4 Time-Tested Truths About Making an Offer to Buy a Business

/in /by

We sometimes work with buyers who lose out on a great business because they’re hesitant to make an offer. Although we cover this topic when we begin working with a new buyer, the lesson sometimes gets forgotten when it’s crunch time. Here’s a helpful primer on the importance of this critical deal starter:

1.An Offer Is a Starting Point

We’ve refined a two-page offer form that has worked almost perfectly for us over the years. It lays out the expectations for how the deal will get done – the financing, leasing, timeline for due diligence, expectations for the seller, need for the asset purchase agreement, etc.

It’s designed to protect you – the buyer – in case you find out something you didn’t expect during the due diligence period. The offer usually comes with earnest money of $5,000 to $10,000 minimum.

offer2.A Deposit Shows You’re Serious

Putting money in escrow shows the seller you’re serious. It may even keep him from talking with competing buyers. Without it, how does the seller know to prioritize time with you to answer your questions and help you understand the business? He might otherwise write you off as a “tire kicker”.

Both the seller and the broker will take you more seriously and work harder for you when you have some skin in the game. By the way, the deposit is refundable.

3.It Opens Up the Books

You almost always have to put an offer on the table before you get access to the detailed financial information you need to make decisions. Sellers won’t take that risk without knowing you’re committed.

And the way you handle this part of the negotiation will set the stage for how you’ll relate to the seller throughout the deal and the transition. Starting off by demonstrating you’re serious can smooth the negotiations as the deal progresses.

4.An Offer Is NOT a Deal

While your earnest money backs up your intentions, it doesn’t represent a terribly large risk. Your business broker will typically keep the deposit in escrow, and it’s rare that the buyer doesn’t get that money back. In one case, Apex kept an escrow payment because the buyer backed out while driving to the closing and told us to keep the escrow!

As described in point #1 above, our standard offer document includes multiple contingencies that allow the buyer or seller to back out if the deal doesn’t proceed as expected. It saves both parties the cost of hiring a lawyer too soon. And it establishes the negotiating process right up to the much-more-detailed legal asset purchase agreement required to close the deal. This document also allows the buyer to start the loan application process.

If you find you’re truly interested in buying company, we hope these principles will help give you the courage to make a serious offer – before the deal slips through your fingers.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

4 Reasons Why Business Owners Need to Pay Themselves First

/in /by

Post by Apex President and Business Broker Doug Hubler, Certified M&A Professional (CM&AP)

As a business owner, you may be tempted to avoid paying yourself a conventional salary. After all, payroll is an extra expense, right? Who needs those employment, Social Security and Medicare taxes? Plus, the bottom line will look a lot better if you don’t take a paycheck, correct?

Not exactly. I’d like to take a few minutes to bust those myths and ask you to consider the advantages of paying yourself a reasonable salary from your business.

1.You lose the opportunity for retirement savings and the associated tax deductions.

If you don’t take a paycheck, you can’t take advantage of tax deferred retirement plans such as deferred comp, 401(k) or SEP accounts. That means you miss out on saving for retirement.

Considering the power of compounding, skipping just a few years of retirement savings can put a big dent in your potential nest egg. Foregoing a paycheck and retirement savings also means you may actually pay more taxes.

money2.Your Social Security payments will suffer.

If you don’t take a salary or take too little, you could be reducing the amount of your Social Security benefit. According to Investopedia, your benefit is based on your highest 35 years of earnings.

If you don’t record income for at least 35 years, the formula inserts $0.0 for the missing years and indexes your benefit accordingly.

3.You could run into problems with the IRS.
Paying yourself too little or not at all can also create problems with the IRS. The IRS expects you to pay yourself a reasonable salary for a person in your position. I’m a small business owner myself, so I understand how hard this decision can be.

I worked with my financial advisor, Joe Pribula at Wells Fargo, to come up with a salary amount that made sense given the needs of my business, my family and my retirement goals.

4.You skew your business valuation.
When you go to sell your business, your paycheck will factor into the company’s valuation. Most buyers will want to see how their personal income needs match with what the sellers’ salaries have been. And taking no salary or commingling your personal expenses with those of the business will confuse that picture significantly.

Buyers and their bankers won’t understand why a seller wasn’t able to pay himself a salary when the business shows a consistent profit. They will see red flags instead. Believe me, you don’t want to be going backwards and trying to correct or adjust your books when it’s time to sell.

If you’re not sure how much to pay yourself, you might want to consult with an accountant or a tax specialist. At the minimum, you’ll want to consider:

  • Funding your own personal needs
  • Maximizing your tax-deductible savings
  • Keeping enough cash in the business to supply working capital for three months or more

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!