Understanding the total cost of your business purchase

When purchasing a business it is important to be clear on all the costs involved in completing the transaction. Specifically, it is surprising how many buyers just look at the purchase price and overlook the additional costs involved. The result can be a failure of the business simply due to a lack of available funds, something no one wants to be faced with.

Aside from the purchase price of the business there are usually several other expense related items you will likely have to pay for:

A Lawyer

When purchasing a business you will likely want to hire a lawyer proficient in business transactions. Depending upon the complexity of the deal, $5,000 may be enough to cover such services, on the other hand you might be looking at $10,000 or more for such services.

The Landlord

If the business resides in a leased property, you will need to talk to the landlord or landlords representative in order to setup a new lease. Likely the landlord will want a deposit from you. The deposit for a small office may only be a few thousand dollars. The deposit for a small retail location however can easily be $10,000 or more.

Lenders

If you are a buyer looking for financing the purchase of your business, the lender will also be requiring application fees and fees to cover legal expenses associated to financing. This again can amount to thousands of dollars.

The reality is, once you own the business there will be some operational costs you will incur within the first few months of owning the business. This is also an area overlooked by many a buyer, who often relying on projected revenues to cover such expenses. Aside from paying the basics such as salaries, (hopefully including your own), the lease and utilities, here are some other expenses commonly overlooked.

Purchasing new Inventory

Unless you can transfer the previous owners accounts into your own company name, it is likely you will have to setup a new account with suppliers. As a new account most suppliers will be unwilling, at least initially, to extend you any credit so purchases will have to be cash or on a credit card.

Equipment repair and maintenance

If the equipment has not been thoroughly checked prior to the closing date, it is not uncommon to hear of new business owners having to pay to repair or replace equipment shortly after purchasing the business. This can literally be any type of repair so depending upon how much mission critical equipment you have purchased, be sure to budget for the unforeseen accordingly.

In summary, we would highly recommend that buyers create a list of expenses they will be faced with both before and after the sale of the business. There certainly could be more expense items than those mentioned above. We would suggest you even include a 10%-20% buffer for any unforeseen expense items. Many a business owner has had to shut their doors soon after opening, due to having inadequate funds to cover the basics. The total cost of purchasing a business really is far more than just the agreed upon purchase price of the business.

About the Author: Matthew Buxton specializes in helping business owners build Sellable, Financeable Businesses. He also completes Business Valuations, and helps people Buy and Sell Small to Medium sized Businesses. For more information please visit www.businessfinancecanada.com

Finding that Perfect Business Opportunity

Let us take a moment to define the term “perfect business”. Picture if you will a live orchestra consisting of 100 musicians. At the front stands a conductor waiving their arms to the beat of the music, guiding the orchestra to play flawlessly and in complete harmony.

A “perfect business” is one where the conductor (the business owner) can be replaced at anytime, (by a qualified buyer), with little to no effect on the orchestras performance, (in this case, the companies performance).

From time to time, we come across an individual or couple who have spent years searching for that perfect business to buy. This is no real surprise as the reality is many business owners have not built a sellable, financeable business. So in keeping with the analogy of an orchestra, this is an orchestra (company) that has no one standing in the place of the conductor. Instead the conductor (business owner) is in amongst the musicians, running around frantically trying to make them play as one.

Often the result of trying to sell a business like this is that the business  ends up selling for a fraction of what it could be worth or in some cases, not selling at all.

The opportunity for you as a buyer is to recognize that many businesses for sale have not been built to sell. Therefore step back a moment and instead of searching for that perfect business consider a business opportunity that you can build into a perfect business – a business in need of a conductor like you.

Is it possible to find a perfect business? A business that is sellable and one that you can purchase with financing? We say – YES.

About the Author: Matthew Buxton specializes in helping business owners build Sellable, Financeable Businesses. He also completes Business Valuations, and helps people Buy and Sell Small to Medium sized Businesses. For more information please visit www.businessfinancecanada.com

When Buying a Business – Review the Employees

The other day I wrote a BLOG titled “Employees who Care”. As I was writing the article it made me think about the process of Buying a Business. As a buyer, how do you know that you are buying a business that has employees who care?

It’s more than likely a seller of a business will not allow you to talk to their employees until there is a bullet proof offer to purchase in place. Even then, as a buyer you may only have an opportunity to talk to key staff.

What I find is that very few buyers actually take the time to ask the seller about the employees. Take a moment to think about it – if you buy a business that has bad employees, then you will likely be buying a nightmare. You therefore want as much upfront information on the employees as possible so my advice would be as follows:

1. Take the time to talk to the seller about each employee.

2. Get a clear understanding as to each employees role within the business. How do they rank compared to the others? Have there been any problems or concerns? Are they critical to the operation of the business?

If you do uncover a bad employee and / or you are faced with the need to downsize, then have the Seller take care of that PRIOR to closing the deal. If this is not possible or the seller is unwilling to do that, then I would highly recommend that you talk to a Lawyer who has experience in employment law. You may find the cost of downsizing outweighs the return on the investment.

 

About the Author: Matthew Buxton specializes in helping business owners build Sellable, Financeable Businesses. He also completes Business Valuations, and helps people Buy and Sell Small to Medium sized Businesses. For more information please visit www.businessfinancecanada.com

Employees who Care

I witnessed a wonderful moment the other day that I wanted to share with you all. As I positioned myself to park the car outside of a coffee shop, I noticed a young man at the side of the building washing a rubber floor mat.

As I approached the entrance to the coffee shop the young man was also walking towards the same door and gestured me inside. I held back as I could see that he needed the front entrance to be clear of people in order for him to complete his task. As he carefully positioned the mat on the floor, I made the comment that he must do this job frequently throughout the day given the state of the roads this time of year in Calgary.

It was at that point I was genuinely taken back by his response. In broken English he replied, “This is important to me. First impressions are very important. I want to keep this area as clean as possible”.

Stunning.

My first thought was that this was someone who I would hire in a second. I then wondered if the owner of that coffee shop knew what a special type of employee he had.

The effect on me as a customer is such that I will always remember that coffee shop. It will certainly be one of the first that comes to mind when arranging a casual meeting. Why, because saying you care is one thing. Showing me that you care has a completely different effect.

This situation got me thinking about the characteristics of an employee. What is the single most important factor to a Business? Education, experience? Perhaps. Someone who cares – invaluable!

Take a moment to think about that. Do you have employees who have this caring type of attitude? If you do then I hope that you continue to foster and reward that attitude.

There are business owners who I have meet who are not so fortunate. These owners are simply worn out and stressed having to deal with bad employees. You know the types, employees who do not turn up for work on time or who continually call in sick at a moments notice. Employees whose actions suggest that they really do not care about the work they are doing. Perhaps even worse are employees who treat owners poorly.

A few major effects of having poor employees come to mind.

1. This relentless stress will over time, have some serious health effects on you as an owner.
2. Your customers or clients will pickup on this “bad attitude”, which will sooner or later have a serious effect on your business and negatively effect its VALUE.
3. Simply selling the business may not be option either. Most buyers will pickup on something not being quite right, either by looking at your physical and mental state or “feeling” the stress within the organization. In either case, finding a buyer for your business will be extremely difficult.

In summary, the difference between a business with bad employees and a business that has caring, happy employees – is night and day. One type of business will flourish, the other will likely destroy itself or worse – YOU.

Making changes to employees is not easy. I know this because I have been faced with this situation myself. The rewards however can be the difference between you loving your business or hating your business.

About the Author: Matthew Buxton specializes in helping business owners build Sellable, Financeable Businesses. He also completes Business Valuations, and helps people Buy and Sell Businesses. For more information please visit www.businessfinancecanada.com

Preparing Your Business For Sale

There is an essential element of business ownership that frequently gets forgotten by many seasoned business owners – preparing their business for sale.

Why do you want to be prepared to sell your business? Simply, being prepared adds tens of thousands of dollars to the value of your business. Lets take a look at a few simple things you can do today that will, over time, increase the value (and saleability) of your business.

How dependent is the company on you personally?

Can your business function without you? Do customers ask for you personally? Great value is added to a business who’s operation is not dependent upon the owner both from a buyers perspective and from a lenders perspective should buyer financing be required.

How do you remove yourself from being integral to the business? There are several solutions from delegation of duties, creating processes and procedures to hiring a sales team and administrative staff. Start working at promoting the business and remove yourself from being integral to the day to day operation of the business.

Do you have a business plan and marketing plan?

Both Business and Marketing plans are critical documents to any business. These documents do not have to be complex. Unfortunately few businesses have these documents and even fewer actively maintain these documents.

The business plan is commonly thought of when financing is required however it should be a document that is frequently reviewed. Software is available that can help you create and maintain a Business Plan.

The marketing plan is essential to every business. Indeed, marketing can easily be a full time job in itself. I’ve seen businesses of all sizes with no marketing plan, all suffering from the illusion that customers and clients will simply pour through the door for product and or service. This attitude is typically the down fall for many a business. Do not underestimate the power of the marketing plan. Consider structuring your business to include an expert who can help you in this area.

Do you have an operations / procedures manual?

I was in a restaurant the other day and in the kitchen was a monitor above the prep table. Anyone in the business, could make a meal by pulling up the step by step instructions on the monitor – which included photos! The point is consistency even if key staff are absent.

Start creating an operations / procedures manual from the perspective of how to run your business, (based on the above example of preparing a meal, step by step). Your manual will then allow your staff complete mission critical activities consistently by following step by step instructions.

Your Employees

You need to ask yourself some tough questions regarding your employees. If you do not, a savvy buyer will. Are all your employees critical to the operation of the business? Are they all pulling their weight? Certainly if there are one or two that are not, it is better to address these issues now before the sale of the business starts.

Start cross training your employees, creating traditions and even implementing a long term incentive program. Each of these areas creates loyalty, significantly improves employer / employee relationships but most importantly, increases the value of your business.

Financial Statements

Accountant prepared financial statements are important to have on hand. For any potential buyer, do take the time to explain any abnormal occurrences such as drops in revenue and any increases in specific expense items.

Having your accountant prepare Notice to Reader financial statements are acceptable for some businesses but if you are considering selling, I would recommend your accountant prepare a Review Engagement financial statement instead. The reason is a Review engagement is viewed as being more credible than Notice to Reader financial statements. Certainly in this day and age, should a buyer be in need of financing, many lenders will only approve loans based on Review Engagement financial statements.

Thinking of starting a Business? Why not Buy an existing business?

Consider the following, you’re excited about starting a new business and you have business cards, perhaps a website, a phone and a computer. You have all the basics in place for starting a business, you just need the customers. In order to keep costs down you start calling friends and family, making cold calls and booking a lot of coffee meetings. The weeks turn into months and it feels like it’s taking forever to get your business going. Meanwhile startup and monthly operating costs are adding up. Now what?

Why buying an existing business can be a better option

Did you know that some businesses get sold a short time after they are started? Did you know that these businesses are typically sold at a fraction of the price it costs to set them up? We see many types of business startups for sale, case in point, we were asked to sell a cafe recently that had only been in business for a short period of time. Why was the Cafe for sale? The sale was due to a partnership breakdown.

The cafe was all new, a beautiful store, with new leasehold improvements, new (high end) tables and chairs and brand new stainless steel equipment and appliances. The equipment included Expresso machines, refrigerators, a panini and gelato machine. The cost to the owners to set this store up was in excess of $150,000. The selling price was under $45,000!

Buying a Business vs Starting a business from scratch

My point is this. When starting a business from scratch, people do not know you or know what you do. You need to pound the pavement relentlessly and in a few years you might be able to sit back and admire the list of customers you have serviced.

When you buy an existing startup business, as in the above example, you are buying it at a fraction of what it takes to start it up. You are buying a business that is already marketing itself and the phone is already ringing. In many of these cases, you are buying a business that has paying customers. This is the BIG difference between buying an existing business vs starting up a business from scratch.

So if you are thinking of starting a business, I’d suggest talking to your friendly local Business Broker about similar opportunities in your area. You may be pleasantly surprised at what existing opportunities you will find.

Confidentiality Agreements / Non Disclosure

A Confidentiality Agreement (CA), also known as a Non – Disclosure Agreement (NDA), is a common tool used in Business to protect sensitive proprietory and confidential information from disclosure to others.

The request to complete a CA / NDA is a standard everyday business practice.

When it comes to inquiring about a business that we have for sale, before dulvulging ANY detailed information about the business opportunity, it is our policy to request a signed CA.

Why? There are many reasons “why”. For example, the Seller has spent lots of time and money getting the company to where it is today. From building unique relationships with suppliers and clients, to developing unique business characteristics and offerings. There is great value in that, and that needs to be protected. Not protecting this information effectively reduces the value of the business.

It is important to note that as this is a legally binding agreement. If the information is revealed to other parties, the injured party can sue for damages.

As a business broker this is one area I use to gauge the seriousness of a Buyer. If the person inquiring has no problem signing a CA, it likely means they are a seasoned business owner, familiar with the request to complete a CA and / or is someone likely serious about learning more about the business opportunity.

If the person inquiring has issues with the signing of a CA / NDA then they are either inexperienced in standard Business practices or perhaps have alterior motives.

On the other hand, in my opinion, individuals selling businesses who do not request that a signed CA be completed and who dulvulge confidential business information, including the company name, are inexperienced and do not understand the ramifications of their actions.

In summary: Not having a signed CA / NDA from a potential buyer, before any information is released, can result in irreparable damage to the business.

So with that thought, would you buy a business that has been damaged through improper marketing and sales techniques?

Franchises – Buyer Beware

Buying into a Franchise is a form of immediate Business Ownership whereby the business model and business processes are already defined and provided to the Buyer – (the Franchisee). This can be attractive to some.

If you are considering a Franchise, BEFORE you sign on the dotted line, ask yourself, do you REALLY know what you are getting into? Have you thoroughly reviewed the offering and do you CLEARLY understand what you are agreeing to? Have you had an independent party (business lawyer or business broker) review the offering with you?

If you did not answer YES YES YES, you could potentially be asking for one big headache.  Now I am not suggesting that all Franchises are bad, but trust me, it can be another mine field for the budding entrepreneur.

Here is a small compilation of questions you need to ask the Franchise and in turn get CLEAR answers to:

1. Is the Franchise basing their Valuation on GROSS sales or Net Income? (If your answer comes back as GROSS – this is a huge RED FLAG!)

2. What percentage of monthly sales has to be paid to the Franchise?

3. Will the Franchise charge you for selling the business?

4. Does the Franchise stipulate when you are to renovate and also what contractors you must use? Are you clear as to how much this will cost you?

5. Will you have to pay the franchise fee again each time you re-new your agreement with the Franchise?

6. Are you being asked to provide a personal guarantee and do you clearly understand what that means?

The bottom line is when a Franchise is telling you that they are one of the most successful in the business, your reply should be “from who’s point of view, the Franchise or the Franchisee?”

In summary, do your homework and get a second opinion it could save you from making a terrible mistake. Excitement, the thought of making money, can and will BLIND you from making an informed decision.

Lease Agreements

A GOOD lease agreement can contribute to the value and desirability of your business should you need or want to sell.

A BAD lease agreement can damage or destroy a business in many different ways. A bad lease can de-value the business, prevent you from selling the business, or drive you into financial hardship / bankruptcy.

Recommendation #1: READ YOUR LEASE AGREEMENT.

Do not rely on Layers, friends or neighbors to read it for you. It can be a dry read, but you must read and understand every clause.

RED FLAGS or clauses that require SERIOUS consideration

- Is there a Personal Guarantee – This means if you default you can potentially lose EVERYTHING that you own! Ask yourself , is it worth it?

- Are there rent increases per year? If you need to make $5K in sales per month just to pay the rent, can you confidently say that you can do this? And can you do this in addition to paying utilities, staff, suppliers, for your marketing and tax’s etc.?

- Note the Term of the lease. (5yr terms with a 5yr option to renew are nice. Month to month can be a concern).

- Are there any Comments that refer to Percentage Rent? This clause will be along the lines of requesting a defined percentage of your annual sales if that percentage exceeds the min. rent for each year.In other words if you have a great year in sales your lease rate will likely increase for that year!

- Are there any Comments to the effect that “The Landlord CAN BE UNREASONABLE”. Yes it happens! AVOID at all costs!

As a Business Broker, there are many more areas I could touch on but these are just a few I have seen of late.

Recommendation #2: Hire a lawyer who it proficient in business law and lease agreements.

If you sign a lease agreement you are legally bound by the contract. Do not overlook this VERY important component of Small Business Ownership. I have seen what a bad lease can do to good, honest people and it is absolutely terrible.

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