How, Exactly, Do You Buy a Business?

[Seahawk]

Just a few things to add to the already excellent advice:

- Really take a deep dive with a CPA on his taxes...and compare them to his books. Not that he would cheat, etc., but you need to understand how his accountant set up depreciation schedules, what he wrote off for business expenses, etc. so you can get a true sense of your operating costs and financial liabilities.

- Business Plan. While you're waiting for the SBA, write a realistic business plan. The mental exercise is a perfect way to begin to see the risks and rewards from a different perspective.

- Cash flow is the king, the queen and the royal court. Really understand the administrative lag times for getting paid, reimbursed, etc. on sales as well as on purchases and inventory.

- Employees? Key.

- Other costs not related to the business: Will you lose your health coverage if you have to leave your current job to make the business a go? 401K and matching in your current job? Commute differences, etc. Again, in your business plan really wring out the money...cash flow is the shoal on which most businesses wreck.

I hope I didn't offend by being too simplistic in my post, but I've owned my own firm for over two years now and was glad I got the same advice.

I wish you the absolute best in this endeavor.

[Don Plumley]

Lots of good info here. My two pence:

Just as good fences make for good neighbors, a clear term sheet (and then a good contract) makes for a good deal. It's easy to get lost in a multi-page purchase agreement, so I recommend you list the key things that are important to you in a transaction. Then when you review the final contract with your attorney, ask them to validate that those provisions are covered.

Business valuation is often overcomplicated. The value of a business is simple: it's what a willing buyer and a willing seller can agree upon. There are books of valuation practices, valuation departments in CPA and investment banking firms, even the practice of a "fairness (valuation) opinion" to validate that the value of the business was legitimate (often required by public boards in a transaction). While rule of thumb valuation metrics are useful in estimating the size of the deal, once you get into diligence, all bets are off.

As you have opined, the benefit of purchasing an existing business is the list of customers and reputation associated with the firm - classic "goodwill"; Assets are easy to value and easy to purchase/replicate on the open market. So you are paying for the cashflow that you are banking will come from that goodwill. Therefore protecting the value of the goodwill is the most important part of your term sheet.

A retiring owner should become your greatest ally. That's one of the benefits of a owner-carried loan is their motivation is to keep the sold business successful. They can say good things about you in the press, can continue to appear at public events, etc. Make them an ambassador to your business.

These are things your term sheet covers, aside from the boring price, financing, default, etc. provisions - how do you enlist the seller to protect the value of the goodwill that you are purchasing.

Deal structure and diligence are the final steps that often get clouded in the ambrosia of closing a deal. Are you purchasing assets or the legal entity. Both have tax and risk implications. What are you looking for during your due diligence? Not just asset impairments, but environmental, tax, city (think zoning, future restrictions), etc.

Happy to answer any questions.

Good luck - it sounds fantastic!

[Don Plumley]

Originally Posted by Seahawk

- Really take a deep dive with a CPA on his taxes...and compare them to his books. Not that he would cheat, etc., but you need to understand how his accountant set up depreciation schedules, what he wrote off for business expenses, etc. so you can get a true sense of your operating costs and financial liabilities.

- Business Plan. While you're waiting for the SBA, write a realistic business plan. The mental exercise is a perfect way to begin to see the risks and rewards from a different perspective.

- Cash flow is the king, the queen and the royal court. Really understand the administrative lag times for getting paid, reimbursed, etc. on sales as well as on purchases and inventory.

- Employees? Key.

- Other costs not related to the business: Will you lose your health coverage if you have to leave your current job to make the business a go? 401K and matching in your current job? Commute differences, etc. Again, in your business plan really wring out the money...cash flow is the shoal on which most businesses wreck.

Great, sage advice.

Cash flow, cash flow, cash flow. Lack of cash flow is what kills/constrains most businesses.

Write a business plan - outstanding. SBA has good resources for this.

Inc. and other publications have stories about buying a business.

Fun stuff!

[Loomis]

Time management is one of the most challenging aspects of owning a business. The SBA and its ilk (e.g., SCORE) will suck up as much time as you care to give them. SBA's loan process is slow, cumbersome, and unresponsive to your individual needs. Sound familiar? Rates are higher, too.

While you will be revved up to get this deal going and pursue your dreams, you will be in limbo for 90-120 days, jumping through your butt to feed the paperwork machine and waiting for word from on high. In the meantime, bills still need to be paid and you are not focusing on the actual work of the business.

You'd be surprised at how many community bankers are looking to earn your business. Many of their loans or lines of credit only require extensive documentation over $100K. Under that, you may be able to get am unsecured credit line based on your personal credit score.

Since you're in Oregon, try Umpqua bank. Meet with the branch manager and see what it takes to qualify for their unsecured line of credit. I use them for personal banking, and they have been outstanding. You will get a quick and realistic answer, which may or may not mean you need to resort to SBA. Incidentally, you can access SBA lending through a bank - you don't need to resort to actually calling the place yourself.

Regarding goodwill: don't pay for any assets that can walk out the front door. Follow your dreams. Even in this horrible economy, change can result in opportunity.

[Scooter]

Find a good business attorney. He/she will walk you thru the details of purchasing the assets or the business itself. Good luck.

[LWJ]

Angela,

I am in a networking group in Portland that has a bunch of people who deal with selling / buying businesses. Lawyers, a business broker, bankers, accounts etc. I am happy to make a referral. I would think the business broker might be the guy for this.

Send me a pm with your email.

Good luck,
Larry

[T77911S]

Originally Posted by john walker's workshop

the business is worth the assets, if the assets are useful to you. the goodwill established by the guy who built the biz goes out the door with him. no value in that.

as for someone that has bought 2 seperate businesses, and has not learned his leasson, the goodwill may go out the door, but the bad rep lasts for ever, or at least a very very long time.

[asphaltgambler]

Originally Posted by MT930

True most are seller financed 20 % down is what most Sellers expect expect. Have your CPA go over the numbers with you to find out if it will pay for it self and provide you a living. The futures bright for auto repair!

Man......................did you read my thread or fastfreds?

[Tobra]

If you take the dive, get a business line of credit, do this before you need the dough.

[RWebb]

Angela - see if the city or county will help you. Eugen has a special biz start-up loan pgm directly thru the City.

also, check with the state - I know we have some small biz help programs in the state govt. - may just be advice & not $$.