Tucson Business Investments - Frequently asked Questions

FREQUENTLY ASKED QUESTIONS ABOUT BUYING OR SELLING A BUSINESS

FOR The SELLER:

Why is confidentiality important?
How much is my business worth?
How long will it take to sell my business?

FOR The BUYER:

Why can't you tell me name & location over the phone?
How much money will I need?
What size of business can I afford?
Why does the Profit & Loss statement show a loss?
Why should I go to a Business Broker?
Why should I buy a business rather than start one?
What is the real reason people go into business for themselves?
How are businesses priced?
What should I look for?
What does it take to be successful?
What happens when I find a business I want to buy?
Do I need an Attorney?

SELLERS: -----------------------------------------------------------------------------------------

Q. Why is confidentiality important?

Most often it is detrimental to a business if it is common knowledge that the business is for sale. It can be damaging to the relationships between the company and employees, creditors, the competition, and customers. Damage to these relationships can weaken the company's competitive position.

Q. How much is my business worth?

Ultimately, as with any asset, a business is worth what a buyer is willing to pay. There are no magic formulas or exact calculations. A professional business broker will help sellers determine fair market value of their business based on cash flow, competitive strengths, market position, growth potential, and risks of the business. But, it will ultimately come down to what a buyer is willing to pay considering the above issues.

Q. How long will it take to sell my business?

The local average is five months. Remember this is an average, some will take longer, some shorter. This will be determined by many factors. Time of year, cash flow -vs- asking price, the size of the business and the market. The most important factor is usually price. The price must "make sense" to the buyer.

BUYERS: ---------------------------------------------------------------------------------------------

Q. Why can't you tell me name & location over the phone?

Confidentiality is very important. Most often it is detrimental to a business if it is common knowledge that the business is for sale. Since it could be damaging to a business if wordgets out that the business is for sale, sellers most often require the professional business broker to keep the very fact that their specific business is for sale confidential.

Q. How much money will I need?

Most business sales involve some financing either from the Seller or from a bank or other financing source. You should expect to have the cash equivalent of more than one years adjusted net profit for the business as a down payment. This is usually equal to 25-50% of the purchase price of the business.

Q. What size of business can I afford?

Typically you can look at a business where the asking price is 2 to 3 times the amount of cash you have to put in as a down payment. The balance will be financed by either the seller or other financing source.

Q. Why does the Profit & Loss statement show a loss?

The name of the game is to pay as little taxes as legally possible. Therefore, the financial statements of a business reflect what the current owner has elected to do with the cash flow of the business. A professional business broker will help you to re-cast the financial statements to show the true cash flow of the business. This is sometimes referred to as "Adjusted Net Profit", "Cash Flow", or "Discretionary Cash Flow" Whatever it is called, this is the amount of cash a new owner should be able to spend as he/she desires.

Q. Why should I go to a Business Broker?

A Business Broker is likely to have access to and knowledge of many more business opportunities available than you are as an individual. In addition, the Business Broker has the knowledge and experience to assist you in locating the opportunity that is right for you, will prepare and submit your offer and will make sure that the entire transaction is properly administered from start to finish. While the Business Broker is usually a representative of the Seller, he is also required by the Department of Real Estate to protect the interests of all parties and allow no action or activity that would bring harm to either party.

Q. Why should I buy a business rather than start one?

An existing business has a track record. The failure rate in small business is largely in the start-up phase. The existing business has demonstrated that there is a need for that product or service in a particular locale. Financial records are available along with other information on the business. Most sellers will stay and train a new owner and most will supply financing.

Q. What is the real reason people go into business for themselves?

There have been many surveys taken in attempt to answer this question. Most surveys reveal the same responses, in almost the identical order of priority. Here are the results of a typical survey, listed in order of importance:

To do my own thing, control my own destiny.
Don't want to work for someone else.
To better utilize my skills and abilities.
To make money.
It is interesting to note that money is not on the top of the list, but comes in fourth.

Q. How are businesses priced?

Generally, at the outset, a prospective seller will ask the business broker what he or she thinks the business will sell for. The business broker usually explains that a review of the financial information will be necessary before a price or a range of prices can be suggested for the business. Most sellers have some idea about what they feel their business should sell for - and this is certainly taken into consideration. However, the business broker is familiar with market considerations and, by reviewing the financial records of the business, can make a recommendation of what he or she feels is what the market will dictate. The more cash demanded by the seller, the lower the selling price; the smaller the cash requirements of the seller, the higher the price. Since most business sales are seller-financed, the down payment and terms of the sale are very important. In many cases, how the sale of the business is structured is more important than the actual selling price of the business. Too many buyers make the mistake of being overly-concerned about the full price when the terms of the sale can make the difference between success and failure.

Q. What should I look for?

Obviously, you want to consider only those businesses that you would feel comfortable owning and operating. You also want to consider only those businesses that you can afford with the cash you have available. In addition, the business you buy must be able to provide you with enough income - after making payments on it - to pay your bills. However, you should look at a business with an eye toward what you can do with it - how you can improve it and make it more productive and profitable. There is an old adage advising that you shouldn't buy a business unless you feel you can do better than the present owner.

Q. What does it take to be successful?

Certainly, you need adequate capital to buy the business and to make the improvements you want, along with maintaining some reserves in case things start off slowly. You need to be willing to work hard and, in many cases, to put in long hours. Unfortunately, many of today's buyers are not willing to do what it takes to be successful in owning a business. A business owner has to, as they say, be the janitor, errand boy, employee, bookkeeper and "chief cook and bottle-washer! " Too many people think they can buy a business and then just sit behind a desk and work on their business plans. Owners of small businesses must be "doers."

Q. What happens when I find a business I want to buy?

When you find a business, the business broker will be able to answer many of your questions immediately or will research them for you. Once you get your preliminary questions answered, the typical next step is for the broker to prepare an offer based on the price and terms you feel are appropriate. This offer will generally be subject to your approval of the actual books and records supporting the figures that have been supplied to you. The main purpose of the offer is to see if the seller is willing to accept the price and terms you offered. There isn't much point in continuing if you and the seller can't get together on a price and terms. The offer is then presented to the seller who can approve it, reject it, or counter it with his or her own offer. You, obviously, have the decision of accepting the counter proposal from the seller or rejecting it and going on to consider other businesses. If you and the seller agree on the price and terms, the next step is for you to do your "due diligence." The burden is on you - the buyer - no one else. You may choose to bring in other outside advisors or to do it all on your own - the choice is yours. Once you have checked and approved those areas of concern, the closing documents can be prepared, and your purchase of the business can be successfully closed. You will now join many others who, like you, have chosen to become self-employed!

Q. Do I need an Attorney?

It is advisable to have an attorney review the legal documents. It is important, however, that the attorney you hire is familiar with the business buying process and has the time available to handle the paperwork on a timely basis. Most business brokers have lists of attorneys who are familiar with the business buying process. Business brokers are not qualified to give legal advice. However, keep in mind the fact that many attorneys are not qualified to give business advice. If the attorney goes too far in trying to protect your interests, the seller's attorney will instruct his or her client not to proceed. The transaction must be fair for all parties.