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How to Buy your first business - The steps to purchasing a business

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http://sellyourbusinessflorida.com/buy-a-business-jacksonville-florida/ - Buying a business can be exciting and overwhelming. To help you understand the process, this short 30 minute video will walk …

http://sellyourbusinessflorida.com/buy-a-business-jacksonville-florida/ - Buying a business can be exciting and overwhelming. To help you understand the process, this short 30 minute video will walk you through the keypoints on what you need to do.

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  • Welcome. I’m Kimberly Deas and with my Partner Bill Yankee we work with business owners and professionals to transition businesses with Murphy Business and Financial Services.
  • SLOW!!!
    Over the next 30 minutes
  • SLOW!!!
    http://www.bizjournals.com/jacksonville/news/2014/01/15/florida-business-owners-expect-gains.html?ana=e_du_pub&s=article_du&ed=2014-01-15
    Often we get asked, is it a good time to buy or sell. So let’s start by taking a quick look at the current economic situation in Jacksonville, fl.
    Recent survey from the BMO Harris Bank that polled business owners found that ….
    If we analyze just the economy, there are many indicator that says, the worst is over and we have transitioned from an economic winter to an economic spring. In the economic spring, buyer are more interested in buying, there is still hesitation, but not nearly like the economic winter. The confidence level of buyers are increasing and there is more activity in general. So the local Jacksonville economy is supporting the buying and selling off businesses.
    In fact in 2013, small business transactions jumped 49% over 2012. Owners Receiving Higher Prices For Businesses, but Buyers Getting More for Their Buying Dollar, According to BizBuySell.com Report
    There's an abundance of confidence in the local economy among Florida business owners surveyed by BMO Harris Bank.
    Ninety-six percent of those polled said they expect their own businesses to either grow or stay at the same level in 2014. Ninety-two-percent expect the Florida economy to improve or hold steady this year, and 80 percent expect the U.S. economy to either improve or stay the same this year.
  • SLOW!!!
    http://www.washingtonpost.com/business/on-small-business/small-businesses-changing-hands-at-a-rapid-clip/2014/01/14/f59bc9f2-7d27-11e3-93c1-0e888170b723_story.html
    Lastly let’s look at the business sale enviroment.
    Story: Online printing business, great books, clean business has 7 buyers begging to put in offers and had it under contract in 7 days from listing. Closed in less than 30 days from contract signed.
    Seller concern: It is predicted over 10M businesses will transition in the next 5-10 years. This could devalue a business in the coming years. Those considering selling – should consider the flood of businesses that may be entering the market in the coming years.
  • SLOW!!!
    Many buyers who are aggressively seeking acquisitions contact us since we are the largest business broker in the state, but we also contact targeted buyers (with sellers permission) and confidentially inquire of their potential interest.
    WATCH OUT FOR Deal de jour buyers…… They chase new deals every day, but never close…and they have the money to close.
    Many view the Broker’s primary duty is to attract buyers. Not true. In fact, that’s the easiest part of our business. Getting the deal structured and financed is where we add the most value.
    Although we try to have more than one interested buyer, we avoid running a bunch of buyers through a business. Helps maintain confidentiality and causes less interruptions to the owners time actually running the business.
    An inexperienced Broker is like a chicken: scurrying around everywhere, clucking loudly; making lots of noise. A capable broker is like a duck; they look like they are floating slowly and carefully along, but underneath, the are paddling like crazy. A good broker does a tremendous amount of work, that clients never observe.
    Once the Buyer signs our Confidentiality Agreement, we provide them with some brief summary information / confidential memo
  • SLOW!!!
    Connected to the value is also the finance-ability of the business. As a seller if you have a business that is not bank financeable and are not willing to offer seller financing, the value of the business is reduced compared to a similar business offering seller financing.
    So let’s look at the financing options.
    The purchase of business can be done via several funding options, including, cash, bank financing, a 401(k) rollover, loans from friends and family, and even non conventional lending at higher interest rates. As a seasoned broker we have access to many funding options for qualified buyers and this allows us to help get business sold that others can’t.
    The most common financing options are bank lending and seller financing. So let’s break them down.
    ***SLOW****
  • Slow !!!
    Remember the sale of a business needs to be kept confidential – Explain WHY
    No obligation to buy
    Only obligated to not share information
  • SLOW!!!
    The 3 steps to evaluating a business
    There are often 2 types of first time buyers. First the person that wants to buy a job and second a person that is looking to buy a business to turnaround and sell at a multiplier of what they paid. These are often professionals that have done this for a corporation and now what to do it for themselves.
    Let’s start with the job buyer. For these buyers, the cash flow is most important or the expected earnings for working this business.
    We call this the SDE or owner’s benefit.
    Often first time buyers are buying a job. So if you are going to buy a job, what do you need that job to pay you?
  • Now, if turnaround type of buyer – this is where the lower the cash flow in relation to the gross income (or revenues of the business) the more opportunity to turnaround. What this ration tells you is the amount of opportunity to increase efficiencies. So if a business has $2.2M in sales but only $50k in cashflow, there is more opportunity for enhancements than a business that has $2.2M in sales and $400k in cashflow.
  • This is the largest hurdle that a stops a buyer from buying - Price
    Real estate is extra so a business where real estate is included the price might se high until you consider the real estate included
  • SLOW!!!
    As a first time buyer, you need consider where your strengths are and what type of role you want in a new business.
    As you evaluate businesses consider which of the 4 roles you might play and look for businesses where your strengths can drastically influence the profitablility of the business. Consider a former sales person of a business that cleans up after fires. This employees has that has lots of contacts with insurance companies and buying a business that links to insurance companies would give him an edge in that business. Find businesses where you can be the edge for the business to further grow the business.
  • SLOW!!!
    Once you have found a business that has the right cashflow and seems to meet your talent requirements, now look deeper. Why is this business successful?
    Here are 3 questions to ask a seller:
    What differentiates your company?
    How would you grow the company?
    What would you do if the company received a windfall of cash?
    Often the first quesiton a buyer wants to know is “why are you selling?” So
  • SLOW!!!
    Top 7 Good Reasons that Sellers sell.
    In the Order of Frequency that we typically see.
    Notice that declining sales or loss of key customer is not on the list.
    AND Waiting to get discovered can take longer than it does for actresses in Hollywood.
  • SLOW!!!
    The Offering Memorandum is a most important document. It must be accurate and complete. Negative items disclosed here tend not to be viewed as negatively as when they are omitted and discovered during due diligence.
    Highlight Any Tax or Contract Issues. Such as mandatory deal structure ( stock sale vs asset sale) Franchisor or Manufacturer advance approval of buyer. Any debt or leases that must be paid off.
    If prepared separate from the appraisal process, a significant amount of additional time is required (30 to 50 hours).
    Stress Again….the Offering Memorandum is given to only a few people that have been approved by the Seller.
  • Meeting the seller and seeing the business does not obligate you to make an offer. Some sellers want to meet sellers before they are allowed to get further information about the business. This is done to assure that only qualified buyers are receiving the highly confidential information about a business for sale.
    This meeting is very casual and is a chance for the buyer to see the business, ask questions and get to know the seller. These meetings will typically address broad-based and specific questions about operations, marketing and sales, employees and business management topics not covered in the profile memorandum.
    When looking at a business, accept all financial information provided as true and accurate.
    Please note: It is during the due diligence process, after your offer is made, where you will ask the seller to prove this information. If the seller cannot prove their numbers, you can re-negotiate the sale.
    After meeting the seller, The next step is to make an offer.
  • For individual buyers, you will be going straight to an offer to purchase. In some cases when a business buys another business, a letter of intent is used, but this is often when the buyer has high credibility and in in the purchase of a large complex business. For a smaller business (say under $1M purchase price), we go straight to a purchase agreement and then after the agreement is accepted, the due diligence period begins.
  • SLOW!!!
    If the Offering Memorandum is complete and accurate. And that is what Makes us here in Jacksonville, very different from the other brokerage firms. You can rest assured that we have done the hard work of putting together the offering memo and compiled most of the information before a buyer ever sees the business, so what you see from us has been compiled for easier verification in Due Diligence.
    Due diligence is really just a verification of the information you have provided. This is typically a review of tax returns and possibly bank statements, vehicle titles (if applicable), sales tax verification and employee tax verification.
    Buyers: Experienced Advisors can bring judgment and calm to the due diligence process. Everything is a crisis to the inexperienced. Don’t skimp on your advisors.
    Sellers: Instruct your CPA and Attorney to openly interact with the buyer’s advisors. Any holding back or having to check with you, their client, will only arouse suspicions when the mission of due diligence is to remove suspicion.
    BUYER’S Greatest Fear: What is the Seller not telling me. It’s tough for a Seller to prove a negative, except by maintaining an attitude of open disclosure.
    (This is the essence of Reps & Warranties/ Indemnifications/Offsets/Escrows and Holdbacks. Fear of the unknown.)
    Sellers remaining with the business and Seller Notes help address this fear.
    SELLER’s Greatest Fear: Rejection and criticism of how they have been running the business.
  • SLOW!!!
    When seller responding to dd – not focused on business
  • SLOW!!!
    If you know what the business is worth and the minimum cash required then you can focus upon the many other issues that comprise a good deal. Keep your limits clearly in mind and well communicated to your advisors.
    Simultaneous Contract & Closing –vs– Contract & Deferred Closing. Corporate and financial buyers typically prefer the simultaneous. Individual buyers and buyers needing bank financing prefer the deferred closing. If simultaneous, suggest that a pre-closing be held at least 2 days prior to the actual closing. Trust me, it’s worth the extra effort and expense.
  • SLOW!!!
  • SLOW!!!
    Story: technical buyer – like to work alone, bought business requiring him to be part of a team. Business failed – sold for pennies on dollar that he bought for.
  • SLOW!!!
    The business owner is an expert at running the business but may not be as knowledgeable about the selling process. An intermediary can assist the business owner reach their goal of a successful transaction.
    FacilitatorProcrastination and delay are critical factors when structuring a deal. Therefore, a business broker will continually move the process forward with qualified buyers, financing resources and ancillary associations to the deal such as CPAs and attorneys. a business broker is in a better position to perform this function than the owner as he/she is focused on the life cycle of the deal. The owner will be allowed to focus on operating a profitable business.
    NegotiatorSelling a business is often emotional for the business owner. An intermediary will act on behalf of the owner and will establish a strong negotiating position without compromising the goodwill and relationship between the principal parties. An intermediary will increase the opportunity to receive “the best price” for the business.
    ResourcesA business broker is a skilled professional in the mergers and acquisitions world and has established relationships with many professional organizations which are required to complete the transfer of ownership. These relationships will prove to be extremely beneficial to the business owner and the buyers.
    ConfidentialityAn owner could experience disastrous results by “leaking” that the business is for sale. Employees, customers, suppliers and competitors' relationships could be damaged causing an adverse condition hurting the potential sale. A business broker will preserve the confidentiality of the selling company during the process of marketing the business and only share information on a “need to know” basis.
    AdvisorAs an intermediary, a business broker will provide the business owner with strategic information regarding market timing, market conditions, market price, financing options, structuring the transaction and other information that is advantageous to the owner.
  • Sellers expect us to bring a qualified buyer for their business
  • SLOW!!!
    We are the premier brokers in Jacksonville and we would encourage you to talk with others brokers to see our difference.
    We are your go to people when it comes time.
  • Now, If you have any questions of me. Please ask.
    Call Upon ROGER MURPHY to Moderate the General Question Session.
  • Now, If you have any questions of me. Please ask.
    Call Upon ROGER MURPHY to Moderate the General Question Session.
  • Transcript

    • 1. Buying Your First Business Kimberly Deas / William Yankee Business Broker 904-683-6655 1
    • 2. Agenda • Understanding the Local Economy • Process of Buying a Business • Avoiding Common Mistakes • Using a Business Broker www.SellYourBusinessFlorida.com 904-863-6655 2
    • 3. Local Economic Outlook • 96% expect business to grow or be stable* • 92% expect FL economy to improve or be stable* • 80% expect US economy to improve or be stable* • * BMO Harris Bank Survey published in Jacksonville Business Journal, 1/15/14 www.SellYourBusinessFlorida.com 904-863-6655 3
    • 4. Business Buying Environment Both Buyer and Seller market (Industry Dependent) Interest rates are low Steady Flow of New Businesses Selling Good, well organized profitable businesses sell faster, higher – Be prepared to move quickly www.SellYourBusinessFlorida.com 904-863-6655 4
    • 5. The Buying Process www.SellYourBusinessFlorida.com 904-863-6655 5
    • 6. Buying Ability Prequalify First! •Cash = Down payment – Friends and Family – 401(k) •Bank Financing / Non Conventional Loans •Seller Financing www.SellYourBusinessFlorida.com 904-863-6655 6
    • 7. Financing Options Bank Lending (SBA) • Business / Buyer must qualify for Lending • Lenders 80% with Seller 10% and Buyer 10% • 60-90+ days to closing • Not available for all businesses / buyers www.SellYourBusinessFlorida.com 904-863-6655 Seller Financing • Some industries not financeable with banks • Seller acts as bank • Affect on price: More seller financing, higher asking price 7
    • 8. Searching For The Right Business • • • • • Online websites Craigslist Ask Friends Approach Directly Work with a Business Broker KEEP CONFIDENTIAL Sign NDA www.SellYourBusinessFlorida.com 904-863-6655 8
    • 9. 3 Steps to Evaluating a Business 1. Cash Flow 2. Talents 3. Opportunity Evaluation www.SellYourBusinessFlorida.com 904-863-6655
    • 10. Evaluating Businesses 1. Cash Flow Requirements – SDE (aka Cash flow, Owner’s Benefit, Adjusted Net) – SDE = Profit + Owner’s Salary + Personal Expenses + 1 time expenses + Adjustments to normalize to current www.SellYourBusinessFlorida.com situation. 904-863-6655 10
    • 11. www.SellYourBusinessFlorida.com 904-863-6655
    • 12. Valuing a Business Worth what a willing, able buyer is willing to pay! Common Valuation Methods: 1.Based on Multiplier of Cash flow 2.Based on Tangible Asset Values www.SellYourBusinessFlorida.com 904-863-6655
    • 13. Evaluating Businesses 2. Your Talents / Skills vs. Business Operation Requirements – Sales – Marketing – Operations – CEO www.SellYourBusinessFlorida.com 904-863-6655 13
    • 14. Evaluating Businesses 3. Evaluate the Specific Opportunity / Location Questions to ask about business: -What differentiates your business? -How would you grow the business? -What would you do with a windfall of cash? -Why are you selling? www.SellYourBusinessFlorida.com 904-863-6655 14
    • 15. Reasons Sellers Sell • • • • • • • Burned Out Retirement – No Heirs Divorce, Dispute or Illness Insufficient Capital to Grow Achieve Estate Liquidity Outside Investors Want Liquidity Get Discovered – Receive an Offer (Order of frequency) www.SellYourBusinessFlorida.com 904-863-6655 15
    • 16. Offering Memorandum • Narrative About Business (Complete Disclosure) • Comparative Historical Financials (Recast) • Forecasted Financials • Synopsis of Contracts, Leases & Lawsuits • Given to just a Few Prospective Buyers www.SellYourBusinessFlorida.com 904-863-6655 16
    • 17. Meeting the Seller • Purpose: Learn the business, understand the seller • Ask Questions about the business • Tour the facility, look at inventory • CEO level questions www.SellYourBusinessFlorida.com 904-863-6655
    • 18. Making an Offer Points to Consider: •Price / Earn Out •Seller Financing Terms •Non Compete Terms •Training Period •Escrows •Contingencies – Financials – Lease – Franchisor Approval www.SellYourBusinessFlorida.com 904-863-6655
    • 19. Buyer’s Due Diligence • Goal: Reduce Risk and Verify Offering Memorandum • Create Priority List of What to Ask (focus on priorities) • Using Outside Advisors – Attorney – Accountant – Specialists www.SellYourBusinessFlorida.com 904-863-6655 19
    • 20. Confidentiality • Harder to maintain during Due Diligence • Shorter time for Due Diligence • Finish Document Review before contacting Suppliers, Customers & Bankers www.SellYourBusinessFlorida.com 904-863-6655 20
    • 21. Negotiating & Closing • Maintain Positive – Flexible Attitude. • Add Addendums as needed • Focus on what’s really important www.SellYourBusinessFlorida.com 904-863-6655 21
    • 22. Post Closing • Indemnifications: Representations & Warranties • Earn Outs, Escrows & Offsets • Seller to Buyer Transition – Extending Courtesies Pays Off – Play Nice. www.SellYourBusinessFlorida.com 904-863-6655 22
    • 23. Common Buyer Mistakes • Overlooking Talent Requirements • Incomplete Due Diligence • Gotta-Do-This-Deal Mentality • Over Paying – Too Much Debt • Under Capitalized www.SellYourBusinessFlorida.com 904-863-6655 23
    • 24. Advantage of 1 Broker vs. Many Brokers For Buying a Business 1 Broker • • • • • FOCUS, FOCUS, FOCUS!! Broker completely knows you and your needs Accumulated knowledge of your interests Business Advisor to guide process Insight to Early Listings www.SellYourBusinessFlorida.com 904-863-6655 Many • No Focus • Keep retelling your story • No broker looking for you • If talking to every broker, some brokers might not work for you. www.SellYourBusinessFlorida.com 904-863-6655 24
    • 25. Working with a Broker • To Qualify – Complete intake interview – Complete Personal and Financial Profile – Provide Resume • Pre-qualify for purchases (as needed) • Complete NDA’s in timely fashion • Provide feedback on each business evaluated www.SellYourBusinessFlorida.com 904-863-6655
    • 26. Why Use Us? • High Level Professionalism • Confidential • Dedicated Networks of Brokers to find Listings • Responsive • Experienced • Partnership Creates more Results www.SellYourBusinessFlorida.com 904-863-6655 26
    • 27. Search for businesses for sale http://bit.ly/1dpJHiS Contact us for Intake Interview: Kimberly Deas / William Yankee Business Brokers Questions: k.deas@murphybusiness.com w.yankee@murphybusiness.com 904-683-6655 27
    • 28. Search for businesses for sale http://bit.ly/1dpJHiS Contact us for Intake Interview: Kimberly Deas / William Yankee Business Brokers Questions: k.deas@murphybusiness.com w.yankee@murphybusiness.com 904-683-6655 28