How to deal with a Business Broker if you are trying to buy a small business

Business Brokers are not all alike nor are their processes. Here are 5 Dos and 5 Don'ts when working with a Business Broker:

Dos

1. Make sure the business broker tells you, in writing, who they represent. Usually it is the seller.
   
2. Make sure you know what your financial situation is before you meet with the broker. How much of your own money do you have to invest? Not how much you think you can get, not what your golf buddy says he'll back you for... YOUR money!
3. Make sure you know the minimum amount of income you need to support yourself when you buy a business. Not the most you'd like to make and not what you think you deserve...the amount you need.
4. Be open minded about the kinds of businesses that might fit your financial situation
   
5. Do your homework but do it quickly. Clear your calendar so you can take care of what needs taking care of in a timely fashion
   

Don'ts

1. Don't expect the business broker to re-arrange his whole world to accommodate your schedule.
2. Don't assume you know more than the broker ( you might, but don't assume it)
   
3. Don't bad mouth a seller. If you're not interested just leave it at that and move on.
4. Don't try to convince the broker you have resources and skills that you don't have.
5. Don't be maybe, maybe, maybe.... a fast no is better than a slow maybe. Move through the process efficiently.

Keep these tips in mind and you'll have a better chance of seeing the good businesses.

When buying a small business - Allocation of Purchase price is important!

Allocation of Purchase Price is done for tax purposes when buying the assets of a small business. The allocation is important because it effects how the person buying a business and the person selling a business will be taxed and what deductions are possible.

Always do the allocation of purchase price before closing the transaction, it's real money! Business brokers should be able to provide you details and the appropriate IRS form 8594.

Here are the issues:

1. Buyer wants shortest depreciation schedule for acquired assets.
2. Seller wants tax treatment at capital gains rates, not ordinary income
3. Buyer wants to write up value in hard assets so buyer can deduct more in depreciation
4. Seller does NOT want to write up assets because it triggers depreciation recapture and tax at ordinary income rates
5. Goodwill and intangible assets are 15 year write off for buyer and cap gains rate for seller.

A good allocation of purchase price can reduce the total amount paid for a business after tax, and after tax is all we really care about, right? Same issue for seller, a good allocation of purchase price can maximize the after tax benefit to seller.

For buyer the difference is WHEN they can deduct the price, for the seller it's the difference between cap gains rates and ordinary income! Big difference!!

Talk to your business broker about how to address this issue in any offers.

Due Diligence for Buying a Business - Part 3

Assuming you've read Part 1 and Part 2 here we go with Part 3.

Sales Tax and Due Diligence in a small business purchase: Make sure the seller provides you with the Sales Tax Reports for at least 3 years. Double check those with the reports filed with the state. It is pretty unusual for small business owners to over-report sales and pay taxes they don't owe ,so this is a good source for determining the minimum sales level. If the sales tax reports and payments are not up to date seek legal advice on what effect that could have on you if you purchase the assets. In some states the sales tax "chase" the assets and you could be in for a surprise when the tax man shows up for old taxes on the assets you just bought.

If you are working through a business broker they probably already have the sales tax reports an can provide them to you in due diligence. But as always, trust but verify. Cross reference with the official state reports.

Financing the Small Business in Today’s Environment

Guest post from Mr. Tim Stamps DRDA, PC

Most of us have encountered a budding entrepreneur who has spent the majority of his/her career in the corporate world and then finally musters the courage to step out on a limb and start their own small business. They face a few problems, though: despite his long-standing corporate career and a nice 401(k) for retirement, they have very few liquid assets and are in need of some capital for their business start-up.

For many small business owners the prime source of funding comes from personal savings, or by refinancing their personal residence with a home equity line of credit. Even so, entrepreneurs still often use outside sources such as friends and family, capital markets, or private equity groups. Funding from third parties can prove undesirable, though, because outside sources usually expect a lion’s share in the business in return for equity financing.

BORSA: A compelling, yet widely unheard of source of equity is the Business Owners Retirement Savings Account. BORSA, for short, is a tool which allows entrepreneurs to fund the purchase or recapitalization of a franchise, business start-up, or business property using their holdings in a 401(a) pension profit sharing 401(k), 403(b), 457, or IRA rollover. By utilizing the BORSA these purchases can be accomplished without distributions, taxes, penalties, or the use of retirement plan loans.

DRDA, P.C., a CPA firm, designed the BORSA (c) in 2005 as a result of extensive research for a tax and penalty-free solution for clients with the need to access their retirement accounts to start a business. They analyzed the provisions of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA), as well as professional publications and court cases that they felt were pertinent. Additionally, DRDA sought the expertise of a nationally recognized ERISA attorney to solidify the legality of such a solution. Today, the BORSA is recognized and is available in all 50 states.

There are three basic requirements for setting up a BORSA for a business venture. First, the business owner must have an existing retirement account such as an IRA or one of the other aforementioned accounts and have the ability to transfer or rollover the funds in the BORSA. Second, the business must be an eligible “active trade or business” that will have at least one employee. Third, the individuals need to work with professionals familiar with BORSA rules and governing laws.

To clarify, a BORSA is not a loan, nor a self-directed IRA. A direct investment into an “active trade or business” by a self-directed IRA is prohibited. The federal government does recognize the use of money from a 401(k) plan as an equity investment. In fact, the Small Business Administration SOP 50-10(5) that was released August 1, 2008 stipulates the SBA will not require a 401(k) plan owning more than 20% or more of a company to guarantee the loan. What’s more, unlike other sources of funding such as credit cards, SBA or asset-backed loans the BORSA plan does not generate additional debt for the business owner.

For additional information on the BORSA plan visit www.borsaplan.com or contact Tim Stamps at DRDA, P.C: 1521 Green Oak Place, Ste 198, Kingwood, TX 77339; telephone: 281-852-3131; email tim@drdacpa.com.

Buying A Business: The Business Plan as a Guidebook

I am always amazed at what little effort goes into a business plan when business buyers are looking at a business. The buyer will spend more time trying to figure out how to make the office bigger than they will trying to build a business plan the will improve the business.

When considering the purchase of a small business here are the 6 elements I think should be in a well written plan:

1. Cash flow forecast: It's not enough to be able to make a profit, the business plan template should include a cash flow element, first 90 days week-by-week, after that monthly for 1 year.
   
2. A detailed step by step, minute by minute plan for exactly what you need to get done in the first 60 days.
3. A marketing section that deals with two elements a) what are you going to do to keep the business that is already there b) what are you going to do to get new business
4. A detailed plan for personnel, what you will discuss with each employee and a well thought out plan for anticipating the employees questions (insurance, benefits, pay, etc)
5. A detailed description of where you see the business in 3 years, bigger? Smaller? New products? New geography?
6. A detailed plan for keeping current vendors happy and a separate plan for identifying and nurturing back-up or new suppliers.

There you have it. A basic no frills look at what issues are important in the new business. The are many resources on the Internet for ideas on how to write a business plan. Many of those can be modified to serve your purposes. This business plan should mean something not be just a fluff piece to to use to apply for small business loans. This document should guide you and give confidence to your employees, customers and suppliers.

Take the time to make it make sense and avoid the common trap of convincing yourself you're a genius and then create some pie-in-the-sky plan that is useless as soon as you hit the print button.

Confidentiality in the Business Sales Process.. why it's important to buyers, sellers and business brokers...

One of the most misunderstood aspects of selling or buying a business is the confidentiality issue.
Why do owners who are selling a business want to maintain confidentiality? Why is everyone so paranoid?

Here's a short list:

• If employees find out the business is for sale they often assume the worst even though it's not true 99% of the time. For some reason most employees assume that if the business is being sold they will lose their jobs. That uncertainty between the time the employees hear the business might be selling and when it does sell leads employees to try to protect themselves by looking for another job. The irony is that business buyers are worried that the employees will quit, while employees worry a new owner will fire them. If the first any employee hears about the business being sold happens after the sale the new owner can say to them "I bought the business and I want you to stay with the business, you have a job ." Confidentiality helps the buyer and seller.
  
• If competitors hear about a business being sold they will talk to customers and spread rumors and try to scare customers into leaving the company. Comments to customers like "XYZ Co is for sale, they aren't able to fill your orders" can sometimes, even though not true, disrupt the business prospects. The buyer wants those customers after the business purchase so protecting confidentiality helps the buyer and seller.
• Vendors - Supplier's get antsy if one of their customers is being sold because they have a fear of not getting paid or losing the volume. So vendors sometimes will put a business on c.o.d. terms if it fears a sale will jeopardize the credit it has extended the business. Again, if buyer can tell vendor after the sale. "I've bought the business and I look forward to continuing to use you as our primary supplier" the vendor at least knows they still have a customer. Confidentiality is good for business buyer and business seller.

The above are just 3 examples of why maintaining confidentiality when buying or selling a business is important. Your business broker will have confidentiality agreements that outline in detail the specific terms that bind the parties to confidentiality. Read it, understand it and respect it because if you buy the business you'll be glad to did.

If you find this article helpful you may want to look at Part 1.

Due Diligence for Buying a Business - Part 2

When working through a business broker to buy a business the due diligence process should be more efficient than when working on an acquisition without a business broker involved.
In Part 1 we talked about doing due diligence for the Sales Tax issues. Now in Part 2 we'll talk about the business income tax return issues.

When conducting due diligence to buy a business we talked about "trust but verify". Income tax returns are no different. In most cases the seller will provide the business buyer with tax returns for the business. The assumption is that the tax returns accurately reflect the results of the business operations, right? Well, sometimes they do and sometimes they don't. However, your first step at this point is to ask the seller to sign an IRS Form 4506. This will allow you to get a copy of the tax return the seller actually filed with the IRS. The vast majority of the time the returns you received from the seller and the returns the IRS has are the same, sometimes they aren't. If they aren't the same there needs to be a really, really good reason.

If the seller was just trying to deceive you...run for the hills and find another business to buy from a seller that's less deceptive. And don't forget to tell the business broker, he will no doubt be just as surprised as you are.

A Business Buyer's Guide to Working with a Business Broker

When looking to buy a business often the business seller has retained a business broker to represent the seller, locate a buyer, assist with negotiations, guide the due diligence efforts and coordinate the closing process.

If you are seriously trying to find a business to buy you will come in contact with a business broker at some point. Here are some tips that might help you:

• Make sure you know who the broker represents and get it in writing. In small business sales it is most common for the broker to represent the seller (but the broker still usually has a duty to treat you fairly and honestly). Know the standard the broker is working under.
• Even though the business broker may represent the seller don't automatically assume he/she is your enemy
• If you don't feel like the broker is treating you fairly and honestly...go somewhere else.
  
• Make sure you understand the source of any information provided to you by the business broker. Did the seller generate the info? Accountant? Broker? Always ask.
• When you receive information live by the old saying "Trust but verify." If there is a reluctance to allow you to verify certain information... that should be a warning sign.
• Move deliberately through the process but at a decent pace... time kills deals. A fast no is better than a slow maybe.
• Be responsive to all parties, return calls promptly, check your emails, etc. If you are not interested that's fine, tell the broker and move on, but don't just go "radio silent" without advising the parties that you have lost interest.
• Finally, treat all information received as confidential, do not try to get cute with this. I've seen many buyers get themselves into a pinch because they failed to comply with confidentiality agreements. Immediately return to the business broker any information requested that is bound by the confidentiality agreement you sign.

Buying a business is a grind but the rewards are great for those who can get through the process with thoroughness while maintaining the goodwill of all the parties.

Due Diligence when selling a business Part 1

First in a multi-part series on due diligence.

When selling your business .... know your buyer.

Even in the rare instance of an all cash deal it is a good idea to do a background check on a potential buyer. They'll be getting your employees, customers and the good name you've built in your industry. Background checks are very inexpensive relative to the transaction price. Simply asking a buyer for information to perform a background check will tell you something... if the buyer opposes a background check you know something!

When you sell a business and close the transaction the deal is not over. There is a transition period when you'll be working with the new owner and you'll have to explain to customers, vendors, etc why you chose to sell to this person.

Choose your buyer as carefully as the buyer chooses your business!

Due Diligence for buying a business Part 1

The due diligence issue when buying a business is a long topic with many items. I will break them down into a series of steps that when completed will make a reasonable starting point for due diligence when buying a business. Since all businesses are different this list may not be appropriate for every situation but it is (or should I say will be) a good check list.

A critical element is examining the sellers business tax returns.......BUT after you examine the tax returns and before completing the business purchase make sure you ask the seller to sign an IRS form 4506. This form will allow you to pull a transcript of the tax returns from the IRS that will confirm that the tax returns filed by the seller are actually the same as the tax returns you received! If they are different you need to get a good explanation as to why (and I'd like to hear the reason as well!)

As always, trust but verify!

Tax Law Changes effecting Biz Sales

The new benefits offered by congress allow small businesses to reduce their tax bill which makes the business sale more appealing for the sellers.

S Corporation Built-In Gains Tax Relief. For tax years beginning in 2009 and 2010, ARRA shortens, from ten to seven years, the amount of time that an S corporation that has converted from a C corporation must hold on to its assets to avoid taxes on any built-in gains at the time of the conversion.

Deal Closing!

This past Friday we completed a sale transaction. Buyer was an east coast Private Equity group funding a strategic acquirer. Lot of moving parts including a last minute hiccup with landlord but everyone pulled together. Seller is staying on for a smooth transition and buyer brings lots of support and buying power to the business - everybody wins.

We were retained by the Seller to locate a suitable buyer for the business and we're very pleased to have accomplished the mission in a difficult financing environment.

Is buying a business right for you?

We often get to speak to people who are undecided about looking for a new job or, usually as a plan B, buying a business to replace the income they've lost when they left their previous employer. It is rare when these people have thought through the process of buying a business with clear lens. Here are 5 Dos and 5 Don'ts when considering purchasing a business:

DOs

1. Understand your current financial situation and resources thoroughly.
2. Be prepared to move through the process at a good pace but without skipping steps. For instance, don't plan a 2 week vacation in the middle of the process.
3. Understand that being in business has risks, few of which are as risky as having a job, but risks none the less. You will not buy a quality business without some risk.
4. Be prepared to spend money for good advice from people who are experts (not your buddy at the country club who once bought a margarita machine to rent).
5. Look at businesses that need skills you have, not just businesses that "seem like they'd be fun to own". Your skills will determine the biz future, match your skills with the right business.
   

DON'Ts

1. Don't assume everyone is out to cheat you. You can find reputable people to deal with.
2. Don't let your emotions run wild. This is a arduous process that rewards discipline and a stick to it attitude.
3. Don't fail to listen, you night actually learn something.
4. Don't be afraid to admit what you don't know.
5. Don't assume the seller is your adversary. Experience has proven that the buyers who get the best price and terms on a deal are the buyers who treated sellers with respect and courtesy. You can say no in a good way or a bad way, choose the good way.
   

Email as Productivity Tool

We have been using gmail enterprise email system for about 6 months and I have to tell you it is a great system. Like most of what Google is known for, biz gmail is intuitive yet robust enough to handle a relatively heavy email user (I get about 150 emails a day). If you are looking for any easy to launch, low cost and full featured email system I think you'll find gmail for biz a good choice. Here's a place to start google biz email.

We have about 17 users on the system and although the email works great the google docs system has a way to go. We still have trouble with document conversions and I can't recommend google docs for any serious document management uses.

If you decide to try it let me know what you think.

Tax law changes and business sale net values

Tax changes are on the way! What does it mean for a business owner who may wish to sell his business in the next 3 - 5 years? Here's a link to an article you might find interesting, click here.