Eight and a Half More Business Buying Mistakes

Blindfolded archer trying to shot at a tarketThe process of buying a business has many potential pitfalls every step of the way.  As you decide which business is right for you we want you to keep them in mind to help you avoid being tripped up by them.  Our goal is for you and your business to be successful.  In order for that to happen here are some not so common mistakes.  Maybe you may have already considered them, but just in case you haven’t, here are some causes of failure along the way:

  1. Impatience–Buying a business too fast. A thorough search and proper due diligence take time.  If you rush, then you are opening yourself up to many further mistakes.  Plan on the search process and the due diligence process to take some time.  Depending on the size of the business it can take anywhere from 3 months for a simple business to even 9 months if a franchise is involved.
  2. Choosing a business that is wrong for your interests. Just because it is for sale and you can afford it doesn’t mean that it is right for you.  Does the business fit your experience, ability, your interest, your family obligations and your passion?
  3. Buying a business that isn’t the right fit size-wise. Do you have the proper management skills for your size of prospective business.  If you are not realistic, then you might bite of much more than you can chew.
  4. Can you handle the number of employees? Does the business already have someone doing the HR or are you planning to do that and if so, can your skills scale with the business?
  5. Can your checkbook tolerate the length of sales cycle?  How much working capital do you have and is it realistic for your business?Sometimes the purchase of supplies and products does not occur on the same time frame of the income.  Can you afford to float the expenses for the first couple of cycles? What kind of on-going credit is going to be required for you to operate the business and can you handle the debt load?
  6. Is the drive time to and from your new business realistic?  Have you driven to and from the business to your home at peak times?  Even if the business is marketed as “absentee owner-friendly”, not business is truly owner absentee, at least not ones that stay successful.  Can you tolerate the drive time when you have to come in to manage things?
  7. Is the market area of your business realistic for you and for your business?  Have you seriously considered the demographics and buying behaviors of your potential customers and whether or not the coming economy can tolerate business growth?  In the case of buying a franchise, can the territory actually support the growth necessary for you to achieve the income levels you desire?
  8. If you are purchasing more than one operating unit, can you handle all that comes with that?  Often in the franchise world, to make enough money for income expectations, the buyer buys three franchises, especially with food-related franchises.  Can the business tolerate you not being at each location every day?  Do you have adequate managers in place at each location? Sometimes when you buy more than one unit, one of the units requires significantly more effort than the others.  Do you already have a handle on which ones and why?

The last one is not really a “one half” of a single mistake but it could definitely be part of your important consideration.   If you have to negotiate a lease in the closing of your business you can make some serious miscalculations in that process.  It it is not uncommon to get almost entirely through the business purchase due diligence process and realize the landlord is going to raise the rent when you take over the business or that you have left something out rent-related that could make the deal go south.  One of the mistakes people make in their calculations is not including the Common Area and Maintenance, taxes and insurance in the calculations of a net lease when planning on total rent expenditure.

Since our goal is to help you get to the finish line of a successful closing, we hope these tips will help remind you of something to consider as you conduct your due diligence.  We don’t want you to try to go through this process alone.  Please allow us to help guide you through the sometimes tricky, but exciting process of buying a business.  Call us today!  (615) 649-6999

Is a Franchise or Franchise Resale Right For Me?

Franchises Sales and Resales—To Buy or Not To Buy?

Business in a box - FranchisesFranchises are sometimes referred to as a business in a box. The comforting aspect of buying one for some business buyers is many of the variables have already been exercised and vetted and the systems have shown a reasonable amount of success. A typical independent business that is up for resale may have more freedom to change aspects of the business, for good or for ill. People who purchase franchise or franchise resales enjoy a greater feeling of security and stability by belonging to a much larger organization with a proven track record. Whether or not the franchise is a new franchise or a resale, you will need to scrutinize each opportunity and the franchisor will also want to look at you. Buying a business in a box may not be for you. Maybe you are already confident the business you are buying will make you more money and you want to have a much greater say about the processes. Having a good conversation with a trusted Beacon Business Broker can help you explore all of your options.  In either case, doing proper due diligence is still a critical part of your success.  We can help you decide for yourself and help you on your path to success.

If Buying a Franchise Is The Way For You To Go…

At Beacon Business Brokers, we help potential business owners find franchises with a good fit for them. The number of available franchises is staggering, over 2000 registered in the US today. Not all are created equally. You many not qualify for some of the choices you would like and some of the choices might not be a good fit for you even though you might qualify. Each franchisor most likely will require an application process where you will be asked to provide information to them, usually in the form of a franchise disclosure document (FDD). You will typically be allowed to visit, with previous permission, other franchisees and see their operations. You need to plan on several visits.

Let Beacon Business Brokers Be Your Guide to Better Business Buying and Selling Choices

As you search you will want to find at least one unhappy franchisee so you can ask them questions too. We will help you through the process and you will need to be diligent and active in every part of it.
  Each franchise has varying degrees of benefits but you will want to confirm all of them for yourself.

How Thoroughly is the Concept Tested and Proven?

Typical Benefits of owning a franchise:
♣ An operating system that is tested and proven
♣ Access to corporate business advisors and coaching
♣ Corporate Training
♣ Company-based advertising and brand packaging
♣ Business that are part of a larger system typically have a much higher success rate
♣ Better competition management
♣ Better exit strategy—more buyers for franchises than independents
♣ Generally, access to franchisor research and development
♣ Possible purchasing power through bulk buying
♣ Sometimes leasing, landlord negotiations are included and sometimes build-out costs are as well.

Is the concept a good idea? Is it a fad or will it have staying power?
You will want to confirm the type and extent of the training, what kind of ongoing support, what kind and the extent of their marketing, franchisee/franchisor relations, how much actual investment (versus just the franchise costs), how much actual earning (how much does each unit make and how long does it take to typically start making money), and what systems documentation is available?

You will want to carefully verify actual earnings.
We will ask you the following questions to help you decide:

1.   Have you owned your own business before?
2.   What kind of hours do you like to work?
3.   What are your reasons for thinking about buying a franchise?
4.   Do you have a specific area that you want to locate?
5.   How much capital do you want to invest?
6.   Will you have partners?
7.   Have you managed people and how do you feel about that?
8.   Are you going to one to only own one or are you planning to buy several?

Once Beacon Business Brokers asks these questions we can better direct you to a business that will fit your key characteristics and help you evaluate your choices. The process can take on average about a month. You are interviewing them as much as they are interviewing you. If you get through the process and it doesn’t seem to work for you, you can move on to the next one. We look forward to helping you find your next franchise. Call us today to get started!  (615) 649-6999

Buying Trends

According to The Complete Guide to Business Brokerage, (Thomas L. West, pg. 69), “Over 60 percent of all businesses have four employees or fewer, and that almost 80 percent of all businesses have 19 employees or fewer.  Recent studies have also shown that the average price business sold by business brokers is less than $350,000.  A recent survey also indicated that 46 percent (that’s almost half) of all buyers have less than $100,000 in cash to use as a down payment.”

Nearly 90 percent of business buyers are first-time buyers.  Most of the are looking to replace a job.  Income substitution is a major reason for purchase.  Most buyers have between $50,000 and $100,000 they can use toward a down payment.  Since most businesses are between $150,000 and $350,000 that means most buyers won’t have enough funds to pay cash for the business.  When buyers have enough money to buy a business using all cash, they typically will want to leverage their money to buy a bigger business, not pay for the business outright.  When they do pay for a business using all cash, they usually expect a discount, which can be substantial.  The adage that cash talks is still true today.  Most sellers have to choose between getting top dollar or getting cash.  The chances of a business selling are much greater when an owner is willing to offer financing.

Trends in typical sources for financing for buyers:

  • Bank Financing
  • Hard Lenders (Non-bank lending companies)
  • Owner Financing.

At Beacon Brokers, we offer another exciting way to finance your next business purchase using money from your 401K or IRA. When you make your appointment to meet with us, we can tell you more about how you can be the master of your own money in buying your next business.

“Studies reveal that, on average, a seller who sells for all cash receives only 70 to 80 percent of the asking price.  Sellers who are willing to accept terms receive, on average, 86 plus percent of the asking price.  That’s almost a 16 percent difference on a business listed for $150,000, meaning that seller who is willing to accept terms will receive about $24,000 more than the seller who is asking all cash.  The seller who asks all cash receives, on average, a purchase price of 36 percent of annual sales, while the seller who will accept terms receives, on average, 42 percent of annual sales.”   Beacon Business Brokers can help you look at your finances and help coach you as to how you can best obtain financing to help you meet your business buying goals.

Why take advantage of the trend to offer owner financing?

  • The seller makes much more money overall because of the interest they can charge on the sale.  In most cases, the interest rates are higher than what a bank would typically charge.
  • The tax consequences are often advantageous. Seller financing can spread the tax burden over more time rather than expose the seller to a huge capital gains hit.
  • Sellers who are willing to owner financing create buyer confidence.  If they are willing to sell it with “skin in the game” then the buyer feels the seller is willing to stand behind the asking price and the business itself.
  • Because the seller is acting as the “bank” it is important to to get a credit history and how long they have lived in their house, whether or not they have a good banking relationship and if they have personal references.
  • In some business segments, banks simply do not loan money on those types of businesses.  If there is no financing there simply won’t be a sale.

With good contracts involved, very few buyers walk away. It is important to have a professional, like Beacon Brokers, help you structure your financing to your greatest advantage.  No one can guarantee that anyone will succeed in their business but when the seller asks for a significant amount down, very few business owners will walk away from that initial investment.  What ever the terms are going to be, make sure they are in writing at the beginning of due diligence. Having a lawyer, like Todd Jackson, your risks can be reduced significantly.

The most cutting edge solution continues to be using your 401K and IRAs to finance the purchase.  Beacon Business Brokers’ sister company New Day IRA is ready to help you set that up for you.  No other brokerage in the Greater Nashville area is set up to help you do that paperwork in-house.  Ask us how.