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Thinking of Buying a Business?

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This is a presentation I use regularly to talk to individuals and groups about the importance of being well prepared and following a disciplined process if you are thinking of buying a business. The presentation provides context and framework, raises questions for reflection, and provides guidance for some important preparatory steps.

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Thinking of Buying a Business?

  1. 1. Thinking of Buying a Business?Gareth J. YoungAbraxas Business Services<br />
  2. 2. You should expect to get out of this class…<br /><ul><li>The importance of a process designed to find a business that fits you
  3. 3. Types of Business: Start-ups, franchisees and existing businesses
  4. 4. An introduction to key business attributes you must know (including valuation)
  5. 5. Overview of financing
  6. 6. Practical tips
  7. 7. When and where to use professionals</li></li></ul><li>Building a Successful Process<br />
  8. 8. Building a Successful Process: Brand “You”<br /><ul><li>Your personality type matters
  9. 9. Your skills/ experience
  10. 10. Expectations versus reality
  11. 11. Personal goals meet financial constraints
  12. 12. Targeting the Search: Success factors…</li></li></ul><li>Building a Successful Process: Brand “You”<br />Your personality type matters<br />Do you like sales?<br />How to you feel about risk?<br />Are you self motivated?<br />Can you work alone?<br />See what the tests say about you<br />http://marriottschool.byu.edu/cfe/startingout/test.cfm<br />http://www.startupjournal.com/howto/soundadvice/20020327-mancuso-quiz.html<br />http://www.communityfutures.com/cms/Entrepreneur_Test.15.0.html<br />www.sba.gov/services/training/index.html<br />
  13. 13. Building a Successful Process: Brand “You”<br />Your skills / experience<br />Strong management/leadership skills<br />Good people skills<br />Appreciate and understand financial statements<br />Profit and loss statements<br />Balance sheet<br />Cash flow statements<br />Forecasts<br />Orientation to love the profit – not the product<br />
  14. 14. Building a Successful Process: Brand “You”<br />Expectations versus reality<br />Profit minimization versus maximization (tax driven)<br />Compiled versus audited statements<br />“Good ole boy/gal” versus pedigree<br />Very long hours versus long hours<br />Empty the trashcans versus call your assistant<br />Orientation to love the profit – not the product – it’s a comment worth repeating<br />
  15. 15. Building a Successful Process: Brand “You”<br />Personal goals meet financial constraints<br />Buying a job or buying for growth – it matters<br />Is your family on board – especially your spouse<br />Income to support your personal expenses<br />Working capital – can be a significant amount<br />Investment capital<br />And of course, a cushion<br />
  16. 16. Targeting the Search Around Brand “You”<br />Success Factors...... <br />Passion<br />It’s great to have but it takes more<br />Experience / education<br />What are you really bringing to the success equation<br />If you don’t have it – can you get it? Hire it? Rent it?<br />Are you best served by corporate America<br />Realistic expectations<br />Capital constraints<br />
  17. 17. What type of business?<br />
  18. 18. Launching a Start-Up<br />
  19. 19. Buying a Franchise<br />
  20. 20. Acquiring an Existing Business <br />
  21. 21. Where to Look for a Business<br />On-line (review these tonight!)<br />BizBuySell (www.bizbuysell.com)<br />GABB (www.gabb.org)<br />IBBA (www.ibba.org)<br />Referral sources <br />CPAs<br />Attorneys<br />Everywhere<br />
  22. 22. Attributes You Must Know About a Business<br />
  23. 23. Attributes You Must Know About a Business<br />
  24. 24. Cash Flow and Adjusted EBITDA<br />
  25. 25. Determining the Price of a Business<br />
  26. 26. Seller and Buyer Views of the Purchase<br />Buyer Perspective<br />Sales price<br />Plus closing costs<br />Plus working capital loan<br />Less down payment<br />Equals the Debt Required to Finance the<br />Business<br />Free cash flow<br />Less debt service (5 – 7 years)<br />Less taxes<br />Less capital expenditures<br />Less working capital increases<br />Equals cash available to purchaser<br />for compensation<br />Seller Perspective<br />Free cash flow<br />Times multiplier<br />Equals the Sales Price<br />Adjusted for:<br />Less advisory fees<br />Less seller financing<br />Less debt repayment<br />Plus A/R and other retained assets<br />Less taxes<br />Equals “Net to Seller”<br />
  27. 27. Financing a Business..... <br /><ul><li>Financing will be the biggest challenge so plan ahead and understand the size deal you can really afford
  28. 28. Lower middle-market deals are hard to finance with traditional fund sources
  29. 29. SBA loans could be available but know that loans at this level generally require leveraging of personal assets
  30. 30. Funding with IRAs gaining popularity
  31. 31. Plan on 10% to 20% seller financing if the business is priced appropriately
  32. 32. Plan on at least a 20% down payment
  33. 33. For a business valued between $500K to $3M, figure on a 2.0x to 3.5x multiple</li></li></ul><li>Top 10 Reasons SBA Loans aren’t Approved<br />Brilliant business plan doesn’t address contingent risks<br />Periods of inactivity in the exact marketplace<br />Poor applicant/spouse credit score<br />Lack of collateral (i.e. real estate)<br />Round numbers on cash flow projections or loan amount needed<br />Poorly written/sloppy loan application forms<br />Hard to read executive summary/poorly packaged business plan<br />Lack of directly related management experience<br />Owners don’t have enough cash to maintain 25% equity position<br />Not explaining what the loan is for<br />
  34. 34. Practical Tips on Your Purchase<br />Plan to spend six to twelve months looking<br />Expect to see a lot of businesses, and to learn a lot along the way<br />Buying a business is a full time job! <br />There is no single purchase price multiple<br />Look for growth attributes:<br />Scalable<br />Extensible<br />Repeatable<br />Use advisors – but select them with care<br />
  35. 35. Using a Professional Business Broker<br />To help you determine the type company you are seeking<br />Working with the seller or the seller’s broker on obtaining key information<br />Analyzing the purchase price<br />Constructing a letter of intent or term sheet<br />To lead negotiations <br />Provide advice and experienced leadership<br />Act as a buffer, especially when emotions get high<br />Push the process to the closing table<br />
  36. 36. Summary<br />Build and manage a disciplined process<br />Leverage your brand “you” strengths<br />Plan ahead <br />Understand the right size deal <br />Plan your financial cushion and full commitment<br />Make sure your spouse is on board<br />It will probably cost more and take longer than you thought<br />Hire a professional and use them effectively<br />
  37. 37. Contact Information<br />Gareth J. Young<br />gyoung@abraxas.biz<br />+1 404-790-5536<br />www.abraxas.biz<br />

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