Buyer Seminar 2009


Published on

Outline text of a seminar I have given for 15 years locally as a volunteer for SBA\'s Service Corps of Retired Executives (SCORE).

Good overview of the process.

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

Buyer Seminar 2009

  1. 1. Buying A Business © Copyright 2009 by Glen J. Cooper by Glen J. Cooper, CBI, CBA, BVAL President, Maine Business Brokers Seminar of January 15, 2009 Agenda: My Notes / FYI: 6:00 p.m. Part 1. Introduction & Personal Reflection I Hope to Add Value: 6:30 p.m. Part 2. Setting Your Objectives -Information Part 3. How to Search for a Business -Examples Part 4. Business Valuation – Part 1 -Stories -Encouragement 7:30 p.m. Break My Experience: -Business Brkr./Appr. 7:45 p.m. Part 5. Business Valuation – Part 2 -28 yrs. / 400+ sales Part 6. Financing – What Can You Expect? -10,000 +/- buyers Part 7. Due Diligence – Questions to Ask We Don’t Cover: -Franchises 8:30 p.m. Questions (Questions okay at any time) -Legal Detail 9:00 p.m. Adjournment -Financing Detail Part 1. Introduction & Personal Reflection “The purpose of a business is to give its owner more life!” (Michael E. Gerber) 6 Questions: 1. Where is my experience? 4. When do I want to work? 2. What are my talents? 5. Where do I want to be? 3. What do I like to do? 6. What kind of business do I want? The “Entrepreneurial Myth” is the myth that most people who start or buy a business are “entrepreneurs.” They’re not! According to author Michael Gerber, most are “technicians suffering from an entrepreneurial seizure!” They know how to work “in” the business, but not “on” it. If you don’t learn to work “on” your business, it won’t give you more life; it will take the life you have! Suggested Reading/Listening (all works by Michael E. Gerber): Books: The ‘E’ Myth (Revisited) 272 pp. (2001) Paperback $16.00 US. Or Awakening the Entrepreneur Within 268 pp. (2008) Hardback $24.95 US.
  2. 2. Audio Recording: The ‘E’ Myth Seminar (1995) Available online. Part 2. Setting Your Objectives Three Areas of Consideration Before You Start: Three Truths: 1) Do you have the resources in place? 1) We only move  Do you have enough money? forward when we  Do you have enough energy? have to.  Do you have sales & management skills?  Can you take the time? 2) Most buyers don’t know what 2) Do you have the background, understanding they want. & support you need?  Who are your role models? 3) Only 2% buy!  What is your personal experience?  Who in your family will understand & support you?  Can you take a calculated risk? 3) Do you understand how to run with your strengths?  Your experiences – leveraging what you already know  Your talents – doing what you have always been good at  Your preferences – taking advantage of your unique style  Your passions – working on what you care about Suggestion: Make A List of "20 Things I Like To Do" and a List of “20 Things I Want To Do Before I Die.” Then ask: 1) Which of these things use my experience, talents? 2) Where can I do these things? Do I have to move? 3) What do these things tell me about my values and my priorities? 4) How many of these things cost money? What are my income needs? 5) What do these things tell me about how I like to spend my time? 6) What do these things tell me about what kind of business I would like to run? Suggestion: Take a Myers-Briggs Personality Type Indicator (MBTI) Test 16 Personality Types from ISTJ to ENFP (I/E & J/P are particularly important!) Read: Please Understand Me II by David Keirsey, Prometheus Nemesis Book Co., 348 pp. (1998) or Type Talk by Otto Kroeger & Janet M. Thuesen, Dell Trade Paperback, 290 pp. (1988) For a private MBTI test and review, contact: Mark Rajotte, Career Management Associates, 72 Pine St., Portland, ME 04102 (207)780-1125 Myers-Briggs helps measure your preferences and clarifies your strengths. It explains: The ways you learn and communicate The ways you build relationships The ways you view work The ways you view conflict 2
  3. 3. Part 3. How To Search For A Business Where to look: 5 Primary Sources 1) Search your own networks. Your trade, your industry, your environment, people you know. Your attorney, your accountant, your banker. 2) Cold call current owners. Advantages:  You may be the only one who knows the business is available.  You may catch them exactly at the right moment.  You can target specific types of businesses.  Create lists to call from the Internet Disadvantages:  They may be more unrealistic on price than usual because you've caught them early in the process.  They may not easily share information if you're a stranger.  You may need a go-between negotiator. After you've assumed the primary negotiating role, it's hard to step back. 3) Review the ads on the Internet networks To eliminate the dogs, ask these key questions:  What's for sale? (Tangibles, Intangibles)  What's the opportunity? Where's the "up-side"?  How was the price determined?  What is the financing?  Why is the current owner selling? Internet: - BizBuySell is the largest national network of listings & brokers also, or 4) Contact trade & professional associations. Some trade & professional journals have good classifieds. Some Executive Directors of Trade Associations know what's available. Most today have websites to visit with lots of industry information. 5) Call a business broker. Ask someone to recommend a good business broker. Your lawyer, your accountant Look in the Yellow Pages in the nearest metropolitan market Ask about the businesses they have for sale Part 4. Business Valuation – Part 1 3
  4. 4. Basic Concepts of Value: Cost, Market & Income Approaches  Cost Approach - What it costs to duplicate - most commonly used to value new construction  Market Approach - What it costs to buy a substitute - most commonly used to value residential real estate  Income Approach - What's reasonable to pay based upon profits - most commonly used to value businesses Basic Concepts of Valuing A Going Business: 1) Rules of Thumb Are Dumb "3x net" means nothing if you don't know what "net" you’re talking about. "3 months gross sales" means nothing if you don't know profitability. No rule of thumb makes sense if you can't define and understand it. 2) Only Future Benefits Create Value (“ROL and ROI”) Remember that the buyer is buying a job and a return on investment. A decent job is worth just so much of the net cash flow. This is known as "Return on Labor" (ROL). The rest will be for debt service & return on the buyer’s cash invested. This is known as "Return on Investment" (ROI). The buyer’s “cash invested” is often thought of as the down payment & the amount needed for working capital. 3) Nobody Really Knows Exactly What a Business is Worth There are really no "experts" who know what a business is worth  takes in-depth knowledge of that specific business  takes in-depth study of potential markets for that business  takes several long talks with the current owner  takes a lot of numbers crunching & analysis by you! 4) Strategy: You Can Control the Process Whoever understands the fundamentals and formulates the assumptions controls the process: Deciding what cash flow will represent a fair "Return on Labor." Deciding what rate of "Return on Investment" is appropriate. Determining whether or not it will fit your lifestyle.  Does it utilize your experience, talents, skills? Note: This is  Will it be what you like to do? directly related  Is it the kind of work that will be attractive to you? to questions  Is it where you want it to be? and MBTI on  Is it the type of business that buyers prefer? Pages 1 & 2! Part 4. Business Valuation – Part 1 (Continued) 4
  5. 5. Rules of Thumb Which Are Used (Dumb or Not!) Ultimately, people like “Rules of Thumb” Choice of: Earnings Multiples (A business is worth X times its annual earnings) Sales Multiples (A business is worth X percent of its annual sales) Occasionally, it might be X times annual sales (re: hotels) Only used for homogeneous comparisons of very similar businesses Possibly used as a “sanity check” against other methods For Small Businesses, Most Common Earnings Multiple is: 3 times “Cash Flow to the Owner” a.k.a. "Seller's Discretionary Earnings" (CFTO or SDCF or SDC or SDE) or “Earnings Before Interest, Taxes, Depreciation, Amortization & Owner’s Salary” (EBITDA + O, or just EBITDO) Note: This is a general formula and DOES NOT apply to businesses where the major part of the sale is real estate value (i.e. hospitality & recreational property). Where do these multiples come from? Bizcomps® is a national data base started 25 years ago. Pratt’s Stats® (More recent database Developed by Shannon Pratt, top U.S. business appraiser) Both databases are available at [#1] Past or Future Earnings - Which do we use? Answer: Whatever makes sense: past or current earnings for larger, more stable companies where the future is predictable by past or current performance. projected earnings for companies where purchase and sale will create a whole new situation. [#1] In the data bases mentioned above, the earnings for the “most recent financial report date” are the figures that are supposed to be used by those reporting the data. But, this data doesn’t always get reported in a uniform manner, and the quality of the reporting is uneven. Despite these weaknesses, the data is still useful. Over the many years of the IBA database, for example, there is enough data in many business categories to give the appraiser a clear indication of the appropriate ranges for earnings multiples. Pratt’s Stats and Bizcomps have also attempted to improve the data collection in their databases. How this data is collected, analyzed and presented is still evolving. Part 4. Business Valuation – Part 1 (Continued) 5
  6. 6. Answers to Frequently Asked Questions: Minimum value of a business is always its “liquidation value.” Maximum value of a business is its “cost to invent.” (if it can be calculated and makes sense to somebody!) Assets included in the multiple-derived value include everything the business needs to operate. Only “excess assets” are added. The multiple-derived value implies a “turn-key” operation, ready to go with everything set as needed to produce the income stream being multiplied. There is controversy here on the question of including inventory figures for some businesses. Some appraisers believe it needs to be treated like real estate. Businesses with real estate - If the business and real estate it occupies are valued separately, care must be taken to keep the analyses separate, before adding the results back together. The business valuation must include fair real estate rent as an operating expense before business net pre-tax profits are determined. Typically, the real estate would then be valued using an income approach based upon the fair rent assumed. Business real estate is usually valued separately from the business. Value is based on scheduled business rent less expenses. This equals Net Operating Income or NOI. 8-10X NOI is the common “rule of thumb” range for income-producing commercial real estate. Doesn’t usually apply to a residence, unless the home is “commercial investment real estate.” Cash not included - As you might expect, cash and cash equivalents (like rent and utility deposits or pre-paid items) are not usually included in the small business sale. Most small business sales are asset sales where it doesn’t make sense for the buyer to purchase these cash items. Furniture, Fixtures, & Equipment (FF&E, or FFE) which is needed to run the business is usually assumed to be included in a sale. In the national databases, FF&E is usually included within the reported sales price. Owner’s Vehicle - Although often owned by the business, it is usually not included in any sale or valuation. Inventory is handled quite differently from one transaction to another, depending upon the type of business and what is agreed between the parties. In the national databases mentioned above, the treatment of inventory is not consistent, so adjustments need to be made when using data from more than one database. Inventory includes inventory of supplies as well as inventory held for re-sale. The value of inventory for re-sale is always stated as the lower of cost or wholesale value, never at retail value. Accounts Receivable, Accounts Payable and Other Balance Sheet Items - Usually, accounts receivable, accounts payable and all other balance sheet adjustments for debt are not included in a sale or valuation of a small business. In a sale, the seller typically settles these accounts either before closing or after closing, during the transition period. In a valuation, the value conclusion is usually expressed as the value of the business as if it was free of debt. Common sense always takes precedence over somebody’s rule of thumb or method of valuation! Buyers and sellers set the price and terms. Part 5. Business Valuation – Part 2 Seven Essential Questions: Buyers need to ask; Sellers need to answer. 6
  7. 7. 1) What’s the Company Story? Can the buyer fit into the company story? Is this a new company, or an older one? Is it too new? Is it old and in decline? Where has it been? Where is it going? Is it established and steady? Or, is it disorganized and hard to figure out? Does it have a good record, reputation and growth rate? Or, is it a turn-around candidate? 2) What’s the Numbers Story? What picture does the numbers story paint? Does the business have declining sales? Is it stable, but sleepy? Or, is the company in a high growth pattern? How about profitability? If it’s declining, what can be done? If it’s growing, can management keep up? How much working capital is needed over-and-above the down payment for purchase? Do the separate pieces of the “company story” and the “numbers story” make sense as a whole when they are combined? 3) What’s the Workstyle? Is this attractive or unattractive work? How many hours are involved? How does the buyer expect to spend time? Does the business present normal challenges, less-than-normal challenges, or greater-than-normal challenges to its owner? Does it provide its owner with interesting and challenging work? Does the business appeal to a large number of buyer prospects? 4) How’s the Workspace? Is the facility the right kind of facility for the business? Is it conducive to the work being performed? Can the business efficiently and effectively produce the product and/or service in the workspace currently occupied by the company? Can the physical facility handle the intended future growth? Can the buyer envision herself/himself in the CEO’s chair? 5) How’s the Industry? Is the general industry category on the rise or decline? Is this an old, declining industry? Is it stable? Or, is the product and service “hot”? Is there a brighter future predicted? How easy is it to determine industry trends from independent sources? 6) What’s the Competition? Are there any significant barriers to competition? Are new competitors likely to enter the market? How stable is the competitive environment? Are the current competitors weak or strong? How many competitors are there and where are they? 7) What are the Terms of Sale? Has the seller offered reasonable terms that make it easier for the buyer to pay the price? What are the assets being sold and what kinds of loans can a buyer get from other sources? Will the seller finance the whole thing in a first place position, or take a second to bank financing? How easy is it going to be to finance the business? Part 6. Financing - What Can You Expect? Seven Sources of Capital: Banks will lend: 1) Your family & friends 70-80% of Comm’l R.E. value 2) Sellers 80% of New Eqpt. Price 7
  8. 8. 3) Banks 50-80% of Used Eqpt. value 4) Government & Hybrid Non-profit groups 50% Inventory wholesale value 5) Vendors & Leasing Companies 80% of Receivables < 90 days 6) Customers 0% on Intangible Assets 7) Venture Capitalists 6 “C’s” of Credit: 1) Character, 2) Capacity to Repay, 3) Capital, 4) Collateral, 5) Credit & 6) Cash Flow Part 7. Due Diligence - The Questions You Should Ask Here are 15 Items You Need to Start the Process: 1) Financial Statements for the last 3-5 years with corresponding tax returns 2) Last 12-36 months income by month (expenses by month also, if available) 3) Details of Sales, Cost of Goods Sold (COGS), Payroll & Other Major Line Items 4) Aged accounts payable & accounts receivable reports (may not be relevant) 5) List of all FFE (Furniture, Fixtures & Equipment) as well as any other special assets (exclusive agreements, patents, licenses, franchises) 6) Current asset depreciation & amortization schedules (tells when equipment was acquired, and when improvements were made, and what they cost) 7) List of assets owned by, but not used in, the business (i.e. Owner's personal vehicles and other items which may be on books but which are not included in the sale) 8) List of assets used by, but not owned by, the business (i.e. Owner's personal audio sound system, computers, artwork - items which may need to be replaced at buyer’s cost) 9) Inventory description & evaluation finished inventory, current inventory, seconds, work in progress 10) Customer and/or supplier lists & how kept Buyer should examine what % of business is each customer and supplier 11) Legal documents (leases - real estate & equipment; tax assessment records, real estate deeds, surveys, plot plans, diagrams, photographs, partnership agreements, license agreements, etc.) 12) Employee list with job descriptions, hours, pay, fringes, next pay raise due, accrued vacation pay, retirement plans & benefits 13) Company brochures, price lists, internal & external memoranda 14) List of competitors, estimated market shares, strategies, and detailed analysis (buyer gets seller's ideas on these subjects up-front, then shops the competition) 15) Copies of relevant trade journals or studies made by the trade association. Note: This list does not include real estate due diligence: environmental checks, zoning verification, review of possible easements, marketable title verification or location analysis. Addendum: Where to Find Us: Glen J. Cooper, CBI, CBA, BVAL Certified Business Intermediary Certified Business Appraiser Business Valuator Accredited for Litigation 8
  9. 9. Fellow of the International Business Brokers Association President, Maine Business Brokers Vice President & Broker Associate, New Hampshire Business Sales Also: Barbara J. Cooper, Vice President & Treasurer Bradley L. Kaplan, Vice President Lee Edwards, Operations Director Edward P. Settino, Jr., Associate Broker J. Mark Koshliek, Esq., Associate Broker David W. Bartholomew, Associate Broker John Hirschauer, MBA, CFP, Associate Broker Brian D. Hanson, Associate Broker Reginald E. Perry, CPA/ABV, BVAL, CVA, Associate Broker Dennis E. Norton, CPA/ABV, Associate Broker 217 Commercial St., Suite #401 (by appointment only) P.O. Box 7346 Portland, ME 04112-7346 207-775-1957 (Office) 207-775-6573 (Fax) E-Mail: Check out our listings on or or or BuyerSeminar2009.doc 9
  10. 10. Fellow of the International Business Brokers Association President, Maine Business Brokers Vice President & Broker Associate, New Hampshire Business Sales Also: Barbara J. Cooper, Vice President & Treasurer Bradley L. Kaplan, Vice President Lee Edwards, Operations Director Edward P. Settino, Jr., Associate Broker J. Mark Koshliek, Esq., Associate Broker David W. Bartholomew, Associate Broker John Hirschauer, MBA, CFP, Associate Broker Brian D. Hanson, Associate Broker Reginald E. Perry, CPA/ABV, BVAL, CVA, Associate Broker Dennis E. Norton, CPA/ABV, Associate Broker 217 Commercial St., Suite #401 (by appointment only) P.O. Box 7346 Portland, ME 04112-7346 207-775-1957 (Office) 207-775-6573 (Fax) E-Mail: Check out our listings on or or or BuyerSeminar2009.doc 9