyers present their final offer and the sellers negotiate with the best one to reach a final deal.

Note that this covers the basics and other steps, or processes, may be included.

There are several reasons that the auction process is used to sell larger businesses:

  • By not putting a price on the business, you don’t put a cap on the price.

  • There may be strategic buyers who are willing to pay much more than the financial value of the business.

  • Buyers are knowledgeable and don’t need a selling price to develop their offer.

  • There are many potential buyers so an auction process, which creates competition between them, can be used.

  • It gives all buyers time to present an indication of interest and final bid which should result in a higher sale price.

Here are some reasons why the auction process isn’t used often to sell smaller businesses: 

  • Many buyers make offers based on the asking price and are not familiar with, or comfortable with, developing a price. They are worried about overpaying.

  • Buyers are not used to an auction process, are not comfortable with it, and would not participate.

  • Many businesses don’t have a strategic value, or have a small one, so attaining a much higher price by using an auction is limited.

  • There are few buyers for the business.  A successful auction needs to have several buyers participating.

Nonetheless, there are some small business sales that would meet the criteria.  Here are a few,
            Liquor Stores – there are typically many buyers, who may already have bought another store, and are familiar with the sale prices.
            Printers – there are many potential buyers for a printer’s book of business and they will develop an offer.
            Security Alarm Companies – Are highly sought after because of their recurring revenues and long-term contracts.

Although the auction process may not be appropriate for most small business sales, it can be an effective way to sell some businesses.  It can be a good way to handle a high level of buyer interest and get the best price for the seller.

Tags: sell a business, business broker, auction a business for sale

Exit Planning? Update Your Marketing

Posted by Marc Gudema on Thu, Apr 17, 2014 @ 03:11 PM

When I meet with business owners who are preparing to sell their businesses, it is not uncommon to find that their marketing hasn’t changed much for several years.  They still pay for the yellow pages.  They may not have a website – or, if they do, they don’t know how to use it. They don’t use Google Adwords.   They are probably not using social media. 

It is easy to be overwhelmed by the marketing choices today and not do anything different.  But, reaching customers has changed tremendously over the past 20 years and any business that hasn’t changed its marketing is losing out on many potential customers.  It isn’t as difficult as you may think.  Here are some easy ideas for updating your marketing.

For starters, you must have a website.  The first thing a potential customer will do to check you out is look at your website.  The website should have an up-to-date appearance.  It should be “responsive”.  What that means is that it automatically looks good on whatever device – computer, tablet, or smartphone – someone is using to view the website.  Be sure your website has your contact information and contact forms on most pages so it is easy for a potential customer to contact you. 

Your website should be optimized for search engines.   Try to use a URL that relates to the products or services you sell – not just for the home page, but for internal pages.  Focusing each page on a term or topic that people will be searching for will help that page to be ranked higher on the search engines. 

When people do searches on the Internet, there are two types of results that appear.  At the top and side of the page are “Sponsored Links”.  These are “pay per click” ads; about 30% of people click on these.  The rest of the results, which 70% of people click on, are “natural” results.  These are chosen by the search engine’s software as the website pages that are most relevant to the search terms entered.  Although it doesn’t cost anything to appear in the natural results, it can be difficult to be listed on the first page of the search results.  That is as much as most people look at.

Google Adwords, and BingAds, serve up the “Sponsored Links” that you see at the top and exit planningside of search results.  This is a very good way to market your website and, consequently, your business.  Although it costs money to advertise this way, you have more ability to be seen on the first page of the search results.  One of the best features of this advertising is the ability to target your advertising.  The most basic targeting is by geography.  Your ads are not shown outside of the area you specify.  You can also adjust your advertising over time as you see what works, and what doesn’t.  I’ve found that it makes sense to pay more to be listed in the search results at the top of the page rather than the side.  I would also suggest that, rather than sending everyone to your homepage, you create landing pages tailored to the ads you are running.

What about social media?  If you are a retail business, it probably makes sense to have a Facebook page.  Be sure to keep it up.  If you are doing business to business sales, LinkedIn may be better for you.  Some people find that participating in groups on LinkedIn can be an effective way to attract customers.

How do you find someone to create the website and Adwords marketing?  You can search for them using the search engines.  You can also go to websites where free-lancers are offering their services.  Some popular websites are,, or

If you are preparing to sell your business, don’t forget to have an up-to-date marketing program.  Of course, the other benefit is that while you own the business, you should get more leads, more sales, and more income.  If you need to update your marketing, start with the basics.  Create, or update, your website and do some Adwords marketing.  These are likely to get you the most “bang for the buck” and the best results for the efforts.

Tags: sell a business, exit planning

Do you have the skills to become a business broker?

Posted by Marc Gudema on Tue, Apr 01, 2014 @ 11:07 AM

The outlook for business brokerage is very good and a successful business broker can make a very good income.  According to IBISWorld, the business brokerage industry – revenues earned on the sale of businesses at a price of $2,000,000 and under -- should surpass $1 billion in revenue in the next few years.  The improving economy, increasing number of businesses, and more business owners reaching retirement age will drive continued growth.  According to the 2013 Business Brokerage Press survey, an industry veteran should earn over $100,000.  If you like business, being a business broker is an interesting career.  You see many different businesses and management styles.  No two days are the same.  If you are thinking of becoming a business broker, here are some skills you need.

First and foremost, you need to have excellent sales skills to be a business broker.  In the typical sale of a business, you need to convince a business owner to give you the exclusivebusiness broker   young woman   Copy right to sell their business and then you need to sell the business.  We find that good b-to-b sales experience is essential for a business broker.  But, you also need to have skills in selling to consumers.  The majority of small business sales are to an individual.  You are selling the sizzle and the steak.  The buyer needs to be excited by the business and they need to see that the numbers work – that they will make an adequate income from the business.

In addition to having excellent sales skills, you need to enjoy sales.  Selling is what you will spend most of your time doing.  If you don’t enjoy it, it will quickly burn you out.

You also need to be able to work with financial statements – primarily the income statement and balance sheet – to become a business broker.  You are not an accountant, but you need to understand financial statements and recast them to show a buyer how the numbers will look to them.  You also need to understand financial statements to prepare market value reports to show an owner what their business is likely to sell for.

There are a few personality traits that will help you to be successful as a business broker.  The ability to stay calm when dealing with a tense situation is important.  Buying or selling a business is a stressful event in someone’s life.  They will take out some of their stress on you.  They are likely to become angry at the other party at times during the process.  You are a buffer between the parties.  You need to be able to resolve the differences without taking it personally.   You also need to bring reality to the buyer and seller.  Many times, they will bring unrealistic expectations to you.  It will expedite getting a deal done if you can nip these in the bud.  You also need to be able to relate to and deal with many different types of people with various ethnic backgrounds.  Another skill that will increase your ability to close deals is “creative problem-solving”.  If you can come up with creative ways to get by differences and obstacles, you will close more sales and make more money.

You need to have good communication skills, both in your speech and in writing, to become a business broker.  You spend a lot of time talking to people.  You need to be able to communicate your ideas clearly and in a manner that is acceptable.  You will also write reports and emails.  These need to be well written.  If they are not, they may not communicate what you want to say.  If poorly written, it will reflect poorly on you.

You need to be self-motivated and self-directing as a business broker.  You need to be able to schedule your time by setting your priorities.  Even if you work for a business brokerage agency, rather than on your own, it is unlikely that the owner of that company will want to micro-manage your schedule.

The final skill that I would suggest you have to become a business broker is the ability to work with technology to stay organized and be effective.  A CRM system is essential for keeping track of clients and scheduling.  A Smartphone enables you to stay in touch better and respond faster.

If you are thinking of becoming a business broker and have these skills, please contact me.  I would be happy to talk to you more about what it takes to become a successful business broker.

Tags: business broker, become a business broker, business brokerage

5 Terms to Be Reasonable About If You Want to Sell Your Business

Posted by Marc Gudema on Fri, Mar 28, 2014 @ 10:46 AM

You may have a great business to sell, but if your selling terms are not reasonable, it may not sell.  Or, it may take a lot longer to sell the business and result in you getting a lower price.  Keep in mind that no matter how good your business is, a buyer doesn’t have to buy it.  A buyer is comparing your business to others on the market, and if any of these terms are not realistic, it may kill a buyer’s interest.

The most common term we think of when we think of being realistic is the price.  If the price is too high, it generally means that the cost of financing the purchase will take too much of the cash flow and the buyer won’t get enough income, or return on investment, for the deal to make sense.  Keep in mind also that you are competing with other businesses on the market, in your industry, and all businesses.  If your price is not in-line with what others are asking for comparable businesses, buyers will buy another business.

Another reason that a high price will kill a deal is that, in most sales, the buyer gets an independent appraisal.  They may need one for the lender, or just get one to confirm the price.  If it is much lower than the deal price, the buyer may pull out of the deal or demand a lower price.

The best way to find out what your business is likely to sell for is by getting an independent sell a businessappraisal from an accredited appraiser.  Most business brokers can give you an estimate of the selling price using your financials and information on what businesses like yours have sold for.  These valuations are based on the financial results of your business -- generally weighting heavily on the most recent results.  That’s because a buyer is paying based on how your business is doing now and the most recent year’s results are the closest to it.  Don’t expect to get paid on the tremendous growth opportunity in your business or the “goodwill” you have from being in business for many years.

Another expectation that can be unrealistic is the proposed financing.  In order to get an SBA loan, the business tax returns, with typical add-backs, needs to show enough cash flow to provide an income to the buyer, payoff the loan and have a margin of safety.  If the tax returns don’t show this, then you will probably have to provide a seller loan.

It is unrealistic to expect an all-cash buyer.  Most buyers are leveraging the money they have for a down payment with a loan to buy a business.  The buyer that has enough cash to buy your business is usually looking at a larger business to buy using his cash as a down payment.   That’s not to say it never happens, because it does, but the all-cash buyer is a small percentage of the potential buyers.

Keep in mind also that the lower the amount of the down payment a buyer needs to buy your business, the more potential buyers there are for it.  An SBA loan typically requires 20% down and a seller loan 40% to 50% down.  If the buyer can get an SBA loan, there will be more potential buyers.

If your location is important to the results of the business, then a buyer will need to get a lease for the space.  Lenders will not give a loan that is longer than the term of the lease, with buyer options to extend.

A buyer will expect you to sign a non-compete.  This will prevent you from operating a competing business that does business with the same customers, or operates in the same market area, for several years – typically 3 to 5 years.  The non-compete is also likely to prevent you from hiring away employees.

You need to be realistic about the training and transition you will be willing to give a buyer.  How much they need depends on the skills of the buyer, how complicated your business is, and what other people or resources there are for training.  If you will be staying on for an extended period, it is reasonable to be paid for the time you put in.  But, the rate of pay will usually be lower than what you’ve earned in the past.

When you are putting your business on the market, think about the price, financing, and other terms as if you were the buyer.  Would they be acceptable to you?   Talk to us about the terms you expect.  We will give you our expert opinion on whether your expectations are reasonable.

Tags: sell a business, price a business, sale terms

Should You Buy an Existing Franchise or Open a New One?

Posted by Marc Gudema on Wed, Mar 19, 2014 @ 11:55 AM

If you are thinking of buying a business, franchises have a lot of appeal.  They have a track record.  Many are household names.  Most have an operating manual that gives you the information on how to operate the business.  If you need assistance, they have people available to help you.  But, should you buy an existing franchise for sale or open a new franchise location?

The first thing you should recognize is that buying a franchise, no matter how many there are or how well known they are, is not a guarantee that you will be successful.  Just like a non-franchise business, there are successful franchises and unsuccessful franchises.  The same is true of individual locations.

As part of the process of buying a franchise, you will receive a Franchise Disclosure Document.  Franchises are required by law to give you a copy before you buy a franchise. 
This document has important information!  Read it.  It will give you information about conflicts between the franchisor and the franchisees.  It will tell you how many new franchises were sold and how many closed.  It may give you information on how much an average franchisee does in sales or earnings.  It will give you a list of the franchisees.  Contact several and ask them questions about the franchise.  Do your due diligence.

The primary reasons to buy an existing franchise are the same reasons you buy an existing business – to reduce the risk of going into business and to start out with employees, customers, and an immediate cashsell my franchise flow.  As I pointed out, buying a known franchise is no guarantee of success.  Buying one that is up and running reduces this risk since you can see how the business has been doing.  There is no waiting to ramp up and start making money.  Both of these benefits are worth something.  In many instances, you can buy an existing franchise at little more than the cost of opening a franchise.

If the franchise is doing well, it is likely that existing franchisees have bought up many of the best territories.  In the case of some franchises, when a good franchisee wants to sell, they steer the sale to a good current franchisee so they have a good operator running the business.  In this case, their interests are not to get the best deal for the franchisee.  Many franchisees recognize this and sell their business through a business broker.  Exposing it to the market will usually result in more buyer interest and a higher selling price.

I have to give you a warning.  When you talk to the franchisor, they are likely to try to convince you to open a new franchise rather than buy an existing one.  We have had this happen to buyers, who were buying an existing franchise, several times.  This is self-serving to the franchisor.  If you buy an existing franchisee, they don’t gain anything.  But, if you open a new franchise, you may be successful and increase the overall revenues of the franchisor.  If you are dealing with a local franchise representative, it is likely that they will get a commission on your purchase of a new franchise – but not on a sale of an existing franchise. 

There are many good franchises.  But, like any business that is started, there is no guarantee of success and how well a new location will do can vary significantly.  Give consideration to buying an existing franchise to reduce your risk and start out with employees, customers, and a cash flow.

Tags: buy a franchise, buy an existing franchise, sell my franchise

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