Why You Should Buy Instead of Build

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buy a businessThere is an inordinate level of romance associated with building a business from scratch.  Shows like Shark Tank and The Profit only exacerbate the issue.  

Though such shows do show the struggles that these business owners face, the very appearance on television creates aspiration:

“I want to do that too.”  

First-time entrepreneurs looking to get into business see building from scratch as a great option. Seasoned entrepreneurs know better. They know it’s always easier (and often better) to buy than to build.

Why make it hard?

When you start from scratch, you have to build a customer base, market a new business (with a brand and logo you’ll need to come up with), hire employees, and oh yes, generate cash flow during the runway (the financial amount you can survive on during startup) you have to build the company.  Not so with an established business.

They have customers, they have employees, they have procedures, marketing and a brand in place. And yes, there’s cash flow from Day One. It’s even easier to secure financing from a bank, which views an established business as a much safer bet than an untried startup – even more so if the owner has never run a business before.

Lots of choices

You think you know what kind of business you’re interested in, but the truth is, you’ve often not even scratched the surface beyond some daydreaming.  Not only are there businesses out there you’ve never even considered existed, but they’re often for sale – and sometimes, in your price range.

If there’s a type of business that you have your heart set on and it’s not listed, we as brokers can go in as a trusted intermediary to see if maybe there’s an openness to selling.  

Rather than confine yourself to one specific idea that has to work, you can examine dozens of possibilities and see what really ticks the boxes for you.

Take your time

Buying a business isn’t something that most people do overnight.  It’s a process that begins with financial qualification – putting together your assets and seeing what you can afford.

It then continues on with meetings with businesses and owners who truly interest you. And it culminates in an exciting ending: you getting the keys to a business that already works!  

Your concern isn’t keeping the lights on, but deciding what to do next.  

Will you keep it as is?

Convert it to a lifestyle business?

Scale it to the moon?  

A bought business gives you that luxury. A business started from scratch never does.  The failure rate among started-from-scratch businesses compared to bought businesses isn’t an apples-to-apples comparison. Heck, it’s not even a galaxy-to-galaxy comparison.

Are you thinking about becoming a business owner?  Let us help you as we have helped so many before you.  Give us a call today!

Five Sobering Questions to Ask Yourself Before Buying a Business

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fiveIn everything we do, often the sheer excitement of an event, experience or a purchase pushes out everything else, including good judgment.

That’s to be expected, and sometimes, can’t be avoided. But buying a business is such an important event that has the potential to affect so many other things in your life.

Because of that, it’s important to put euphoria and excitement in their proper places and ask some sobering questions of yourself on your business-buying journey.

1. Am I interested in this business solely for the cash flow or prestige?

Both cash flow and prestige are perfectly legitimate reasons to be interested in a business. Money is important, as can be the feeling of being affiliated with something of value or class.  

But on their own or even combined, they’re not enough to keep someone building a business in the medium to long-term. There needs to be at least one other thing that attracts you, be it a fascination with the industry, interest in the city in which a business is geographically sited, or a desire to challenge yourself with something new (just to name a few).

An additional reason beyond money and prestige will make sure that this new business adventure is a long-term play.

2. Do I really want to do this all day?

In his book Restaurant Man food mogul Joe Bastianich goes a long way to disabusing people of the “glamor” of the restaurant business by discussing the realities of the hours (18 a day), and the days you’ll work (weekends and holidays), and how much money you’ll make (20% blended margin even on the high end).  

He does this to discourage the dilettantes who like watching Food Network and think getting into the industry would be “fun.” If the business requires an active owner/operator, are you willing to sleep/breathe/dream about the business during a large part of your waking hours?

If not, you should probably pass.

3. Will demand exist in the coming years?

If you’re interested in growing a business, not just in maintaining cash flow based on a product that is headed for legacy country, you need to ensure that demand will continue to maintain, and even better, grow in the years ahead.  

Look at regulations, the competitive space, and your own costs of capital as part of a blended approach (that includes examining news and reports and talking with veterans of the industry) to get a solid answer to this question.

4. Why is the seller selling?

There’s nothing wrong with someone being “tired” – either in the sense of working in this particular business or industry or working in general. It will happen to all of us at some point. What we want to be wary of are sellers making decisions to sell for abrupt reasons.

Sometimes a family illness or personal emergency will precipitate just such an occurrence. This doesn’t mean a good transaction can’t take place.

It just means that because it was unexpected there are necessarily things that might have been missed, and both buyer and seller (but particularly the buyer, who will be left with the business when all is said and done) need to ensure that the business can indeed not just survive, but thrive with a new owner.

5. How much does the business depend on him/her?

At APEX we’re advocates of Michael Gerber’s famous phrase: “Work on your business, not in your business.”  This flows from a desire to transform a business from a handful of people who are relying on hustle and willpower to a well-oiled machine that relies on processes, not personalities.  

Ensure that the business isn’t overly reliant on the owner. If that’s the case, and the owner isn’t willing to make changes before the business sale to address the issues, consider negotiating a longer transition period or additional seller financing.

One of the reasons we exist is to help people navigate these and other key questions when preparing to make the life-changing decision of buying a business. We’re always here to answer your questions. Give us a call today at 913-383-2671!

What Do Absentee-Owner Businesses and Unicorns Have in Common?

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unicornWe often hear from people who are interested in finding a business that won’t take much of their time – one that’s cheap to buy and provides a good return.

Something they can run as a sideline to their full-time job. The car wash is a common conception of the absentee-owner business.

It looks like a business you can set and forget. Just let it run and collect the money.

Well, finding that kind of business is about as likely as finding a unicorn walking down the street.

If we knew of one, we’d have already bought it ourselves, and we’d be the ones galloping off toward that imaginary rainbow!

If you do find a business that doesn’t require the owner’s constant attention – and we do sell those – it’s likely to be a longstanding business, which the owner has built over time.

He has managers and employees he knows and trusts, and he can look at the financial statements and easily identify and address trends before they become problems.

As a new owner, you wouldn’t automatically inherit the ease he enjoys.

To improve the odds of success, new owners should plan to spend a good portion of every week in the business. You need to learn your industry, your store or operation, your employees and your financials. You will want to build relationships with your customers.

How will you know if your car wash machinery is working right, your property is being maintained and your manager is depositing all the day’s quarters each night? It takes some footwork and close attention to look after all the details of the business.

We had a client who bought a few coin-operated car washes several years ago while holding down a full-time job. It wasn’t long before he learned his managers were stealing from him and failing to maintain the equipment. He quit his job to rescue the businesses but ended up selling the car washes eventually.

Don’t get us wrong; car washes can be great businesses. We have another client who is doing very well with car washes. He has taken some time to build them up and put strong managers in place. If they’re located in high-traffic areas, maintained properly and managed with integrity, car washes can return a solid return year after year.

So is the dream of an absentee-owner business possible? With several years’ investment, you may be able to achieve it. Otherwise, you’re better off leaving the unicorn on the storybook page.

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

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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!

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