One of the more difficult problems for business brokers is how to advertise a business with real estate. Should we advertise the income and price of the business with, or without, including the real estate? What adjustments need to be made in presenting the business with real estate? What should we do if the owner of the business is not paying herself a fair market rent? Here are some things that you, as a potential buyer or seller of a business with real estate should keep in mind.
First, you should recognize that there is no standard way that business brokers advertise a business with real estate. That means that you have to look into each one and look at how the business is being marketed. We usually advertise the income and price of the business only -- after deducting the likely cost to a buyer of a new mortgage on the real estate. This is because, if we advertise the price of both, the price will appear high to many buyers and we get a much lower response to our advertising. Let me explain with an example.
Let’s say the business generates an owner’s cash flow (seller’s discretionary earnings) of $200,000. An average multiple for a selling price of a business is 2.5X SDE, or $500,000 for this business. Let’s say that net operating income of the real estate is $100,000. A normal cap rate for commercial real estate is 10X which would put a price of $1,000,000 on the real estate. If we advertise both together, we have an SDE of $300,000 and an asking price of $1,500,000, a 5X multiple. Since we are marketing to business buyers, they think that the price, 5X cash flow, is too high since they are used to seeing multiples of 2.5X cash flow.
If you are evaluating a business for sale with real estate, you need to evaluate each separately. First, look at the income and cost of the real estate and plug the numbers into your pro-forma for the business. Then, see what the business generates in owner’s income and evaluate the price accordingly.
Here are some other things to look out for.
- If the business does not own the real estate, a separate tax return is being filed for the real estate. You need to see that tax return and what is, or is not, on the tax return.
- The rent that the business is paying may not be a market rent. It may be higher or lower than a market rent. You need to evaluate the business with the rent you will need to pay yourself to buy the real estate.
- Watch out for the real estate taxes. If there hasn’t been a recent sale of the property, it may be under-assessed. When you buy the real estate, the property may be assessed higher and the real estate taxes on it will go up.
- An SBA 504 loan is frequently used by buyers to finance the purchase of the real estate. They typically have to put down 10% or 15% of the purchase price as a down payment.
- Keep in mind that the real estate may be an important component for some businesses. I sell a number of auto body shops. Many are located in communities where it would be very difficult to get approval for a new body shop. Many industry buyers would not buy the business unless they could buy the real estate.
- Consider what the value or use of the real estate would be if the business was not located there.
Don’t be scared off by the cost of buying a business with real estate. There is a difference in evaluating a business and evaluating the associated real estate. Be sure you do both.
When a person buys a business, they usually recognize that getting trained to run it is important. But, it may not be given the attention and importance that it should. If you are buying a business, here are some things to remember when you are working out the training with the seller.
Discuss what training you need and how it will be given during your discussions with the seller before you make an offer. This issue is frequently given just a token discussion. Many times, it just revolves around the amount of time the seller is willing to provide. A meaningful discussion should include what the training should consist of. By breaking down the training more, both parties will be able to come to a better estimate of how much time is needed and what the training should consist of. The buyer of the business will also get a better understanding of what the seller does in the business and what the buyer needs to do to replace the seller.
Working out the training is not usually an adversarial discussion, but rather figuring out what works for both parties. Both parties usually have a strong interest in the buyer succeeding in the business. But, most sellers are selling for personal reasons and want to move on to the next phase in their life as soon as possible. They want to give the needed training, but make it as short as possible. For this reason, unless the training is only a week or two, the buyer should be sure the seller is compensated adequately so the seller is happy to stay on and provide the training.
The amount of time a seller should remain at the business to train the buyer, and the compensation, should be part of the offer the buyer makes. If the parties have discussed the training before the buyer makes an offer, then agreeing to the offer should not be unduly delayed by working out the training. And, the proposed training should be closer to what the seller will accept. At a minimum, the Letter of Intent or Purchase Agreement should state how long the seller will remain to provide training, compensation, and during what hours. The amount of off-site support – typically by phone or email – after the initial training should also be worked out. It is common for sellers to provide the off-site support at no charge if the amount requested is minimal. If the initial training is adequate, the off-site support needs should be minimal.
During the period of time between the signing of the offer and the closing, the parties should work out the details of the training. Creating the training agenda will make it more likely that the training will cover the information that the buyer needs to learn the business.
There are some things that a seller can do which will not only make training much easier and better, but also make the business more saleable. This is to systematize the business as much as possible, write the system procedures into a manual, and develop a formal training program for new employees. This is typically done in franchise businesses and is a reason that buyers find these businesses attractive.
Systemized processes make finding employees easier, their training better, and provide consistency to the products and services the business provides. McDonalds doesn’t look for people who know how to cook hamburgers, they look for people who can learn the McDonalds’ way of cooking them. The same practice can be applied to many of the processes in any business. Once the system is developed, it should be easy to write the steps in the process down and train people how to do them. Even though the buyer is managing the business and may not be “cooking the hamburgers”, the buyer should know what each of the important jobs in the business entails.
When I think of a cowboy, I think of a tough individual who doesn’t need anything or anybody to do his job. That may work on the range, but it doesn’t work well when you are buying or selling a business.
If you have ever bought or sold a house, you probably used a real estate agent to do so. Why? Because if you were selling a house, you knew that they could reach many more buyers. If you were buying a house, they had an inventory of houses to look at. Why was that the case? Because they were part of a group of real estate agents that co-broke the houses they sold. Co-brokering makes for a much more efficient market and allows an agent to give better service to buyers and sellers.
If you are selling a business, you should use a business broker that co-brokes because it exposes your business to many more potential buyers. Your business will be listed on all of the group members’ websites. In addition, you have many more business brokers who may find a buyer for your business. Your business should sell faster for more money by using a business broker who co-brokes. If you are buying, there are a few benefits also. The first is convenience. By working with one business broker, you can be introduced to many more businesses. Also, if the business broker represents you, you have someone helping you to evaluate the business.
Although co-brokering is prevalent in the sale of homes, it is not in the sale of businesses. In fact, the opposite is probably true. Nationally, there are probably many more business brokers who are not in a co-broke group than the number that are. Why? In my view, the primary reason is greed. They do not want to share their commission with another broker. But, if you asked, of course, they wouldn’t give you this reason because it is not a reason based on providing a better service to their customer. They are likely to say that they can reach most of the potential business buyers or that many of the other business brokers are not competent. Another reason they may give is the potential for vicarious liability. These reasons don’t hold up to scrutiny.
We are members of BBANE, the only group of business brokers in New England that are co-brokering business sales. There are 14 agencies with about 60 brokers in the group. We recently had a $2,500,000 business sale between two brokers in different states. The listing broker would not have known about the buyer without the participation of the selling broker in the other state. The business-for-sale websites have certainly expanded the number of buyers that see an advertisement for a specific business. But, it isn’t perfect; they don’t reach everyone. Many business sales are started when a buyer talks to a business broker about what type of business they are looking for and the business broker finds a business that fits. (Isn’t the same true in the sale of homes?)
Another rationale for not co-brokering is that the other business brokers are not competent. That’s simply not true. Just like lawyers, doctors, or any profession, there are better and worse business brokers, but I’m comfortable working with the other brokers in BBANE. Many of them have years of experience in the industry in which they have sold many businesses and have taken many classes to become better business brokers.
Vicarious liability is a concern that can be dealt with. If I’m selling your business and there is a co-broker involved who is working with the buyer, there is a potential for vicarious liability if that other broker represents the seller and me. Vicarious liability means that the seller or I could be liable for a misrepresentation that the other broker makes to the buyer. We avoid this by having the other broker represent the buyer, not the seller or me, and our Non-Disclosure Agreement clearly states this relationship.
When you need a business broker, you need one that works with other brokers. Not a cowboy who thinks he can do it all by himself.
Buying a business is different than buying a used car. If you act as though it’s the same thing and treat the owner of the business like a used car salesman, you will suffer. That can result in the owner deciding not to sell to you, giving you a worse deal, or not being as helpful to you as he could be after you do buy the business. Here are some important things to keep in mind when you meet with the owner.
You want the owner’s cooperation in your purchase. Almost all owners are proud of their business and want it to continue. They want you to succeed and they can be very helpful to you, the buyer after you buy the business. The owner has important relationships with customers, employees, and vendors that you want to have transferred to you. The owner probably knows the business better than any employee. You may need some seller financing. The owner can be more, or less, helpful in the transition. I’ve seen situations where a buyer leaves such a poor impression with the owner that they refuse to sell the business to them. Here are some tips on how to do your investigation of the business while not offending the owner.
Tread carefully in your first meeting with the owner. Start out by developing rapport. Introduce yourself to the owner. Ask about her background, how she got into the business, why she wants to sell the business now. Ask to take a tour of the business. Owners like to show off their business. During the tour, the owner will be explaining the business and it gives you something to talk about.
Use the sandwich approach. You want to make a good first impression and leave a good impression. Ask your tougher questions in the middle of the meeting. But, be careful how you phrase them. Don’t make it sound like you think the owner is a liar. Ask for “explanations” of things you question. In many cases, the owner may not know the financials well. The business broker may be better at getting you some answers on financial questions.
A buyer-seller meeting is not the place to do your due diligence. While you may do some investigation of the business and its financials before making the offer, to be sure you want to buy the business, due diligence is a normal contingency. This is a period of time during which you review the documentation that supports the financials and investigate other issues that could influence your decision to buy the business. Due diligence is time-consuming to a business owner and they don’t want to take the time to prepare the information until they have a deal under agreement.
Don’t wear out your welcome. You want the first meeting to move along so that everyone doesn’t leave worn out and thinking of it as a negative experience. The first meeting typically takes about an hour to an hour and a half. If you have a long list of questions and you can see that the owner gives long-winded answers which will make the meeting last much longer than two hours, you may want to hold off some questions until the next meeting or ask them of the business broker later.
Find out what the owner does in the business. This is one of the most important pieces of information you need to know. You are going to replace the owner. You need to figure out how you can do so and do it in the way you want. For example, if the owner is working 80 hours a week as the general manager and salesperson, you may need to find someone for one of these jobs if you don’t have the skills to do both or don’t want to work 80 hours a week.
Don’t discuss the price at this meeting. The owner hired the business broker to handle the sale. Talk to the business broker about your offer at another time. Be careful about making a low-ball offer if the business is priced reasonably. This can offend the owner or cause them to believe you are not likely to buy their business. In either case, they may not want to deal with you further.
If you are looking at a good business, it’s likely that there are several other buyers looking at it also. It is also likely the owner knows they have a good business to sell. Keep these tips in mind when you have that first buyer-seller meeting and you will get off to a good start.
Have you ever wondered what your website is worth? Have you ever thought about the changes you can make to your website to increase its value? If you own a website, chances are you have thought about selling your website or you are interested learning how much your website is worth.
Website owners put countless hours into developing a website, creating quality SEO, increasing products and growing sales. However, when it comes time to sell the website, as the saying goes, “if you build it, they will come,” right? Wrong! Website owners may have a difficult time selling their website if it is not running as efficiently as it could be.
Like many brick and mortar businesses, increasing traffic to your store or website can be challenging. For a website, having good SEO and an effective pay per click (PPC) strategy can increase traffic rather quickly. As traffic increases, so should sales and profits. Generally, many website owners respond to increasing sales and profits by adding more structure and staff rather than automating the system.
Websites, like many other businesses, are sold on a multiple of Sellers Discretionary Earnings (SDE) or Cash Flow. Typically, these multiples range from 2x – 4x earnings or cash flow. A website owner can increase their multiplier by:
- Having a clean automated system that operates on a small staff.
- Locate vendors that are willing to drop ship product for you, thereby limiting or eliminating inventory.
- Focus on automating the website so it can be run from a laptop computer and cell phone anywhere in the world.
- Having a clean set of financials that can be verified by a buyer.
The first 3 key items add up to 1 main selling feature – being relocatable. Having a website that can be easily relocated will increase the number of potential buyers who can purchase your website. More buyers mean selling the internet business faster and for a higher amount.
The last item directly relates to being financeable. Selling a website is unlike selling a brick and mortar business. There are very few tangible assets that will provide collateral for a bank loan. To find bank financing, a buyer will need to look for a lender that evaluates loans based on cash flow rather than collateral. With little to no collateral, a bank will be looking for squeaky clean financials in order to finance the deal.
To learn more about selling your website or for a free website valuation, contact me, Gino DiGiallonardo, at email@example.com or 508-922-7036.
The first thing that you need to know is that you have a lot of competition in your search for a business to buy. If the extent of your search for a business to buy is looking at Internet ads, it’s likely that when you find the right business, you won’t be successful buying it. That’s because other buyers will be more prepared to take the steps needed to buy that business. The first piece of advice I would give you is to be prepared to take action when you find the right business to buy. How can you be prepared? Here are my suggestions:
- Set a goal to buy a business this year. Break down what you need to do and use the SMART goal approach to increase the chances of success.
- Decide what type of business you want to buy. What industry is it in? What size is the business? Are you looking for a distressed business or one that is doing well? How much income does the business need to generate? How much can you afford to spend on a business? What skills will you bring to the business and what skills do the people in it need to have? Give these, and similar, questions your thought so you will know the right business for you when it becomes available.
- Get to know business brokers. Many business brokers will send an
email to their buyer database when a new business comes on the market. Be sure you are getting those emails. Meet with the business broker so they know you are serious and will remember you when a business that meets your criteria comes on the market.
- Look at businesses that are for sale. This will give you experience in evaluating a business and owners. When the right one comes along, you will have other businesses to compare it to. You will also show the business broker that you are serious about finding a business.
- Learn how to value a business. Most buyers of smaller businesses make offers based on the asking price. Asking prices may be too high or too low. Owners may be willing to take much less, particularly when you can show them that their business is over-priced. Generally, profitable businesses are sold for much more than just the asset value. Learn about the income and market approaches to business valuation.
- Talk to lenders so you know how to get a loan to buy a business. Lenders will have types of businesses they like or don’t like. Most of our business sales are financed with SBA 7A loans. Generally, the lenders are what we call “cash flow” lenders. The cash flow of the business, not the collateral, justifies the price, and will provide enough money to pay back the loan and provide an owner income. Using a collateral based lender can be problematic because, as written above, most profitable businesses sell for more than their asset value. Where is the rest of the collateral coming from? Your assets.
- Find a good lawyer and accountant to advise you. Be sure the lawyer is experienced at business law and business sale transactions. An accountant can be more useful if they have experience in the industry you want to buy a business in.
If you only do these 7 things now, it will put you well ahead of most buyers looking for a business to buy. It will also make you more prepared to move promptly when you do find the right business to buy.
Marijo McCarthy is a principal in the firm of Widett and McCarthy, located in Newton, Massachusetts. Marijo specializes in providing business contract and other legal advice to smaller businesses. Marijo publishes a newsletter and this blog is from her recent newsletter.
My last newsletter focused on the confidentiality protection of non-disclosure agreements. This, in turn, raised questions regarding "non-competes."
Does that kind of protection belong in the same agreement? Who should sign it? Are they just for my employees? If I am selling my business, I know I will be asked to sign one, but what about a request from a client … as a business owner, should I agree to that onerous restriction? And, really, what is their value anyway?
Three years ago, I shared with you the then, current thinking on Beacon Hill as to the Massachusetts Legislature's take on non-competes. Today, and while there is growing support in many areas for some form of restriction of non-competes, there is, as of yet, no uniform agreement on what those restrictions should look like (other than less restriction on fewer employees for a much shorter period of time).
Here are my thoughts, if you choose to use a non-compete agreement with a key employee:
Be sure you have protected your confidential information.
That means more than just stating that protection in an NDA. Rather, you need to have a clear, written policy in your company as to what constitutes confidential information, how it is protected and to whom access is given. Absent that, it is highly unlikely that a Court will grant you the protection you seek if there is a breach by an employee.
Be sure it is as specific and narrow as possible.
Be specific about your business and about the information that is protected. For instance, if you attempt to claim that the names of your clients are to be protected, but you publish those same names on your web site for marketing purposes, it is highly unlikely that a Court will protect those client names. The broader and more vague the non-compete agreement, the less likely that a Court will find in your favor, should you ever have to enforce it.
Be aware of the need for and the cost of enforcing it.
If a key employee leaves, goes to a competitor and shares your confidential information, you either must enforce the non-compete agreement [spending a lot of money to do so] or you need to ignore the violation [in which case, the value of that non-compete with future employees will have just plummeted].
I have often counseled clients to think long and hard before asking a new employee to sign a non-compete for this very reason. Failure to enforce due to the expense of doing so, renders those agreements practically valueless for that employee and for all those who follow.
What then, can you do to protect your business from a constantly moving workforce? Have you considered utilizing a non-solicit agreement? A well-drafted non-solicit agreement…
… restricts the departing key employee from making direct or indirect contact with your company's clients or fellow employees, to encourage a client or colleague from leaving your company and joining the company to which the departed employee has gone.
… is often easier for a Court to support and enforce. The former employee and his new employer may both become targets if one encouraged or allowed the violation of an enforceable non-solicit agreement. So, you have deep pockets to pursue and perhaps more incentive to spend the money to do so.
… is easier for an employee [and his potential new employer] to understand. It provides a time and geographic framework which is [or should be] clear and unambiguous, something which makes violations easier to spot and enforce.
Bottom line? There are practical and legally-enforceable ways to protect your company's confidential information, provided that you invest the time and resources to do so. And, given the consequences of ignoring this issue, it is worth consideration, discussion with counsel and keeping a sharp eye on Beacon Hill!
If you are thinking of selling your business, there are a number of things you should be doing now.
If you want to sell your business within the next twelve months, you should contact a business broker or M & A consultant to start the process now. It will take time to prepare the materials to market your business. It can take a year to sell a business. It will increase the selling price of your business if you don’t have to rush the sale
Regardless of when you want to sell your business, there are some things you can do to help it sell faster for more money and increase the likelihood that the buyer will get financing to buy it.
- Be sure you have good financial records. This consists of income statements and balance sheets that are accurate and up-to-date. Be sure all of your income and expenses are recorded on the books. Be sure you have the documentation to support the expenses; this usually means receipts. If you have a significant inventory, be sure you are taking a physical inventory at least at the end of each fiscal year.
- Clean up your business. A clean and neat physical business makes an impression – on customers and potential buyers. In addition to making your business look good, it sends the message that this is a well-run business.
- Be sure your business records are in order. File and pay all state and federal corporate tax returns. If you are a C corporation, you may want to switch to an S corporation to avoid double taxation on the sale. If you have the time, put together the information a buyer will need for their due diligence. One of the biggest delays in completing a sale is the time it takes a seller to gather the information for the due diligence. Your business broker or M & A consultant can give you a list of what a buyer will normally look for.
- Make your business less dependent on you. Hire good people and delegate to them. A potential buyer will always look at whether they can replace you. The more easily it is to do so, the more attractive your business will be to the buyer.
- Get rid of unnecessary people and expenses and replace negative and poor employees. You want to show good profits to a prospective buyer. The selling price of your business is based on your profits – not how much a buyer can add to the profits. I would add one caveat. If your business is providing personal benefits, such as a company car, that may not be necessary for the business, you don’t have to get rid of them. Just be sure a buyer can easily stop them so that they can see that if they choose to end these expenses, they should be considered as part of the income they would receive from the business.
- Keep up your marketing and sales efforts. Whether your sales and profits are growing or declining will have a big impact on how salable the business is and the price it will sell for.
- Make sure your equipment is up-to-date and in good working order. But, don’t invest a lot of money in new equipment that will not pay back the investment quickly. Don’t obligate the business to any long term equipment leases. A buyer may not want to use the same equipment and will want you to pay off the lease.
- Be sure you have a competent accountant and business attorney. Lawyers specialize; be sure your attorney is a business attorney. When you sell the business, be sure the attorney who represents you is knowledgeable and experienced in doing business transaction work. Not all business attorneys are.
You’ve worked hard to build your business and its sale is likely to be your best opportunity to get the most money for another venture or retirement. Be sure you take the steps to prepare the business for sale and hire the best advisors to represent you when you sell it.
If you are a salesperson with experience selling to businesses and are looking for a good opportunity, you should become a business broker. Here’s why:
- You can make a good income.
- You have flexible hours.
- You are in a growing market.
- Your competition is limited.
Business Brokerage Press recently came out with their 2013 annual survey of the industry. According to their survey, when asked “How much should an industry veteran earn a year in commissions?” the average answer was $156,000, with the most frequent answer being $100,000. When asked how much a new business broker should be able to earn in their first year, the average answer was $47,000 with the most frequent answer being $50,000. Not much difference. The last numbers point out the reason that people may not become business brokers – it takes time to make money. When asked, “How many months did it take for your newest broker/agent to have a closing or sale?” The average answer was 7.8 months. That’s because of the two step sales process. First, you need to list businesses for sale and then you need to sell them. After the business is under agreement, it typically takes two or three months to close the sale. Not surprisingly, the average age of business brokers tends to be older. Again, according to the BBP survey, the average age is 52. One reason is probably because someone this age has saved up enough money to afford to wait out the time when they start making commissions.
Another benefit of being a business broker is the flexible hours. With a laptop, a cell phone, and an Internet connection, a business broker can work from almost anywhere. We want a new broker to work out of our office most of the time so they get more guidance. But, if they need to work from home for personal reasons, they can do so.
I’m the owner of a business brokerage agency with two other business brokers. Both of them are in their thirties. We do a few things differently than most agencies to get a new broker going. First, we have a lead generation program that brings in seller leads and we give the leads to them. Getting leads is one of the hardest things to get when you are starting out. The second thing we do is give a new business broker a draw. It’s less than they could make if they just went out to get the best paying sales job they could find, but it gives them some income while they are getting started. We are also a member of BBANE, a group of New England business brokers that co-broke. This gives the new business broker businesses to sell. These programs are working.
The future for business brokerage is very good. The baby boomer generation is just beginning to retire and, for many years, retiring boomers will be a steady source of potential clients. At the same time, the number of business brokers was recently reduced by the recession. My personal opinion is that the number has not returned to the pre-recession level.
What does it take to be a successful business broker? The first thing you need is sales ability. Not just general sales ability, I look for business to business sales experience and skill. You have to be willing to make cold calls. You need to be persistent and followup. You need to be able to relate to business owners on a peer level. You also need to have some attention to detail. The sale of a business involves a lot of items and you need to stay on top of them. You also need to understand the basic financial statements of a business – the income statement and balance sheet. This can be learned. This is not a complete list, but it covers the basics.
If you are reading this, live in Eastern Massachusetts, and are interested in becoming a business broker, please contact me.
A liquor store can be a profitable business to buy but, like any other business, requires good management, organization and people skills to operate. You should be able to manage employees and direct tasks to maximize profitability for your store. If you plan to work on the floor, good customer service skills are essential. The more products you can recommend to customers the better your store will do and you will ensure repeat customers for many years to come. In Massachusetts you also must be a citizen of the United States and a resident of Massachusetts to get a new liquor license or transfer an existing one. Good credit is also important because you will need to establish credit with your vendors to purchase products.
How Much Do Liquor Stores Sell For?
How much you pay for a liquor store will vary based on the geographical area where you want to buy the store as well as individual business factors such as store margins and rent. For example in Massachusetts, where most towns do not have any licenses available, you can expect to pay around 50% of sales or 3-4 times seller’s income for a liquor store. Stores in more desirable towns may sell for more, as well as stores that have updated interiors, high product margins and reasonable rent. To get a bank loan to buy a liquor store you will need 20% of the total purchase price (including inventory) liquid for a down payment and will need to have good credit. You should also make sure to have some money left for lawyer and accountant fees and working capital. Banks will also want to see some related experience – if it is not directly in owning or working in a liquor store, it can be general business experience, retail experience or related education such as a business degree or MBA.
How Will You Run the Business?
Liquor stores require either a full-time working owner or an owner who can put a trusted full-time manager into place. A working owner can expect to work about 50+ hours a week and will be involved in the ordering, inventory management, employee management, bills/financials and other management activities for the business. Liquor stores are difficult to run absentee because there is a lot of cash involved in the business and you need to make sure that it goes into the right hands – yours – and not your employees. Correctly managing the inventory is extremely important in running a successful liquor store and typically requires a hands-on owner.
What is Your Exit Strategy?
Yes, even before you buy a liquor store or license you should have an exit strategy. It is important to plan the future of the store so that you can make smart business decisions. You may decide to undertake renovations if you plan to own the liquor store for a while and it will increase business, or hold off if you see the liquor store as a shorter term investment. Keeping accurate and detailed financial records will be important when you sell the liquor store. Accurate financial records are essential when selling so that a buyer can easily verify your figures, get a bank loan for the business and pay you in full at the closing. You should keep yearly invoices and daily register receipts and also consider putting in a POS system which will help you run the business and allow you to download detailed reports. Putting the right procedures in place now will ensure a smooth transition when you are ready to sell the liquor store.