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.