Buying a Business
Contact McDowell Business Associates. Unlike selling real property or other commodities, when the owners of a business decide to sell their companies, typically they want to maintain the confidentiality of a potential sale and do not notify the public or even those close to them, and choose to work with companies like McDowell Business Associates. Many of the better businesses never make it to the internet. Consequently, business buyers will a have great deal of difficulty locating some of the more confidential businesses that are for sale.
This broad selection, with appropriate financial and operational information in McDowell Business Associates files, plus our experience and ability to answer your questions and match your needs, abilities, resources and interests with just the right business, can save you considerable time and effort in locating a suitable business.
Buy an Established Business Instead of Starting One Up
If you want to get into business, let someone else take the risk and high cost of starting from scratch. A big advantage in buying an established business is that you, as the new owner, have immediate cash flow and two of the three necessary components of success, 1. A proven location with an established customer base, and 2. An established product or service
You don’t have to build a business; you simply take over an established business and provide the third ingredient: 3 Management.
Look for a Business That Is Established, but Has Some Problems You Can Solve
Some buyers look for the “perfect” business (high profits, low risk, great potential, easy to run, no problems, etc.). If they can ever find a business like that, the price will be very high… and they will be competing with well-financed industry professionals and corporate buyers to purchase the business.
Other buyers look for very cheap businesses, often closed down or failing. These businesses are very risky and may involve significant additional investment to make them profitable. They are usually best left to industry professionals or corporate buyers who can afford the cost and the risk.
Most of the small businesses McDowell Business Associates sells are in the “Safety Zone.” These businesses are priced lower than the “perfect” business (if it really exists!), but are less risky than the closed or failing business. The key is to look for a business that is established, but has some problems you can solve. That way the business will be affordable and you can take all the profit from the improvements you make.
Provide the Seller With What They Like to See
Buying a small business in not easy and you will have questions and concerns. Selling a business creates just as many questions and concerns for the seller. You can often get a significantly better price and terms by being aware of the seller’s needs and removing some of his/her concerns and uncertainties. The more information the seller has on your experience, qualifications and financial situation, the more likely he/she will accept an offer you make.
Frequently Asked Questions:
What is Cash Flow? Unless a business is truly a “cash” business, a better description is Recasted Profits or Discretionary Earnings.
Most small business owners have used every legal trick in the book to minimize taxes and therefore their financial records need to be Recast or Normalized to reflect the true picture of the owner benefits and the businesses’ money making capabilities. This means looking between the lines of the income statements, to add back to the taxable profits all of the legally taken owner discretionary expenses that weren’t absolutely necessary. We analyze the “discretionary earnings” of each business to put it on an even footing with every business, no matter how the owner takes the profits out of the business. We define “Discretionary Earnings” or “Cash Flow”as net earnings before interest, income tax, depreciation, amortization, and total owner’s compensation and other owner benefits or taken out. This is the total amount of money an owner has available to take out, to invest in additional equipment, to make the note payments on the business and pay income taxes. What Is a Fair Price for a Business?
Like any other commodity, a business is worth whatever a willing buyer will pay a willing seller in a free marketplace. However, the value of most businesses is determined by what someone can afford to pay for it. Typically this price will be 1 to 3 times the annual “Discretionary Earnings” or “Cash Flow”for small businesses., with a one-third to one-half down payment and a note to the seller paid off over 5 to 10 years. If the business can earn the income you want and make the note payments, then it’s worth the price. There are many “Rules of Thumb” methods for pricing a small businesses. McDowell Business Associates will be happy to discuss these with you
What’s an Offer?
An offer is just that – an offer. If it is not accepted by the seller within the time limit you set, your offer is void. Most offers are contingent offers – that is, they become void unless certain things happen.
All offers are subject to contingencies which might include any and all of the following:
- Your price and terms being accepted.
- Books and records approved (to your satisfaction)
- All equipment being in working condition
- Assignment of lease
- Approved financing by an SBA Lender
- Ability to get necessary licenses and permits
- Business passing necessary inspections
- Seller providing a non-compete agreement
- Seller agreeing to a specified training period.
If any of the contingencies in an offer are not met within the time frame you set, the offer is void and your deposit is returned to you.
What is Financial Review or Due Diligence ?
Basically it is the removal of the contingencies, the financial review need not be complicated, but the process does generate questions from buyers and sellers. By using the financial review contingency, a buyer can make an offer in perfect safety and the seller is assured that he is dealing with a serious party.
How long does it take? – It’s up to you! Many businesses can be checked out in one meeting. More complex businesses can take longer.
What if I find something I don’t like?
The contingencies in the offer have to be met. If not, you have the right to make a different offer, cancel your offer and get your earnest money refunded, or look at another business.
Why not do the financial review before I make an offer? – Some buyers have expressed a desire to perform a detailed financial audit before making an offer. Later they found that the audit didn’t replace the need to be comfortable with the business and be truly interested in it. They wasted a lot of time analyzing the books, only to find that they couldn’t agree with the seller on price and terms, or that the type of business just didn’t suit them.