Each week as Smallbizlady, I conduct interviews with small business experts on my weekly Twitter talk show #SmallBizChat. This is excerpted from my #SmallBizChat interview with Andrew Rogerson @Andrewrog Andrew is a 5-time business owner that loves helping entrepreneurs exit or enter business ownership. His services include business brokerage; helping owners sell and/or buyers purchase a business. He also provides consulting on purchasing a franchise, certified machinery and equipment appraisals and business valuations. To ensure this is done to the highest standards, Andrew carries the CBI designation from the International Business Brokers Association and the CBB from the California Association of Business Brokers. For more information www.Andrew-Rogerson.com
Smallbizlady: What is the first thing to consider when you want to buy a business?
Andrew Rogerson: The first thing to consider is you, your family and your lifestyle. Becoming a new business owner is a major change in everyone’s life so make sure you have the time to learn new skills and responsibilities and that you have support from your immediate family. It doesn’t mean they have to or will agree with you every step of the way, but make sure their thoughts and concerns have been considered and there is an agreement to move forward.
Smallbizlady: How should you prepare personally to buy a business?
Andrew Rogerson: Do an assessment of your strengths and weaknesses. Most business buyers rush out to see what’s for sale but this approach is flawed. What’s the point in falling in love with a business if it’s in the wrong location, is too expensive, you lack the right management skills or you wouldn’t qualify to buy because you can’t get a loan. Sit down and decide how much you have to invest, refresh your resume to highlight your management and industry experience, decide how far you are willing to travel to a business each day and other questions. I normally have a potential buyer complete a Buyer Qualification form so it draws out the buyer’s strengths and weaknesses. I want the buyer to do things from strength, not because it seems the best idea at that point in time. With the Buyer Qualification form complete, we pull out the nuggets to arrive at their key search criteria.
Smallbizlady: What should happen once you find a business that you are interested in?
Andrew Rogerson: Once a buyer finds a business that meets their key search criteria they tend to want to rush the process. They are concerned the owner will sell to somebody else or they want to move from what they are doing and get on with the process of owning a business. However, before you get too far and if the owner knows what they are doing or is using a business broker to help with the sale, the first piece of business will be to have you sign a confidentiality agreement. Most brokers will also ask the buyer to complete and provide a personal financial statement that shows they have the ability to buy the business.
One of the things a buyer should look for is an Executive Summary or Confidential Business Review of the business. Either of these documents provides a summary of the business and provides a lot of information that allows the buyer to research industry trends and drill down to important questions. If the owner of the business is motivated to sell, they should be willing to sit and engage you. As the buyer, you will be looking to see how you connect with the seller and if you feel comfortable doing business with them. Just be aware, they are doing the same. The seller doesn’t want to disclose a lot of information to you if they feel they can’t trust you or don’t think you have the capacity to buy the business.
Smallbizlady: How long should it take before a new owner takes over the ownership of the business?
Andrew Rogerson: There is no set answer to this question as it varies with each person. This is part of the reason I ask a potential buyer to at first invest in themselves. Once they get the basics worked out, now it’s time to see what is available that meets the search criteria that you’ve set. Finding the right business will take what it takes. Once you find a business that’s of interest to you, and you get to the point of making an offer and negotiating it, once both parties agree on the price the buyer now moves into the due diligence process. The due diligence process is where the buyer can verify all the representations made by the seller. If the buyer is comfortable with all the representations it now moves into the escrow process.
Smallbizlady: What kinds of due diligence should you do on the books of the existing business?
Andrew Rogerson: During the due diligence process the buyer is able to ask the seller for any information that verifies a representation made by a seller. This includes looking in detail at the financial books of the business. It can therefore include looking at documents such as tax returns, profit and loss statements, computer accounting software such as QuickBooks or Peachtree, journals, bank statements, credit card receipts, employee payroll documents to confirm what employees are paid and sales tax documents.
It is critical that when the buyer conducts due diligence that they know what they are doing or hire a qualified professional to help them. Tax returns, profit and loss statements and other financial documents can be confusing.
Smallbizlady: What are the pros and cons of buying an existing business?
Andrew Rogerson: One of the main pros for buying an existing business is that it will have an established customer base, processes of doing business and a positive cash flow. If the business does not have a positive cash flow, then seriously consider starting your own business unless the price for sale is very attractive and you have additional capital to invest in the sales and marketing of the business. Other pros for buying a business are that it should be easier for the buyer to get finance to buy the business, the business will have established relationships with employees and suppliers and there should be brand recognition of the product or service the business provides.
There are cons to buying an existing business and these include the limited number of businesses for sale in a certain industry and just as importantly, being available and in close proximity to where the buyer lives. If the buyer has to sell a house and move to a new city, this not only adds additional costs to the buyer but also slows down the process. Other cons include the limited amount of training a seller may be prepared to offer. Most sellers will offer a small amount of training for free such as two weeks. It is therefore critical for the buyer to learn as much as possible in the shortest time possible, or be willing to pay the seller for additional training.
Smallbizlady: How should one handle the valuation of a business?
Andrew Rogerson: The buyer of a business should generally not need to get the business valued. Either the seller will have done this or the seller will have a price they want. This is one of the interesting things as some business sellers base the price they want for the business on some unrelated factor such as the amount they need to retire debt or it may simply be an expectation they have about what they think the business is worth. If the buyer is motivated to buy the business but they feel the price is too high, the first thing to ask is if the seller’s price is negotiable. The seller should be willing to explain how they arrived at the selling price and they should be willing to negotiate the price. If they aren’t then you accept what they want or move on.
You could try to negotiate the price by offering to get a third party valuation but do this carefully and deliberately. You want the seller to agree on the person to provide the valuation, agree who pays and why and also have some agreement that says if the price falls in a certain range the buyer will continue with the purchase. Too many buyers and sellers get focused just on the price. The terms of the deal are much more important than the final actual price. If the seller is willing to carry some of the finance to save the buyer borrowing this money from a bank, that could be important to a buyer.
Smallbizlady: Should you work with a broker to buy an existing business, what is the advantage of using a broker?
Andrew Rogerson: My answer will be biased to this question as part of the work I do is representing buyers and sellers and helping with the process to buy or sell a business. My answer is also influenced by the fact that I have bought and sold 4 businesses and understand how hard this was when I did not have the advice of a professional broker. From my perspective there is great value in having a broker assist in the transaction. There are many reasons and they include that it’s very helpful to have a third person to bounce questions or processes off.
Many times during a transaction the seller will want to follow a certain process but it may disadvantage the buyer. Similarly, the buyer will also want their process followed. When this situation happens, a skilled professional can either help negotiate the need or be an active player in the issue. In addition to being a conduit to address important issues, a qualified business broker will know what steps to take at what point in the transaction. Buyers expect to receive everything they need on their terms but that’s not always prudent for the seller to do. The normal course of events is for the seller to provide a lot of generic information once the buyer signs a confidentiality agreement, and then it’s the turn of the buyer to show they have the financial capacity to either buy the business or get a loan from a third party such as a bank.
Smallbizlady: What kinds of due diligence should a perspective client do on a business broker?
Andrew Rogerson: If you are looking for a business broker to assist you I would suggest you find someone that has most if not all of the following:
- Communicates and explains things clearly.
- Has a network of professionals they can tap into when help is needed. This could include qualified help from an accountant or attorney.
- Testimonials. A good broker that has been a broker for a number of years will have testimonials they can provide from satisfied customers.
- Access to qualified lenders. Getting a loan approved to buy a business is difficult at the moment. A good broker will have relationships in place to help a buyer get a loan including SBA loans.
- Buying and selling a business is complicated. A good business broker learns the skills from what they do by being part of an association that specializes in business brokerage. Therefore look to see they are a member.
- Membership of an association is good, credential or accreditations to show that the broker knows what they are doing are better.
- One of the key things a good business broker brings is business knowledge. Make sure they have business experience so they can relate to your questions and the help you need.
- Some states in the US require a business broker to have a real estate license. A real estate license allows someone to assist with the buying and selling of a house. My suggestion is to look for someone that specializes in business transactions as the process of buying and selling a house is completely different to buying and selling a business.
- Probably the most important thing to look for in a business broker is trust and ethics. If you don’t feel you can trust and work with the business broker and their ethics, look for someone else.
Smallbizlady: If I want to buy an existing business, is it more or less complicated than buying a franchise?
Andrew Rogerson: In my opinion, if a buyer is organized and knows what they want, the process to buy a franchise should be quicker and less complicated than buying an existing business. If the buyer is disorganized or unsure of which option they wish to pursue and tries to do both so they can decide which makes sense for them, they will generally get confused and drop out of the process entirely. A buyer should be able to quickly decide whether or not they like the franchise method of doing business as opposed to owning and operating a privately held company. A franchise generally appeals to those that have worked in corporate America and highly developed a specific skill be it sales and marketing, accounting, finance, operations and have an interest and aptitude for being in management to make the important decisions quickly.
Smallbizlady: Where is the best place to look for businesses for sale?
Andrew Rogerson: To find businesses for sale and you plan to use a business broker, determine the business broker you wish to work with and let them help you with introducing you to the right business. A lot of time can be wasted by a buyer looking at businesses they aren’t qualified to buy. If you prefer to look on your own, you can look in newspapers. The part of the paper that displays businesses for sale will generally be in either the real estate section or more likely, the financial opportunities section.
Smallbizlady: What is one of the most important things to do when buying a business?
Andrew Rogerson: Being a business owner doesn’t come with any guarantee of success. That’s the nature of the system. To improve your chances of success I always encourage new business owners to put together the best business plan that they can. Most business buyers don’t realize but there are two types of business plans. The first type is a business plan for a brand new business. This business plan goes from A to Z and requires the new business owner to work through many variables. The second type of business plan is for an existing business. This type of business plan can be easier and quicker to complete as a lot of information and processes are already known or in place.
If you found this interview helpful, join us on Wednesdays 8-9pm ET follow @SmallBizChat on Twitter.
For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog http://www.succeedasyourownboss.com.
Melinda F. Emerson, known to many as SmallBizLady is one of America’s leading small business experts. As a seasoned entrepreneur, professional speaker, and small business coach, she develops audio, video and written content to fulfill her mission to end small business failure. As CEO of MFE Consulting LLC, Melinda educates entrepreneurs and Fortune 500 companies on subjects including small business start-up, business development and social media marketing. Forbes Magazine recently named her one of the Top 20 women for entrepreneurs to follow on Twitter. She hosts #SmallBizChat Wednesdays on Twitter 8-9pm ET for emerging entrepreneurs. She also publishes a resource blog www.succeedasyourownboss.com Melinda is also the author of the national bestseller Become Your Own Boss in 12 months; A Month-by-Month Guide to a Business That Works. (Adams Media 2010)
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