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Business For Sale Listings-What are you to look for?

I read this on the BizQuest Newsletter flashmail that I receive and I thought it was very well written and presented:

How To Separate Good Versus Bad Listings
By: Richard Parker | Diomo Corporation
Question:
Some listings have a lot of relevant information and others seem to have almost nothing. How do I separate the good from the bad ones? What should I be looking for so I don’t waste my time?
Answer:
Insofar as the detail of the actual information or lack thereof, please understand that you cannot buy a business off a listing. Quite often the initial information you’ll see online is akin to a classified ad. Further investigation is always warranted….
A lack of information is not a reflection of the viability of the business nor does an abundance of information mean it’s good. As a general rule, if the business is of interest to you send in an inquiry to learn more. In a detailed listing, there are over 70 things to look for but, in the initial listings, at the very least you’ll want to examine the following:
• Business Description:
First and foremost, make sure the business interests you. Look for key points that would make this business a solid candidate for growth (i.e. exclusive territory, large repeat client base, double digit revenue/profit increases, growing industry, etc).
Confidentiality is the key for a seller so the description may be generic but it will provide enough information so you can determine the industry that the business is in specifically. Good businesses sell very fast in today’s market so by identifying the precise category of the business (if it’s specialized) will allow you to begin gathering industry and competitive information.
Assemble some specific questions relative to that particular business to ask of the include seller/broker when you hear back from them.
• Asking Price:
My favorite term; to me it’s an invitation to negotiate. So don’t worry about the price but of course be reasonable. You won’t buy a million dollar business for ten bucks but there is room. Likewise, don’t chase listings that you know are beyond your reach. The average small business sale over the past seven years has been within 14% of the asking price. Of course, there are other ways to creatively structure a deal where the actual price plays less of a role. It’s all in the terms!!
• Seller’s Discretionary Cash Flow:
The terminology may vary from site to site but you need to determine more than just the business’ profit. As the new owner, you need to know precisely what cash you will have available (assuming everything remains the same) to service the debt, generate a salary for you, and fund the business/ growth.
As such, find out exactly what’s included in the number being represented. Pay attention to “add backs” to be sure they are reasonable.
• Down Payment:
The selling of businesses is most often a down payment driven transaction. The asking price is far more flexible. Every seller has an amount that they want “in their pocket” after closing which is the down payment amount. Again, this will prove to be far more rigid that the purchase price.
Many listings will list the price only, or the price and the down payment as the same, but rest assured EVERYTHING is negotiable. A seller listing the willingness to finance, or if the business has pre-qualified for financing, is usually well worth investigating further.
• Skills Required:
These may not always be shown initially. A seller will usually put the most simplistic, “idiot proof” and basic skills in this section because the more specialized the greater the buyer base. As an example, they almost always mark: “general business/sales/marketing/administrative” which doesn’t mean much but if they list a specific skill pay attention!
• Reason for sale:
Personally, I like all the morbid ones: death, divorce, etc. They usually mean a more motivated seller. However; relocation and retirement are also good indicators. I’m always leery about “other business interests” as a reason. I can never understand what someone’s other interests can be if this is such a good business! But, you never know.
• Miscellaneous:
Some listings will include financing terms, asset values, lease information. Others may not. Regardless, the seller/broker will have more information beyond what’s been posted.
• Reply Information:
You’ll have an email address to reply to the ad and often a link to the broker/seller site. Remember confidentiality is important to the seller so your initial inquiry can ask a few basic question but the most important thing is to ask them to forward a non-disclosure agreement to you to sign. Then, you can begin to ask the real pertinent questions. Check it out as it will give you an idea of their professionalism plus they may have additional listings on their site which are usually more detailed

It has been said many times over, “Be Careful What You Wish For.” There is a great deal of wisdom in that old adage however, I am glad I never gave up on one of my wishes. The wish I am referring to, I have always wanted to meet one of my heroes Mr. “Smokin” Joe Frazier – former World Heavyweight Boxing Champion and former Olympic Gold Medal winner. I was lucky enough this past weekend to have this wish come true. I was attending a benefit dinner in Maryland and was lucky enough to be seated at a table next to, you guessed it, one of my all-time heroes Mr. Smokin Joe Frazier. What a great evening it was and I am so glad I never let go of that wish because Mr. Frazier is one truly remarkable person with a fantastic personality and an unbelievable zest for life. We had a great time that evening and I will always cherish this picture of me with Mr. Frazier. I like hanging out with Champions…

The role of the business broker

Selling businesses is very different from selling residential or investment property. When selling a business confidentiality is almost always a significant and material issue. In almost all cases when a business is to be sold neither the employees, the competitors, the vendors, nor the landlord will know the business is for sale. This makes marketing a going concern business a much more difficult task and sets it apart from selling residential and investment properties. In order to market your business we must first prepare a “Confidential Business Review or Abstract” and then place the listing on several local, nationwide/worldwide business listing services. Buyers are required to submit a signed Confidentiality Agreement before any business specific information is exchanged. Your broker’s objective is to get your business sold to the best qualified buyer at the highest possible price as soon as possible. Your broker will manage every phase of the sales process to maximize our promotional efforts, represent your best interests, and to use his/her experience and best practices to make the transaction go smoothly.

Excerpted from Office of Small Business Administration Office of Advocacy’s FAQ

How important are small businesses to
the U.S. economy?
Small firms:
• Represent 99.7 percent of all employer fi rms.
• Employ about half of all private sector employees.
• Pay more than 45 percent of total U.S. private payroll.
• Have generated 60 to 80 percent of net new jobs annually
over the last decade.
• Create more than half of nonfarm private gross domestic
product (GDP).
• Supplied 22.8 percent of the total value of federal prime
contracts in FY 2005.
• Hire 40 percent of high tech workers (such as scientists,
engineers, and computer workers).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97 percent of all identifi ed exporters and produced
28.6 percent of the known export value in FY 2004.
• Small innovative fi rms produce 13 times more patents
per employee than large patenting fi rms, and their patents
are twice as likely as large fi rm patents to be among the one
percent most cited.
Source: U.S. Dept. of Commerce, Bureau of the Census; Advocacy-funded
research by Kathryn Kobe, 2007 (www.sba.gov/advo/research/rs299tot.
pdf); Federal Procurement Data System; Advocacy-funded research by CHI
Research, 2003 (www.sba.gov/advo/research/rs225tot.pdf); U.S. Dept. of
Labor, Bureau of Labor Statistics, Current Population Survey; U.S. Dept. of
Commerce, International Trade Administration.

Below you will find an excerpt from a column written by Richard Parker. Richard Parker, the President and Founder of Diomo Corporation and a world renowned expert on buying and selling businesses. He is the author of six comprehensive programs on buying businesses including the best-selling How To Buy A Good Business At A Great Price© series and has had over 100 articles published. Richard is also a highly sought after intermediary and recipient of the Business Brokers of Florida Top Dollar Producer having sold the highest volume of business in the State of Florida. Since 1990 he has purchased ten businesses and has started several more. As President and Founder of Diomo Corporation, his materials and live seminars have helped thousands of prospective small business buyers in over 70 countries realize their dream of business ownership. He is also on the Trump University faculty for Entrepreneurship a thought leader in the business brokerage industry.

Personally, I don’t agree all of the philosophies or methodologies that I hear some business brokers practice but as a buyer you really should not pay too much attention to it. It just doesn’t matter. This is where I think some business buyers completely miss the mark.

Buyers get too hung up on the broker’s role and forget what their goal is in the process.

The business buying process has plenty of blemishes, of that there is no doubt. Anyone who disagrees has their head in the sand. However, I am convinced that a fundamental misunderstanding of how this process is “supposed” to work is at the core of what causes the friction and lack of communication between buyers and brokers.

Let me first address prospective business buyers and provide you with some insight to business brokers. I will touch on a few points that are basic yet fundamental reasons that cause a lot of wasted time and misunderstanding. I am also going to discuss some issues related to business brokers and their world in the next newsletter which will clearly help anyone who is buying a business understand this process better.

First, most business buyers begin the process thinking that business brokers operate like residential estate sales people. You figure they’ll respond to every inquiry with rapid fire speed, they’ll show you tons of businesses and take as much time as you need to find the “perfect” business. Unfortunately, that’s not the way it works.

The only common thread between business brokers and real estate agents is that they are both paid on commission – end of story. Real estate sales people will generally work more favorably with buyers and there are a number of perfectly good reasons why this happens.

I once read a statistic that said any individual or couple that contacts a real estate person will likely purchase a property within twelve months, seventy percent of the time. Contrast that to a prospective business buyer whereas over ninety percent will never buy a business. That alone could cause some business brokers to proceed cautiously before becoming too involved with any buyer. I know I do. Wouldn’t you agree?

To further complicate matters, the market is absolutely flooded with buyers; always is; always will be. Unless you separate yourself from the crowd, you are simply in a pool of tons of others who, in the minds of sellers and brokers will probably never buy. Here’s a great article on how to separate yourself from the crowd.

Since business brokers are not going to take you to see countless businesses for sale listings, a good part of the search falls to you. Now, this does not mean there’s any excuse for a broker to not return your calls or emails when you inquire about a business (a frequent complaint) and I know how aggravating that can be. On the other hand, if you are able to search more effectively, and ask the right questions (especially in the first contact) you will be miles ahead of the other buyers. Business brokers are not going to do your work. Don’t expect them to.

Second, the misconception exists that banks have their vaults open ready to lend money to small business buyers – not true! And so, many inexperienced buyers who simply do not have the financial resources to complete a transaction go down the wrong path thinking that every business listed for sale is within their reach. Unfortunately, that is not the case.

Financing a business is not as simple as getting a mortgage on a home. While there are many options available to finance a business, you certainly want to understand these early on so that you don’t chase the wrong deals. If not, the only result will be wasted time and frustration. If you do not have the financial resources to execute a sale, a business broker is not going to indiscriminately distribute a company’s financials to you. The lesson is simple – know what you can afford. Be prepared to share your financial information with a broker and provide them with the proof they need to deem you qualified for a particular listing.

Third, learn the business buying process. If you’re really serious about buying a business, then don’t become a “looker”. Educate yourself, hone into a few businesses, present yourself properly, ask the right questions, do your research, and be prepared to make offers. It’s quite simple and the only way to get any deal done.

I know these few points sound relatively simple, and perhaps even obvious. I also know and hear first-hand how frustrating it can be to work with an uncooperative business broker. Yes, those situations do arise. Yet, one thing is certain: every single business broker wants to sell you a business. If not, they don’t eat. They will help you. They will move the deal along. But they are not going to do your work nor will they spend time with you on listings they know you cannot execute.

The business buying process is not perfect; far from it. However; the blame can not rest solely with brokers. I know there are plenty in the profession who should not be there. Chances are that they won’t be in twelve months. Nevertheless, you cannot possibly rely on a business broker to dictate your success and whether or not you complete a transaction.

Brokers have their role but deals get done between buyers and sellers. Placing your destiny in this process in the hands of a broker and then becoming discouraged or worse yet, aborting the project because of their inefficiencies simply does not make sense. That would be like you deciding to take the bus and not buy a car because you did not like the salesman at a particular dealership.

The bottom line here is that business brokers will not pay any attention whatsoever to unqualified buyers. I’m not saying that their methods for qualifying a buyer are always right by any means. However, if you truly want to get the level of cooperation you believe that should be bestowed upon you by a business broker, then you need only follow a few simple steps.

Come to grips with whether you have a real need to buy a business or you are just looking. When you arrive at the former, you’ll be successful.

Get a handle on how much you are prepared to invest of your own money. Buying a business is not like the “no money down” real estate infomercials. Be willing to share this information with business brokers. They will help steer you to businesses they know you will be able to purchase.

Be prepared. I don’t care how smart you are, or what your prior business experience may be, those are attributes that will help you AFTER you buy a business. You absolutely need to educate yourself. In my publishing business where we offer how-to guides on buying a business ( www.diomo.com ), I like to ask prospective clients the following questions (think about this for a second): If you are going to invest your money to buy a business, and especially if you have never bought one before, shouldn’t you first learn how to buy the right one? If not, that would be like your college bound child telling you that they want to become a doctor but they aren’t going to buy any of the books or even attend most of their classes. How would you respond? Buying a good business is well within your reach. We are not talking about sending men to the moon. However, if you fail to prepare; prepare to fail.

So here’s your homework:

1. Compile your personal financial statement and be prepared to provide it to brokers.

2. On your next inquiry to a business broker follow the steps we discussed in the article separate yourself from the crowd .

3. Commit to buying and not looking.

4. Get hold of the materials you need to learn how to become a savvy buyer

5. If you can’t make headway with a certain broker, move to the next one.

Good luck and please send me your thoughts.

Richard Parker

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