While it’s true that fewer business-for-sale deals are being made during the recession, it’s not because potential buyers aren’t looking. Across the country, there is plenty of buy interest in businesses, but a shortage of financing is keeping many deals from getting off the ground. As a result, sellers willing to finance at least part of a business sale are finding it much easier to get their businesses sold.
By offering seller financing, a business seller allows a buyer to make a down payment, agreeing to carry a note for the remainder of the purchase price. This way, the buyer only has to come up with a portion of the total price up front and can then pay off the remainder over time.
A seller’s willingness to finance a portion of a business sale has always been a strong selling point for potential buyers, but in recent months it has become essential to many deals. With most business buyers unable to access the full amount of a business price from lending institutions, today’s sellers are faced with the decision to either lower asking prices or work with buyers to overcome sale barriers.
While seller financing could be the key in attracting buyers and taking a sale to completion, sellers should be aware that it comes with risks. Here’s what sellers need to know if they are considering “being the bank.”
Be Aware of the Risk
There’s no doubt that seller financing is an important part of today’s business sales, but the fact remains that it’s not the right approach for every seller. Before making the decision, sellers should evaluate owner-financing as a business investment that undoubtedly comes with risk. When providing financing, a seller stays tied to the business long after the sale has been made, counting on the new owner to turn profit and pay back the principal with interest. Unfortunately, success under the new owner is not guaranteed, and there’s a chance the seller will face the loss of interest income and extra costs associated with collecting debt. For this reason, sellers should make sure they are confident with the promise of the business and the prospective new owner before financing a sale.
Require a Down Payment
Even after they’ve made the decision to offer financing, sellers shouldn’t waive a buyer’s significant down payment on the business. This way, they can minimize their risk by distributing a larger portion of it to buyers. It’s usually in a seller’s best interest to finance no more than one-third to two-thirds of the sale price, letting the rest fall on the buyer. In certain cases where a seller has a vested interest - such as selling to a family member - financing more than this is acceptable, but as the amount increases, so does the risk.
Use Financing to Your Advantage
Many sellers view self-financing as a last-ditch attempt to sell a business, but it can actually offer benefits that cash sales don’t. Sellers can typically sell their businesses for 15 percent more by advertising a willingness to provide financing. Sellers can also use financing to multiply the principal value of a business through buyers’ future interest payments. Most financed sales can bring in an average of 8 to 10 percent interest over a 5 to 7 year note.
Get Outside Help When Necessary
The idea of owner-financing might come with a do-it-yourself mindset, but trying to go it alone can lead to complications during a transaction. A loan between a buyer and seller comes with a great deal of structures and variations that require input from legal and financial professionals to properly secure loan terms, collateral and adequate insurance coverage. Using these professionals when appropriate, can help sellers avoid headaches and sell their businesses much more smoothly.
Don't Be Pressured
No matter how important seller financing has become in today’s business-for-sale marketplace, sellers who have done their homework and still aren’t comfortable with the idea of offering it simply shouldn’t do so. It’s not rare for potential business buyers to try to strong-arm sellers into offering financing, but that’s never a legitimate reason for sellers to go ahead with it. There’s always an underlying reason why a seller doesn’t feel comfortable with owner-financing, and going against this gut feeling could lead to regret. Owners on the fence can benefit greatly from arranging a meeting with someone who sold a business using seller financing and can speak from experience. Acting as the bank can allow owners to sell faster and reap financial benefits, but in the end every seller should step back and assess their individual situation before making the leap into seller financing.
Showing posts with label Mike Handelsman. Show all posts
Showing posts with label Mike Handelsman. Show all posts
Monday, December 14, 2009
Thursday, December 10, 2009
Is Now the Right Time to Buy a Business?
Over the past year, historically high levels of unemployment have left record numbers of highly skilled individuals looking for work. Many are asking themselves if now could be the right time to pursue their dream of buying a business and becoming their own boss.
With corporate jobs less secure and available now than perhaps at any time in recent history, buying a small business could be an excellent way for many of these unemployed individuals to take control of their own destiny and success. Tough economic times have created an abundance of distressed companies in the business-for-sale marketplace, meaning business buyers currently have access to great bargains. However, anyone thinking of becoming a business owner must undertake considerable research and self-evaluation before taking steps to turn the idea of buying into a reality.
Anyone thinking of purchasing a business should keep the following points in mind before going further:
Analyze Your Strengths, Weaknesses and Lifestyle Needs
While the thought of running a business is exciting and causes many would-be entrepreneurs to want to buy as quickly as possible, it's essential to properly evaluate what type of business suits you. When buyers choose the wrong businesses, their entrepreneurial dreams can quickly turn into stressful burdens.
For this reason, you should do a careful analysis of your strengths, weaknesses and lifestyle needs before diving into the buying process. Here are five critical questions to ask yourself before deciding what type of business is right for you, or if you are even cut out to be a business owner:
• What are my strengths and skills? Business buyers should also consider their personal strengths before looking for businesses to purchase. Maybe you're a skilled writer and communicator, excel at teaching concepts to others or have a knack for technology. If you buy a business that allows you to put your strengths to work, it will have a much better chance of succeeding.
• Are there any particular times I absolutely can't or don't want to work? If you buy a business that requires a schedule that will complicate your life, the business you thought would make life better will likely do just the opposite. If you're considering a specific type of business, talk with current owners of similar businesses to get a sense of what their schedules are like. Keep in mind that owning your own business does not necessarily mean more free time; it can mean just the opposite. Be prepared to handle the long hours that often come with running a business.
• Am I comfortable managing people? Just because you want to be a business owner doesn't mean you are--or need to be--a "grade A" manager of people. However, if you buy a business that won't involve a manager on staff to do it for you, you'd better make sure you're comfortable with the situation before committing. For example, should a situation occur that is hurting the success of the business, would you feel comfortable confronting employees who were at fault, or would you be more likely to pretend it's not happening?
• What size business do I want? Small businesses can range from zero to 100 employees, which means that there's no cut-and-dried small-business owner experience. An owner of a five-person company will likely have a very different role and lifestyle than an owner of a 50-person company.
Understand the Market
It's not uncommon for new business buyers to enter into the buying process without a solid understanding of the small-business market and what they should look for in an investment. These buyers are only throwing nails in the road by being unprepared and are positioning themselves for hard times ahead.
The moment you identify a business that grabs your interest, you should begin investigating the business and everything surrounding it--including the industry as a whole, competition, marketing efforts, suppliers and so on. It's important to do this early so that once you contact the seller, you'll know exactly what to ask.
You should know what a business in your location and industry of interest typically costs. Websites such as BizBuySell.com offer tools to enable you to conduct quick and easy business valuations by benchmarking the business you want to buy against businesses in the same industry. Whether you're interested in buying a casual pizza restaurant in Chicago or an auto repair shop in San Francisco, these resources will give you some guidelines for what you can and should expect from a pricing standpoint.
Finally, you should make a point to talk with existing business owners--ideally in the industry you'd like to enter--who can speak from experience and offer invaluable advice on how to approach a purchase for the best results.
While some business buyers feel equipped to go through this process alone, others opt for the help of a professional business broker. If you don't feel comfortable taking a do-it-yourself approach, a business broker can help make sure you cover all bases and avoid getting burned in a transaction.
Run the Numbers
Before taking serious steps to buy a business, it's important to know exactly what you can afford and how much income you'll need every month to live comfortably. Someone who has $500,000 in the bank is going to experience a buying scenario much different from someone who has $20,000.
If you have significant cash reserves you're willing to put toward financing the business, you won't have to worry as much about securing financing for the business through a bank. If don't have reserves, pursuing businesses for sale with a seller-financing option is probably ideal. Since bank loans are so hard to come by, seller-financed opportunities are most likely to pan out.
Seller financing--when a business seller agrees to finance part of the sale, with the buyer agreeing to pay the seller back with interest over time--has become a crucial element of business-for-sale transactions during these tough times. In many cases, seller financing can also be more advantageous to buyers because it helps ensure that sellers will remain vested in the success of the business after you take over. Your success is directly related to your ability to pay the seller back.
Narrow Down and Negotiate
If you've done your initial due diligence and have determined that buying a business is the right decision for you, it's time to narrow your options. Pinpoint the top three or so businesses for sale that most appeal to you and carefully weigh the pros and cons of each. Is one located more conveniently to where you live? Does one seem to have a longer track record of success and a more established customer base? This will make it much easier to come to an informed, justified decision on which business you should pursue.
After you correspond with the business seller and get serious about going through with a transaction, you'll enter a negotiation process. Since the down economy has created a distressed selling situation for many sellers, the time is right for you to be able to negotiate a great deal. This is when it pays to have a comprehensive understanding of business valuations and the knowledge to ensure that you arrive at a number that's fair and that you're comfortable with.
Once you reach a pricing agreement with the seller and progress to the stage of an accepted offer, it's time for more due diligence. The period of financial due diligence typically lasts from 10 to 30 days and allows you access to all of the company's books and records. Review them carefully, and if you're working with a broker, make sure that broker clearly explain to you the implications of the information.
It's a buyer's market, so if you approach your entrepreneurial dream with the right amount of consideration and research, buying a business could prove a realistic alternative to the job search. You just might find that it's time to leave your traditional job description behind and become your own boss.
With corporate jobs less secure and available now than perhaps at any time in recent history, buying a small business could be an excellent way for many of these unemployed individuals to take control of their own destiny and success. Tough economic times have created an abundance of distressed companies in the business-for-sale marketplace, meaning business buyers currently have access to great bargains. However, anyone thinking of becoming a business owner must undertake considerable research and self-evaluation before taking steps to turn the idea of buying into a reality.
Anyone thinking of purchasing a business should keep the following points in mind before going further:
Analyze Your Strengths, Weaknesses and Lifestyle Needs
While the thought of running a business is exciting and causes many would-be entrepreneurs to want to buy as quickly as possible, it's essential to properly evaluate what type of business suits you. When buyers choose the wrong businesses, their entrepreneurial dreams can quickly turn into stressful burdens.
For this reason, you should do a careful analysis of your strengths, weaknesses and lifestyle needs before diving into the buying process. Here are five critical questions to ask yourself before deciding what type of business is right for you, or if you are even cut out to be a business owner:
• What are my strengths and skills? Business buyers should also consider their personal strengths before looking for businesses to purchase. Maybe you're a skilled writer and communicator, excel at teaching concepts to others or have a knack for technology. If you buy a business that allows you to put your strengths to work, it will have a much better chance of succeeding.
• Are there any particular times I absolutely can't or don't want to work? If you buy a business that requires a schedule that will complicate your life, the business you thought would make life better will likely do just the opposite. If you're considering a specific type of business, talk with current owners of similar businesses to get a sense of what their schedules are like. Keep in mind that owning your own business does not necessarily mean more free time; it can mean just the opposite. Be prepared to handle the long hours that often come with running a business.
• Am I comfortable managing people? Just because you want to be a business owner doesn't mean you are--or need to be--a "grade A" manager of people. However, if you buy a business that won't involve a manager on staff to do it for you, you'd better make sure you're comfortable with the situation before committing. For example, should a situation occur that is hurting the success of the business, would you feel comfortable confronting employees who were at fault, or would you be more likely to pretend it's not happening?
• What size business do I want? Small businesses can range from zero to 100 employees, which means that there's no cut-and-dried small-business owner experience. An owner of a five-person company will likely have a very different role and lifestyle than an owner of a 50-person company.
Understand the Market
It's not uncommon for new business buyers to enter into the buying process without a solid understanding of the small-business market and what they should look for in an investment. These buyers are only throwing nails in the road by being unprepared and are positioning themselves for hard times ahead.
The moment you identify a business that grabs your interest, you should begin investigating the business and everything surrounding it--including the industry as a whole, competition, marketing efforts, suppliers and so on. It's important to do this early so that once you contact the seller, you'll know exactly what to ask.
You should know what a business in your location and industry of interest typically costs. Websites such as BizBuySell.com offer tools to enable you to conduct quick and easy business valuations by benchmarking the business you want to buy against businesses in the same industry. Whether you're interested in buying a casual pizza restaurant in Chicago or an auto repair shop in San Francisco, these resources will give you some guidelines for what you can and should expect from a pricing standpoint.
Finally, you should make a point to talk with existing business owners--ideally in the industry you'd like to enter--who can speak from experience and offer invaluable advice on how to approach a purchase for the best results.
While some business buyers feel equipped to go through this process alone, others opt for the help of a professional business broker. If you don't feel comfortable taking a do-it-yourself approach, a business broker can help make sure you cover all bases and avoid getting burned in a transaction.
Run the Numbers
Before taking serious steps to buy a business, it's important to know exactly what you can afford and how much income you'll need every month to live comfortably. Someone who has $500,000 in the bank is going to experience a buying scenario much different from someone who has $20,000.
If you have significant cash reserves you're willing to put toward financing the business, you won't have to worry as much about securing financing for the business through a bank. If don't have reserves, pursuing businesses for sale with a seller-financing option is probably ideal. Since bank loans are so hard to come by, seller-financed opportunities are most likely to pan out.
Seller financing--when a business seller agrees to finance part of the sale, with the buyer agreeing to pay the seller back with interest over time--has become a crucial element of business-for-sale transactions during these tough times. In many cases, seller financing can also be more advantageous to buyers because it helps ensure that sellers will remain vested in the success of the business after you take over. Your success is directly related to your ability to pay the seller back.
Narrow Down and Negotiate
If you've done your initial due diligence and have determined that buying a business is the right decision for you, it's time to narrow your options. Pinpoint the top three or so businesses for sale that most appeal to you and carefully weigh the pros and cons of each. Is one located more conveniently to where you live? Does one seem to have a longer track record of success and a more established customer base? This will make it much easier to come to an informed, justified decision on which business you should pursue.
After you correspond with the business seller and get serious about going through with a transaction, you'll enter a negotiation process. Since the down economy has created a distressed selling situation for many sellers, the time is right for you to be able to negotiate a great deal. This is when it pays to have a comprehensive understanding of business valuations and the knowledge to ensure that you arrive at a number that's fair and that you're comfortable with.
Once you reach a pricing agreement with the seller and progress to the stage of an accepted offer, it's time for more due diligence. The period of financial due diligence typically lasts from 10 to 30 days and allows you access to all of the company's books and records. Review them carefully, and if you're working with a broker, make sure that broker clearly explain to you the implications of the information.
It's a buyer's market, so if you approach your entrepreneurial dream with the right amount of consideration and research, buying a business could prove a realistic alternative to the job search. You just might find that it's time to leave your traditional job description behind and become your own boss.
Thursday, August 13, 2009
Business Sales Decline in Tough Economy
In the midst of possibly the worst economic downturn of our time, it’s safe to say that small business owners across the country are looking for answers on how tough times are affecting the value of their businesses. Should owners hold onto their companies until conditions improve or list them for sale now?
Business owners struggling with this decision need to consider what is happening specifically in the small business economy. A report by BizBuySell.com tracking the health of small business revealed -- as one might expect -- a decline in business-for-sale transactions and valuations. Additionally, the number of closed transactions reported in the first quarter decreased by 36 percent as compared to the same time period in 2008.
The value metrics for businesses are also dropping. By dividing the selling price of a business by its annual revenue or cash flow, we can determine how small businesses are faring in the current economic environment. Revenue multiples for closed transactions dropped 5.5 percent to .69 in the first quarter of 2009, while cash flow multiples fell 3.8 percent to 2.69. Finally, the median business sale price for closed transactions decreased 17.3 percent to $165,500. It makes sense that valuation multiples are going down. Buyers are hesitant to pay typical asking prices for a business because of less certainty that the business will bring in adequate revenues and cash flows in the future.
Buyers are also facing difficulty accessing the capital necessary for business purchases. Traditional avenues of securing capital such as SBA-backed loans have become more limited, and with recent stock market declines, fewer buyers have the funds necessary to buy without a loan. This means fewer buyers are able to bid on most businesses, creating less upward pricing pressure.
That is not to say that buyers aren’t out there. Economic conditions have made it more difficult to close deals; however, business brokers are reporting a record number of buyer inquiries as a result of the huge number of corporate layoffs over the last six to nine months. Slow closing deals notwithstanding, people are looking at entrepreneurship as an alternative to the traditional job search. Selling prices are expected to continue to decline, which could mean that in the near future, credit will slowly become more available to aspiring buyers. This should improve market conditions for small business transactions over the next few quarters.
Business owners struggling with this decision need to consider what is happening specifically in the small business economy. A report by BizBuySell.com tracking the health of small business revealed -- as one might expect -- a decline in business-for-sale transactions and valuations. Additionally, the number of closed transactions reported in the first quarter decreased by 36 percent as compared to the same time period in 2008.
The value metrics for businesses are also dropping. By dividing the selling price of a business by its annual revenue or cash flow, we can determine how small businesses are faring in the current economic environment. Revenue multiples for closed transactions dropped 5.5 percent to .69 in the first quarter of 2009, while cash flow multiples fell 3.8 percent to 2.69. Finally, the median business sale price for closed transactions decreased 17.3 percent to $165,500. It makes sense that valuation multiples are going down. Buyers are hesitant to pay typical asking prices for a business because of less certainty that the business will bring in adequate revenues and cash flows in the future.
Buyers are also facing difficulty accessing the capital necessary for business purchases. Traditional avenues of securing capital such as SBA-backed loans have become more limited, and with recent stock market declines, fewer buyers have the funds necessary to buy without a loan. This means fewer buyers are able to bid on most businesses, creating less upward pricing pressure.
That is not to say that buyers aren’t out there. Economic conditions have made it more difficult to close deals; however, business brokers are reporting a record number of buyer inquiries as a result of the huge number of corporate layoffs over the last six to nine months. Slow closing deals notwithstanding, people are looking at entrepreneurship as an alternative to the traditional job search. Selling prices are expected to continue to decline, which could mean that in the near future, credit will slowly become more available to aspiring buyers. This should improve market conditions for small business transactions over the next few quarters.
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