Where can I find information about buying a business in a specific industry?

As we all know the web has a lot of information but often it is hard to sort through the mass to get to the finer topics.

Every Friday, on internet radio, there is a 1 hour broadcast that deals with buying a business in a specific industry. This week's show (1pm cst, noon eastern) is about trucking companies. These shows feature industry specialists who can provide true insights into the good and bad to look for in a business.

Also, on the Entrepreneurial Insights website there is a menu of many previous shows and the industries they cover. You can replay those shows at your leisure.

Take a look.......and listen to Entrepreneurial Insights , you can visit and replay the broadcast anytime but the live broadcasts are Fridays at 1pm central.

Thinking about buying a business? Here's a way to figure what is possible

If you want to own your own small business there are really only two ways to get into business. You can start a business from scratch, often called a start-up. Or you can buy an existing business from a business owner who is ready to sell their business.

There is much written about starting a business. The biggest problem with a start-up is in the time it takes a start-up to become cash flow positive and unfortunately many never become cash flow positive and they fold.

Buying an existing business is often a good choice. If you do it right you can be cash flow positive immediately and financing for purchasing a business is often very favorable. In a previous post I wrote about "Why would someone sell be their perfectly good business?" and it talks about why business owners choose to sell good businesses.

If you want to buy an existing, profitable, business you need to answer a couple of questions about your situation before you begin your search.

First, how much money do you have available for a down payment before borrowing any money from any banks, credit cards, etc. It will be very, very difficult to buy a good business without a down payment.

Second, what's the minimum amount of money you need to make from the business to live on once you buy the business.

If those two numbers are reasonably close to each other you have a decent shot at buying a business.

Here is a "typical" deal:

Business earnings (Seller's Discretionary Earnings)  $75,000
Selling Price of business   $200,000
Down payment    $50,000
 Earnings/Salary you need  $50,000
Get an SBA Loan for $150,000
Annual Payments for your SBA Loan $20,500 (10 years @ 6.5%)

Business earnings $75,000 - $20,500 (debt payments) = $54,500 to you the new owner.

Also, when thinking about your down payment there is a mechanism to use you 401(k) funds to buy a business without incurring early withdrawal penalties nor tax obligations.

If you want to be in business for yourself it's always a good idea to get informed and look at all your options.

SBA Loans have new underwriting policy

A few days ago the SBA came out with a new lending policy to be used when buying a business. Business brokers are very excited about this change since it will facilitate more financing for small business purchases. About 15 months ago the SBA made a draconian change in their underwriting that eliminated business acquisition financing for goodwill in excess of $250,000. This 2008 policy change effectively dried up SBA lending for buying a business sales. Small business financing is a unique problem since the loans are usually not large enough for lenders to make much profit.

SBA loans are a very important part of the small business financing options. The newly released SBA business loan policy allows up to $500,000 in goodwill financing or if the buyer puts up at least 25% in equity the goodwill limit is uncapped.

This policy change is important because the goodwill value in the transaction is an indication of a highly profitable business.

SBA loans are back and business buyers and sellers will be more able transfer business ownership to retain jobs and help their communities grow.

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.

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.

Find a job or buy a business... a choice worth investigating.

Buying a business could help you achieve your retirement goals. Today's economic problems have changed the future for many people who thought they had a job for life (or at least a job until they decided not to have a job). In times like these, finding a new job is not only difficult but maybe even unwise.

Have you thought about buying a job? You can if you buy a business.....but you're thinking "oh, but it's so risky"... I doubt it's any riskier than going to work one day and getting fired because some idiot in New York bet that oil prices would go up forever or bet that people who took out mortgages they couldn't afford would some how hit the Lotto so they could make the payments.

What's the risk in owning your own business? First you might ask... are you smart enough to run it? In my experience with thousands of business owners I can tell you, I.Q. and education have very little to do with success.

Why do small businesses succeed? Because the owners understand what it takes to get people to pay for the product or service they provide. It's not rocket science.

But you say, with the economy so bad nobody is spending money. Wrong, the economy looks like it will be down about 5 % in this last quarter of 2008. Guess what that means? 95% of the money spent last year is still being spent. Have you stopped spending money on EVERYTHING? Electricity? Food? Toothpaste? Beer? Gas? Internet? .....you get the idea.

Just look around your neighborhood. Even in this economy you will see many, many businesses whose owners are doing a lot better than an unemployed person who used to have a job.

What does it take to buy a business? Here's simple formula that can give you a general idea of the financial requirements of a business purchase:

Whatever salary you want to replace, you should have about that much money for a down payment. If you want to replace a $50,000 per year salary, you need about $50,000 for a down payment.... $100k salary...need about $100k down payment, etc.

Where do you get the down payment? There is a tax break for you! You can use money in 401(k) or I.R.A. to fund the down payment (see CPA or got to www.borsaplan.com) with no penalty or taxes for withdrawal.

But you say "that's my retirement money!". First it won't be if you need to withdrawal it to live on and secondly you have no idea if it will increase in value over time.

If you own a small business that could be your retirement..SELLING IT. In fact you are likely to buy the business who is retiring!

Where do you find a business to buy near where you live? First you can check www.sunbeltnetwork.com. There are other business brokers out there but Sunbelt is the biggest with about 250 offices in the U.S.

While you're worried about finding a job, also spend some time worrying about how you can gain the security of owning your own business. I do and you can to.