It Pays to be Thorough with Due Diligence

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paul-temmePost by Paul Temme, Certified M&A Professional (CM&AP), Apex Senior Advisor

If you’ve found an attractive business to buy….CONGRATULATIONS!

Knowing the kind of business that interests you and matches your strengths is one of the hardest and most important first steps. Once you’ve expressed an interest and begun the conversation, it’s time to put your plans in place for digging into the business and making sure you know what you’re getting. That’s called due diligence. And it’s wise to prepare for it in advance.

Understand Your Business Advisor’s Role
As business advisors, we typically represent the seller. While we want to see both parties benefit from a fair deal, our role is primarily to convey information between both parties. Early in the discussion process, we will share the seller’s profit and loss statement and balance sheet. And we will confirm with you that they jive with the seller’s tax return.

Basically, if the seller says he has $1 million in revenue and $250,000 in profit, it should show on the IRS filings. But it’s important to note that we don’t audit the seller’s financial statements or confirm their validity. That’s up to you.

Consider Hiring an Accountant
Once you have a settled offer on the table, it’s your responsibility to execute whatever due diligence you think is needed. Typically, that means confirming the accuracy of the financial statements. The seller is required to open the books, including checking account statements, credit card statements, benefits information, insurance bills and more.

duediligenceUnless you have a strong background in accounting, you should probably engage an accountant to review the seller’s disclosure statement and books and compare them with the IRS filings. At the least, you should have a professional direct you in your review.

We once had a $4 million deal that was in jeopardy because the buyer – an experienced sales person – was having trouble understanding the seller’s financials and the large tax implications for the seller of the business.

He ended up hiring an accountant who worked with the seller’s tax attorney to structure a deal to benefit both sides. Five years later, he’s still going strong.

There’s a Buyer for Every Good Business
It’s important to know whether your business advisor is representing the seller or the buyer. Regardless of whom we represent, it’s important to us at Apex that buyers understand we are here to help them by conveying information – including helping them find the other advisors (accountants, attorneys, etc.) they need.

We want happy buyers and sellers who come back to us when it’s time to buy or sell in the future. And if the deal doesn’t work out for you, that’s OK. If one business doesn’t work out, another good match will come forward.

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!

Buyer Be Aware: What Every First Time Business Buyer Needs To Know

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buyer be awareOh, how we love to work with first-time business buyers. Many have thought long and hard about the next phase of their business life. They’ve carefully assessed their capital and made a decision to invest their hard-won assets in the business of their dreams.

They’re ready to take the plunge. Their hopes are high. And their vision is often super focused on the business, career and personal life they’re going to have if they can just find that perfect business opportunity.

And then we set them straight.

While we don’t like to burst anyone’s bubble, we do try to give new buyers a reality check before they get started.

There’s Hair on Every Deal
That’s a pretty blunt way of saying that no deal is perfect. Any small business has an issue or two – whether it’s employees, customers, service levels, marketing or a dozen other things. But that’s actually where the opportunity for a buyer comes into play. If you’re willing to be flexible, you might find a great deal that plays to your strengths.

Do you have exceptional team management skills? Then maybe you can help a business struggling with staff issues. Would it be easy for you to put some marketing, social media or advertising in place for a business that has none? If so, you might be able to grow the business faster than the current owner can. Big, easy wins like these are often possible.

Be Ready to Work Hard
Some business buyers approach us with “passive” business ownership in mind. They don’t want to be involved in day-to-day management. But we see very few “absentee-owned” businesses. Owning a self-serve car wash is a great example. Even though it doesn’t require an attendant, the business will always have needs – from equipment repairs and supply deliveries to maintenance and cash collections.

Also consider that the current owner may have been running the business for several years before you buy it. What takes her 20 hours a week may well take a new owner 40 or more hours a week.

Keep Your Options Open
While it’s a good idea to start with some idea of the type of business you’re looking to buy, it pays to stay flexible; you may be surprised. One family approached us convinced they wanted to buy a Sonic restaurant franchise. We showed them some other businesses, and they ended up buying a brake service business.

It had everything they were looking for – a good history, solid financials and a convenient location. They even had a family member who could run it for them. It turned out to be a great deal, and they’ve been successful with it for 10 years now.

Know Your Requirements
While flexibility is important, there are some aspects of the process where we don’t suggest compromising.

  • Get all the information you need and verify it.
  • Work to develop a feeling of trust and solid communication with the seller.
  • Know your finances. What kind of investment can you afford, and how much risk can you handle?
  • Follow your values. If there are certain aspects of business you don’t want to be involved with, be sure to draw that line early in the process so you don’t waste your time.

Get Ready to React Quickly
Line up your ducks before you start looking so you can be responsive to an opportunity. If a business piques your interest, act on it. We have dozens of clients who were sorry they hesitated to make an offer on a business when they first had the chance. The good ones go fast!

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!

From Corporate Executive to Business Owner: What You Need To Know

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We work with a lot of buyers who are fresh off a few decades on the corporate merry-go-round. Some are weary of working for “the man” and want a taste of running their own show. Others have been right-sized and are looking to apply what they’ve learned to a new business. No matter the motivation, some former corporate executives are well suited to make the transition. (And others definitely are not!)

Ask Yourself These Questions

  • How much personal risk can you handle? Are you willing to place a significant portion of your savings on the line? Most buyers need to put down at least 20% to 25% of the purchase price.
  • How hard do you want to work? Every business is different, but it’s not unusual for new owners to put in 70- to 80-hour weeks. And you’ll probably have to do a lot of the hands-on work yourself. Even with a strong staff, you’ll need to pitch in wherever the business needs you.
  • business ownerHow decisive are you? Can you trust your gut to make fast decisions based on little information? You may not have the time for the kind of research and consensus building you had in the corporate world.
  • What kind of supervisor are you? Again, you’re on your own here. You may not have an HR staffer or fellow manager to help you out. It takes a great people manager to hire and keep strong players on the team.
  • Do you have a diverse background? Business owners often have to handle all the basic functions, from finance to HR and marketing, so it helps to have exposure to the fundamentals.
  • Are you self-motivated? It all starts at the top. Your vision, direction and optimism will drive others.

Prepare Yourself for the Process

  • Get your finances in order. Clean up your budget. Know your credit status. Take a look at your assets and understand how much you need to retire.
  • Who’s in your circle? Most successful small business owners build a network of peers to help them with input and advice when they encounter something new or difficult. You’ll also need a team of business advisors, including legal, finance, sales and marketing.
  • Talk with your family about these issues, too. How comfortable is your spouse with the investment needed to make this work and the potential change to your work/life balance?
  • Don’t let your nerves kill the deal. You should be a little nervous about closing a transaction that will change your life. But if you let your anxiety take over now, you’ll have a hard time running your new business, too.

Consider These Steps

  • Think about what kinds of businesses appeal to you and what you want to avoid. You might start with businesses in your current area of expertise. Or perhaps you want to make a radical change. Are you open to buying a franchise? Is retail on or off the table?
  • Bring your spouse along to look at business opportunities and understand the financial aspects of the deal. We’ve seen many a divorce threat at the time of closing because the spouse didn’t understand what the family was getting into until it was time to sign the papers or transfer the cash.
  • Learn about how to access your 401(k), IRA or other tax-advantaged funds to purchase a business. You can do it, but you’ll need professional help.
  • No matter what your financial situation, get a business coach as soon as possible. Even the strongest leaders need a qualified, trusted professional to bounce ideas around with.

Finally, if you think you’re up to it, get ready for a ride. Owning your own business can be both agonizing and thrilling. You may well find that it’s a satisfying alternative to the corporate life.

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!

Partnership Pitfalls

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PitfallWe have worked with hundreds of very successful clients over the years and have been fortunate to participate in successful transitions to new owners.  However, there have been a few tough ownership/partnership situations that have made transitions difficult. Partnerships can be a very good way to get into business if documented properly. They can also be a curse if there was a lack of preparation and foresight.

David Seitter with Spencer Fane in Kansas City has had quite a bit of experience assisting new owners writing partnership and operating agreements and has also been involved in cleaning up the messes caused by improper partnership planning.  David and I recently spoke about partnerships pitfalls.

Doug:  “David, What do you see as the leading causes of partnership disputes?”

David:  “The joy and enthusiasm in starting a new venture becomes, at some juncture, a challenge to fulfill the expectations each individual has for the relationship. Like all great “marriages” the ability to lay out clear terms of understanding up front on “why” [and see Simon Sinek’s book “Start With Why” in this regard] this partnership makes sense is, in my experience, the clear starting point that is often not fully developed.

Some of the success stories I have seen have occurred when folks working together as employees for a company declare one day…. “hey, we have a better model for customers because we will build it for the following reason which is__________”. And so begins the “why” conversation. It is not the “how” or the “what” but why the two parties should work together that is the most telling. And if that is not discussed up front…well then, disputes will occur.”

David: “Doug, what do you think are the leading causes of partnership disputes?”

Doug: “Over time, it seems that people grow apart in a couple ways. One partner feels that they are putting more effort into the business without proper compensation, or one owner wants to grow the business more aggressively while the other is satisfied with status-quo.  People change over time and sometimes the partnership doesn’t change with them. There needs to be ongoing communication about personal and business developments so that the partner’s visions are in sync.”

Doug: “David, What could have been done, if anything, to avoid those disputes?” 

David: “Well…disputes cannot be avoided.  You know you can have a great conversation with a partner, but it doesn’t have to be pleasant…it is about getting the issues to the table and using resources internally and externally to resolve problems.

My clients know much better than I that there will always be problems that have to be dealt with. The question is how to handle the disputes which will always arise. Some of the best functioning companies I have had the pleasure to be around have owners who have amazing abilities to handle each other at the highest gentleperson level through great communication and better listening skills, along with unbelievable patience and desire to mutually solve problems. And I call those folks “owners”.
 
First, when starting the conversation of building a partnership, start with why. Then determine what each partner brings to the table. No two people are alike which is great! Some have great entrepreneurial bents…some are excellent in following through on projects, some are good at details and some will execute any decision. If I have learned anything from Dan Sullivan of “The Strategic Coach”, it is that business owners have to determine what they do well and do just that – sharing power and authority to those who can add bring other skills to the ownership table.

In summary, do not avoid disputes, but embrace a mechanism that will allow you to effectively deal with the same. During one of our next blogs we should discuss the “phone book” theory of entrepreneurial problems.”

Doug: “Can partnership contracts or agreements help to avoid problems?”

David: “Yes. Anytime you can lay out the terms by which you will do business together, the better off you will be.  But remember, a good contract cannot keep together a bad relationship.  The paper is only as good as the people who wish to live the terms of the agreement!”

David: “How do you counsel folks on dispute avoidance?”          

Doug: “Probably similar to what you mentioned, but when we see them at Apex, it’s usually too late. They have already skipped through the tips you just mentioned, avoided the tough conversations early, and now are just angry and ready to file suit (in the extreme).  What we would prefer is dealing with companies whose owners are not ready to kill each other. They don’t have to be happy and ready to spend the next 10 years together, but they should still be cordial, professional and working for the best interest of the company. After all, if buyers sense a problem with the leadership, it will only hurt business value.”

Talk to your Apex Business Advisor or reach out to David Seitter to discuss partnership planning or existing issues. We are happy to assist!

What Happened to my Deal?

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Deal KillerDeals can die for many reasons, but “Time” is the worst reason of all! It’s possible to manage, yet also easy to let Time take control.

Let’s say I have a buyer, Bob, who is taking his time getting due diligence done. He has a process – no problem. However, as he completes his due diligence, it is revealed that he hasn’t proceeded with the bank loan application.

Well, the bank takes their process seriously too. Their loan committee meets every two weeks and the next meeting is in two or three days.  The banker doesn’t see any way to have Bob’s request in time – so he will present at the following loan meeting two weeks out. Remember, Bob is not his only potential client. Now, let’s add to the mix the SBA, a buyer’s attorney, insurance agent, accountant, financial planner to access his 401k, and oh yes, the landlord. The deal can linger for months with very little actually getting done.

All of Bob’s advisors have their existing clients plus other business to handle and he needs to fit into their schedule (and they can’t always jump at his request). After 4 months of following a process and scheduling the time to meet with advisors, the deal is starting to unravel.

The seller interprets the delay as a problem with the buyer. The buyer must be “weak” financially, unable to manage a business, or maybe the buyer isn’t really serious. Although this isn’t an accurate view, this is the seller’s perception. The seller starts to look for other buyers as the negotiations grind to a halt. This is known as “Deal Fatigue”. It happens all the time and it can be easily avoided. Well, not easily. It does take time, work, and effort. But that’s business!

Control Time by showing urgency and impart that urgency upon your advisors and others involved in the deal. Set due dates and follow up. Be a leader of the process. Follow these general steps:

  • First, due diligence and bank loans should be happening at the same time. Meet with several banks – immediately!
  • Second, gather information needed for insurance, licenses, etc. while the loan is in process.
  • Third, when you have positive feedback from your lender, begin to negotiate terms of the buy-sell agreement. The attorneys will document what you have agreed to and will advise on technical points. While you are actively working the process, do you have access to your down payment?

These steps are worked concurrently, not consecutively. By the way, don’t quit your job until you know the deal is going to close!

Stay in close contact with your Apex Business Advisor through the process. Your Advisor can assist with the communication and follow up with banks, attorneys, and the seller. Keeping lines of communication open is critical for getting to the closing table!

Doug Hubler
President

The First Step in Research

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HamsterOpportunities can disappear in a blink of the eye!  Engaging in business acquisitions requires buyers to act quickly and assertively. There is quite a bit of activity in the market with many buyers looking for businesses to purchase. The best businesses go fast! If you have been looking at businesses for a few months, or years, you know when good businesses become available.

But potential business buyers repeatedly miss out on deals because they hesitate, want to do all their research up front, want to talk to bankers, industry associations, or do other things that keep them from making a decision. By the time they start to get comfortable with the opportunity, the business is already under contract. This happens time and time again. Don’t do the research hamster wheel.

The first research step should be meeting with the seller. What better way to find out about the business and industry! There will be plenty of time to thoroughly examine the company after the meeting, and the research will most likely be much more efficient.

Why do tons of analysis on a company, meet with advisors and then decide not to move forward after interviewing the seller? Another advantage to meeting with the seller prior to conducting time-consuming research is that he or she could potentially give clues as to what a buyer should be reviewing.

Don’t miss out on that deal that you’ve been waiting for!  Talk to your Apex Business Advisor for more information on buying or selling a business.

Doug Hubler
President

Status Quo or Something Better?

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Quote4Did I just catch you daydreaming of a better life? Were you thinking about your sucky job? Or have you already been laid off and are searching for a much more secure future for you and your family?

Have you thought about buying a business?

There are some things to think about when comparing holding down a job vs. leading your own business:

What are your real passions, goals, desires? Are they currently being met with your job?

  • Are you entrepreneurial but restricted by your job description?
  • Do you go to meetings to plan other meetings? Feel like your days are wasted?
  • What decision making control do you have vs. how much do you want (and deserve)?
  • Are you fulfilled in your work? Are you being challenged?
  • Are you reaching your full potential?
  • Are you properly compensated for the true value you provide your employer?
  • How much flexibility do you have in your job vs. how much you want or need?
  • Is your future secure?

If you are reading this, you may have already been considering buying a business or at least are on the fence. If you are on the fence then you most likely are not fulfilled with your current job or your prospects. Maybe it’s time to take control of your life.

Owning a business doesn’t mean life is suddenly wonderful and you will be immediately successful. However, business ownership provides the opportunity to combine your talents and motivation to reach the level of success desired.

Talk to an Apex Business Advisor and take control of your future by acquiring a fabulous business!

Invitation coming….Be looking for an invitation to register for the February Basic Buyer Process Seminar which will be held on the 25th.

Doug Hubler
President

He Who Hesitates is Lost

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weirdstoplightThis is an old Chinese proverb. Or He Who Hesitates, Regrets. An Albanian Proverb.  Either way works in the business broker world. We see hesitation with buyers and sellers every day. Whether Buying a Business or Selling a Business, either party can ask the same questions – Is this the best or right price for the business? Will there be a better opportunity next week? Am I doing the right thing? I’ve gotten three opinions, should I get three more?

When you operate your business, or make decisions in your job, hesitation can often be costly. One of the benefits of owning your own business is that you can make all the final decisions and you can make them quickly, without going to committee.

Many people leave the corporate world for this reason alone. How many times have you said, “Boy, if I could run this business and make decisions without all these meetings, I could double revenue” or something on the same theme?

Here are some examples of recent regrets that our Kansas City Business Brokers have witnessed:

  • Seller was presented with two good offers within the last year. Both were declined as insufficient. The business is now in bankruptcy because the seller’s health is failing and he is not able to tend to the business.
  • Buyer A wanted to make an offer on a business but wanted to complete due diligence first. The seller balked at providing further detailed information without an offer. Buyer B quickly submitted an acceptable offer with a contingency for completing due diligence and is currently on his way to the closing table.
  • A buyer wanted to make an offer on a business but decided to wait until kids were back in school after spring break. The business sold while he was in town – at home.

These are real regrets and real pains. It’s understandable that someone wants to make the right decision. However, we see the deal-killing results of analysis paralysis every day. In the end, those who have the ability to be decisive within a short time frame are usually the most successful at making it to the closing table with a satisfactory deal.

We at Apex Business Advisors are here to help with your business transition. Contact one of our Business Advisors for a free consultation.

Doug Hubler
President

Low Ball Offers

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Low Ball Offers2There are various ways to go about buying a business, but all of them require making a deal with the current owner. As mentioned in prior blogs, before a deal can move forward, a written offer needs to be presented. Keep in mind that offers are based on information supplied from the seller to buyer at this point and more information is probably forthcoming with an accepted offer.

A seller needs to feel comfortable with the person who is interested in taking over their business (their baby), and a relationship needs to develop between buyer and seller during the process. For a strong relationship to be maintained there needs to be fair give and take during negotiation.  Negotiation is expected.

A proper offer needs to be made unless the buyer just wants to play hard-ball and present a low-ball offer. Most sellers of good businesses are not desperate and may have multiple interested parties. A low-ball offer will most likely offend the seller and could compromise any future communication between the parties.

There are times when low-ball offers seem to make sense, e.g., the IRS has shut down the business, bankruptcy is at hand, or there is only one customer and future business is at risk.  Otherwise, be reasonable and success will follow.  If a buyer feels the business is way overpriced, there could be some missing information.  The buyer should discuss pricing concerns with the broker before making an offer.

Please discuss any questions you have about buying or selling a business with your Apex Business Advisor.

Doug Hubler
President

Buying A Business Requires Financial Readiness

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OrderlyRecordsBuying a Business is a process. Much like a business owner preparing a business for sale, buyers also have to plan ahead for an acquisition.

Besides focusing on the right type of business to match background and personality, the business also has to be the right size for the buyer. There needs to be enough income to meet personal and family needs while still having enough cash flow to support debt and working capital requirements of the ongoing business.

If the business is too big for the buyer’s pocketbook, there will probably be too much debt, which in turn will stress the working capital and personal needs part of the equation.

Once the right business is found and the seller has accepted the buyer’s offer (we are optimistic), the banking process starts. Getting an acquisition loan from a bank will require a buyer to be completely open with their financial situation. The bank will also be assessing the buyer’s background and the fit with the business, and evaluating the financial history of both buyer and seller.

Buyers will have to submit a detailed list of investments, liquid assets, and real estate that will be used as a down payment and collateral. Also, the buyer will have to submit proof of income in the form of tax returns, check stubs, bank statements, etc. This piece of the process isn’t difficult if you have good records. So have your financial house in order before hunting for a business.

Apex Business Advisors holds monthly “Buying A Business” seminars, so if you are interested in more information, contact your Apex Business Advisor.