22 Oct 3 Things to Know Before you Buy a Business
The baby boomer generation is retiring and those who are business owners are selling their businesses. So, where do you start? How much do you pay for the business? What’s it worth? How do I get if financed? Depending on your situation, you may only buy and sell one business in your lifetime, so you want to do it right. Here’s 3 things you must know when buying a business:
1) Set up your team. Buying a business is a complex transaction for a large amount of money. You should hire an attorney to help you with business formation issues, corporation (LLC), partnership, and proprietorship. They will walk you through any and all personal and business liability issues. You may want to set up 2 LLC’s if the business you’re buying includes real estate, one for the business and the other for the real estate. You want a CPA to help you with all the tax implications of buying the business. Typically, a business is purchases for a value in excess of the assets. So, you have an intangible asset called goodwill on the balance sheet when it’s purchased. Your CPA will help you with determining the best way to structure your purchase from a tax point of view. Finally, a business broker/advisor rounds out your team and will coach you through the negotiating process from Letter of Intent (LOI) to due diligence to the actual purchase agreement. There are numerous terms and conditions that can be included or are important to buyer and seller. Rely on a professional to guide you through the process.
2) Determine what you’re willing to pay. Ultimately the purchase takes place at the point where a willing seller and a willing buyer agree. You can rely on your business advisor/broker to do industry research to determine the multiples of cash flow or revenue that businesses like the one you’re buying go for. They can pull comparable sales to determine what the current market value. But setting all those aside, you have to be comfortable with the price you’re paying and all the terms and conditions of the sale.
3) The business acquisition loan of choice is the SBA 7a loan. The 7a loan provides 10 years terms, about 80% of the purchase prices can be financed (in some instances a higher %) and the rates at about 3% above Prime, some higher, some lower. The term extends to 20-25 years if the transaction involves real estate. If you’re buying both a business and the real estate, the lender will blend the term based on the weighted average of the 2 values (business value and real estate). So, it’s likely you’ll end up with a 17-18 year term for the loan. The bank gets an SBA guaranty of 75% of the loan amount. This covers them in liquidation if there’s a default and a collateral deficiency after all assets are liquidated. You pay a premium for the guaranty which is about 3% of the loan amount. It can be financed in with the loan amount, if there’s sufficient collateral. The lender is required to but forth “best efforts” to fully collateralize the loan with business and if necessary personal assets. You’ll want to deal with a “preferred lender” a designation given by the SBA to a lending institution. It speeds up the process.
Buying a business is an incredibly difficult, but ultimately rewarding process. It’s important to take these three things in to account before you begin.