Can you afford to buy a business?

Can you afford to buy a business?

Six weeks ago you lost your job.  So far, all your leads have been dead ends and you’re starting to get nervous.  You did get a package, but it’s not going to last forever.

Maybe it’s time to go into business for yourself, provide your own job security and income. The thought of it gets your pulse racing. You’ve got a strong work ethic, a positive outlook, experience in leading a team, and hey,  if the stress and pressure of your last job didn’t get to you, nothing will.  You start researching and the more you read about it, the more it appeals to you. You find out there’s a much higher rate of success based on buying an established business compared to starting one:

• starting a brand new business, 35% are successful
• buying a new franchise, 80 to 85% are successful
• buying an existing business that has shown profit for three years, greater than 98% are successful

Maybe you’ve been thinking along the same lines, but unlike the individual in the above scenario, you don’t have a severance package—you’re still working and you’ve only got $20,000 put aside. You have a line of credit with your bank that you could draw on, though.  Should you even consider it?

How much would you need to put down? How much would you need in total?

First, some perspective on buying a small business* in North America:

• 90% of buyers will have to finance the purchase price of a business;
• 90% of buyers will have to get the sellers to finance part of the purchase price;
• 90% of buyers have from $50,000 - $150,000 that they are willing to risk or spend investing in a business.

*all uses of “businesses” here refer to companies with fewer than 10 employees, and less than $3 million in sales.

Negotiating the down payment

In negotiating a business deal there are many things that are important, but none more so than the price and terms.  Businesses tend to sell for two to three times what the business makes. Another part of the price and terms is the all-important down payment.  The down payment should never take a buyer right out of cash. They will need some working capital to keep the business going, even though an existing business should have an immediate cash flow. Buyers should always keep something aside for the unexpected.  And if they’re intending to add improvements, that too, should factored in.

Although the seller always wants more down payment and the buyer always would like a smaller down payment, somewhere in between is a fair deal that will work for both parties.

Keep in mind, too, that negotiating the right deal takes time and effort, typically some three to nine months, and in the meantime you’ll still need to pay for your groceries and other family expenses.

Is now the time to sell my business?

Business owners want to know: should they sell now or later

The recession has thrown many business owners off track, leaving them unsure and unequipped, akin to driving in an unfamiliar area without a GPS or map or navigating the wilderness without a compass.

For many who’ve lost 25% to 50% of their savings in the market, the paved road to retirement is now full of potholes.  Do they keep on course, or take a detour?

Business owners want to know:  should they wait a few years before selling their business  or should they go ahead and sell it now?  If you own a business, maybe it’s a question you’ve been asking as well.

If you can afford to retire with the proceeds of the sale now, do it now:

• There is a good market for quality businesses. Businesses that are currently performing well are selling at the same multiples as before the recession.  Those that are under performing are selling at lower multiples than they would have prior to the recession.
• There are many more buyers chasing fewer businesses.  It’s true that buyers have also lost part of their savings in the markets, leaving them with less cash for a down payment.  However, with downsizing, rightsizing, plant closures and layoffs, there are more individuals actively seeking out other means to support themselves and their families.
• You may have to finance a bit more of the transaction than a couple of years ago but if the business is performing well, you will get top dollar. Vendor financing can add as much as 30% to the price of your business and you get the interest on the financing on top of that.  Most small business sales in Canada are financed 50% by the seller, with a note that runs three to five years . They can also be financed in part through the Canada Small Business Financing (CSBF) program or  a loan from the Business Development Bank of Canada (BDC), with the seller providing a note for 20% of the transaction.

Waiting a few years is risky and may result in a much lower price

Maybe you’ve landed in one of those potholes. You don’t have enough to retire on and selling your business will still leave you short. You’re stuck managing your business a few more years to make up the losses.  It’s your only choice.  You need to understand the consequences of that decision, though.

Business brokers help buyers and sellers, part 2

In part one of this post, we explored how business brokers bring buyers and and sellers together, providing the all-important expertise to bring the deal to a conclusion that works for both.  Here are some takeaway points specific to each party.

Some points for buyers

There is no perfect business-only some that are better for you than others. The key is to find the right “opportunity” for you to make it your perfect business.

• A business broker will inventory your skills, interest and experience, as well as your personal and financial goals.  This will help match you with business opportunities best suited to your profile and objectives.
• You will want to look at price, terms, income, cash flow  and location and be sure the business serves your financial needs. A business broker will help you gather all the necessary information at the appropriate stages.  You’ll find that the true value of a business is not always as obvious as the numbers on the spreadsheet.
• Buy the business for a negotiated price with a down payment that works for you.  Ensure that the cash flow is enough to cover your financing payments while still leaving you enough money to live on.
• The terms and conditions on the balance due note can be anything that works and is agreeable to both parties.

Some points for sellers

On the flip side our brokerage won’t accept assignments unless we think we can successfully achieve the seller’s objectives.   For one thing, the seller’s expectations need to be in line with the market reality.

• The business broker starts by formally assessing the value of the business. This value is not negotiated.  From there, we determine the most probable selling price (MPSP).  This represents a reasonable price, factoring the true earnings and what the market is willing to pay.  The seller can then negotiate on an informed basis.
• A business broker that’s associated with a well-established firm can expose your business opportunity to hundreds of prospective buyers without employees, customers or competitors knowing that the business is for sale.
• Most sellers are unaware of how much interest they can generate by offering financing. To buyers, it’s one indication that sellers are confident that the business will pay for itself.