A.I.F. welcomes our two new brokers, Ms Romy Maurasse and Ms Pamela Painson. We wish them both the best of luck, and we look forward to working with you.
What is a Small Business?
Although the term is somewhat malleable depending upon where you live, a “small business” is generally considered to be one that is privately owned and operated – that is, not a public company listed on any sort of stock exchange – with fewer than 100 employees (or fewer than 50 in the European Union). The U.S. government further defines an enterprise as a small business based upon annual sales, but this will vary by category and only comes into play in order to qualify for small-business set-asides when bidding on government jobs.
Buying a Small Business for Sale
Businesses for sale are all around us. This could include the dry cleaner’s shop where the owner wants to retire, the corner restaurant whose owners are interested in buying a bigger place downtown, or the mobile dog-cleaning service with a proprietor who’s tired of driving all over the city. There are a number of factors to consider when buying a small business, and plenty of questions to ask once you have settled on a couple of possibilities. Learn as much as you can before taking the big leap.
Examine the Financials
Check over the company’s profit-and-loss sheets and cash flow statements. You should know everything there is to know about how much money has come into the business, where it went, and what are the projections for future earnings. Enlist the services of an accountant or CPA to assist with these efforts. Pay special attention to the company’s liabilities, as new owners usually acquire these along with the company’s assets. The due diligence package should also include the company’s income tax returns, legal filings, articles of incorporation, and information on lawsuits both past and pending.
Understand Why the Business is For Sale
Everyone has his or her own reason for wanting to sell a business. Retirement is a popular choice, as is the desire to change fields, move to a different city, or use the funds to purchase a larger business elsewhere. But the reason you hear may not necessarily be the truth. You will want to carefully explore this situation and avoid taking the seller’s word without question. Is there an ongoing problem between the owner and employees, or is their relationship so tight that everyone plans to abandon ship when the business finally gets sold? Is the location a poor one, or possibly so terrific that a major competitor is planning to open up across the street in a few months? Knowing these things before you sign on the dotted line can prevent you from making a huge mistake.
Observe the Business in Action
Hang around for a week and see if the traffic matches the claims made by the seller. Chat with customers and find out what they like about the business and what they would like to see changed. Scope out the competition, see how they operate, and compare the kind of traffic they enjoy with that of the business you’re thinking of buying.
Determine the Value of the Business and Line Up Financing
The seller will have placed a price on the business. As the buyer, you are responsible for determining whether it is a fair price. Here you may wish to consult a local business broker, as they oftentimes have a better handle on valuation issues, which can vary depending upon the type of business and the industry in which it operates. Fast-growing companies will normally sell for a higher price, as the potential for greater future earnings is factored into the equation. You will then need to determine if the price is something you can handle financially. Your banker and accountant will be of considerable assistance here, as each helps you to reconcile monthly net earnings against the cost of buying a small business.
Ask For the Seller’s Help
Under most circumstances, the seller wants out at least as much as you want in. If you plan to meet the asking price – or at least provide a reasonable negotiating position – it never hurts to ask the owner to provide some of the financing. You will probably get better terms from the seller than you would from a bank, including a lower interest rate and longer payback term, and the seller will therefore be motivated to see you succeed. To that end, you may even ask the owner to stay on for a while – receiving a fair consultant’s fee, of course – to help with the transition period and make sure you know what you’re doing as the new owner.
When buying a business, you are buying its future based on its past performance. Your decision to purchase a business for sale will affect your life style and finances. A cheat sheet can minimize your risks and uncertainties.
1. Which business opportunity matches your knowledge, experience and passion? Is the business for sale profitable? Is there room for growth? Consider products or services that generate sales and attract repeat customers. What are the recurring expenses associated with running the business? Can you lower costs to increase your profit margin? How is the business compared to the competition?
2. How much does the business cost? How much of this can you raise on your own? What are your borrowing requirements? Choose a company with a healthy cash flow so you will not be in debt for long. Only borrow the amount that you can afford to pay.
3. Investigate the business for sale. Make sure there are no problems in the transfer of existing contracts with suppliers, landlord, etc. to you.
4. Study how you will structure your company. Will you invite partners or go solo?
5. How much time will you spend in running the business? Do you know enough about this business to run it? How will your family life be affected?
Coming up with a firm business plan will ensure that you follow the path to your financial goals. Do not lose focus on your objectives. Hopefully you find this business cheat sheet is helpful. Did you have any questions?
Congratulation to Tony Fernandes for being recently named Lakeshore Brokers Association President. We wish Tony the best of luck in this prestigous position.
We are proud to announce that the youngest member of our team , Matthew Fernandes, has attained Chartered Broker status, and we wish him lots of success in the future.