The True Meaning of a Fairness Opinion
Many people assume they know what “fairness opinion” means because they are familiar with the term “fair market value.” Fair market value refers to a price that is reasonable for both a buyer and seller in an open and competitive market. However, a fairness opinion is quite different. This term refers to a report that evaluates the facts of a merger or acquisition or any other type of business purchase.
A fairness opinion is typically in the form of a letter that contains an actual opinion and justification of why a selling price is fair. Of course, there are limitations, as this report is fully based on information that has been provided by the management of the business.
Who Prepares a Fairness Opinion?
A fairness opinion must be prepared by a professional with expertise in business valuation. It is typically done by a business intermediary or appraiser. An investment banker can also prepare a fairness opinion. Although the professional who prepares the fairness opinion may very well have experience in structuring deals, this letter does not include any information or opinion on the deal itself. It also doesn’t include advice or recommendation. In preparing the report, the advisor seeks to look at the deal from the perspective of the investors.
Basically, it is structured to specifically comment on fairness from a financial perspective, based on the information on hand.
Who Uses Fairness Opinions?
You will most frequently see fairness opinions utilized in the sale of public companies by the board of directors. When this document is received, it shows that the board is working to protect the shareholders. Of course, fairness opinions can also be used for private companies. In this case, it can serve to protect the interest of shareholders or family members who may later look to challenge the sales price. However, in most situations that involve middle market private acquisitions, a fairness opinion is not necessary.
In the end, a fairness opinion assists with communication and decision-making. It serves to lower the risks surrounding a deal. This important document can be used in court if a shareholder later decides to file a lawsuit against the director of a company.
Copyright: Business Brokerage Press, Inc.
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Is it Possible to Buy a Business Without Collateral?
When it comes to getting a loan, you can be certain that a bank will want collateral. This is true for both personal and business loans. Simply stated, if you have collateral, your bank won’t be concerned about being left empty handed if you can’t repay the loan. Many budding business owners are, in fact, held back by the fact that they lack the collateral needed to buy a business. However, the good news is that there are ways that one can buy a business with no collateral or very little collateral.
The Small Business Administration (SBA) is the first stop for those wanting to start a business with a low level of collateral. The SBA’s 7 (a) program provides banks with incentives to make loans to buyers. It is through this program that the SBA will provide guarantees for a whopping 75% of the loan amount. The borrower still has to have the remaining 25% of the loan amount. This means that on a $1 million dollar business, the borrower just has to come up with $250,000 and not the full $1 million dollars.
Through the SBA’s 7 (a) program it is possible for prospective business owners to consider businesses that would otherwise be completely out of their reach. Yet, there is a second excellent aspect to the program, namely that the cash that buyers use to meet the 25% requirement can come from an investor or a gift. Anyone looking to become a first time business owner will want to fully explore all that the SBA’s 7 (a) program has to offer.
A second route for those looking to buy their first business is seller financing. Seller financing is not rare, as many may suspect. This method of financing is actually quite common. If sellers are motivated, they are much more willing to consider seller financing. Keep in mind that there are many reasons why a seller may be motivated, such as retirement, unexpected personal problems, or just burnout. Seller financing and the SBA’s 7 (a) program could, in some situations, be used together. This combination could serve to greatly increase your chances of buying a business.
This is not to state that there are zero obstacles or limitations with the SBA’s 7 (a) program. For example, the program requires that sellers cannot receive any form of payment for a full two-year time period. There are ways to address this problem, but it is something that buyers and sellers alike should be ready to address.
A lack of collateral doesn’t have to mean the end of the dream of owning a business. If you are interested in owning your own business and lack collateral, meet with a consultant at S.C.O.R.E. and other experienced professionals, such as a business broker or M&A advisor. An experienced brokerage professional will have a wide-array of ideas for how to buy a business with little or limited collateral.
Copyright: Business Brokerage Press, Inc.
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Seller Carry. Why We Should Avoid It When We Buy Business in NYC
“Seller carry” is a legitimate way to secure a business purchase in certain scenarios. It basically consists of the financing made by the selling party of a portion of the sale over an extended period.
This might be a reasonable course of action in the event that:
* The buyer doesn’t have all the funds available
* The bank won’t lend the remaining amount
* The seller, nonetheless, still wants to go ahead with the sale
Notwithstanding, there is a lingering temptation on the part of investors to keep sellers on a leash via a _seller carry note_ that could function as an additional “warranty” of sorts, beyond whatever other warranties found in the Asset Purchase Agreement (APA in short). If a seller agrees to the issuance of this seller carry note, the buyer is thus reassured that the former will not try to “cut and run” when serious problems arise.
There is nothing wrong with exercising a bit of caution, particularly when you buy a business in New York City (of all places). Alas, this fear can get a bit too far and we can end up pushing away a good seller for no discernible reason.
It should not surprise us that putting such a burden on the seller is not appreciated, especially whenever the buyer has all the means to pay the required amount. When we push it too far, asking for a seller carry can become a giant deal-breaker. For this reason, business brokers advise against opting for this route save for special circumstances.
Bank Financing to Buy a Business New York City
If you decide to buy a business (NYC and elsewhere), banks actually _do _finance a large sum of the investment price, contrary to what many would believe. Most often than not, this financing represents a whopping 90% of the asset’s value, which is the maximum percentage guaranteed by the US government-backed SBA (Small Business Administration).
Unless you genuinely have a bad credit score – in which case, you’re not eligible to buy a business in New York City in the first place – getting credit for a sizable portion of a small business’ purchase price should not be overly difficult. A competent business brokerage firm can offer assistance in this regard and direct you to highly affordable and reliable lenders.
Situations could arise, however, in which investors don’t have the remaining 10% or they need to fill a 5% gap, in which case, seller carry notes are a good alternative. Be advised that seller carry notes should not wholly _replace_ the loan but rather serve as a means to mend the fence when available funds are not enough.
The only reasons you’d want the seller to assume an exceedingly high percentage of your purchase in lieu of a bank is because:
* As said earlier, you don’t trust him/her; or
* You’re not actually a suitable buyer under the criteria set out by virtually every professional business broker, to begin with, if only because you’re not in good standing with financial institutions
Either way, the seller’s confidence in you wanes and he/she might even feel offended by the proposal. It’s one thing to abide by the “settled accounts keep old friends” motto, and another one to go the extra mile and call good faith into question beyond necessary.
Read MoreShould A Business Be Sold After Its Most Profitable Year?
What goes up eventually goes down, even if just momentarily. In the stock market, the saying goes “buy low, sell high”. This could likewise apply to business selling but in a more concrete way.
Unless you’re planning to keep your Long Island venture for the long term, you may want to sell your business whenever you’re able to get the highest business valuation. Long Island business brokers would point to your most profitable year as possibly _THE__BEST _moment to sell.
WHAT ATTRACTS BUYERS TO A BUSINESS?
It’s very important to understand the psychology of a potential buyer. Most investors aim to have money work for them and not vice versa. They would most likely opt for a company that has an already established brand with a loyal customer base and a stable recurring income. The mere idea of having to start a marketing plan from scratch or organize entire departments will probably scare most of them off from the start.
A thriving business, a leader in its respective industry with a renowned and verifiable trajectory, will undoubtedly turn more heads than an underdog that can hardly make a sale or that is past its prime. which is, ironically, the stage in which most business owners would look to sell because of disenchantment and other emotional factors.
It should also be stressed that investors would want a business that has the potential to keep flourishing and growing, and not just one that is “doing well” at the present moment. For this reason, growth projections must be done in the most accurate manner. Moreover, the owner should not completely detach him/herself from the company’s operations during the sale process and, in many instances, investors would want the former owner to stick around even sometime _after _the deal is done.
All of these profits and projections would come at a price, of course, which is ascertained through a meticulous business valuation. Long Island brokers would make sure that all of these factors are included and reflected in the final analysis.
To avoid any discrepancy in this regard and to ensure a buyer’s trust, the “due diligence”, which is the review performed by the prospective buyer to make an informed decision, would have to take into account nearly the same information that is usually provided for business valuations.
Long Island has a very competitive business selling market that is, admittedly, a tough nut to crack, which is why finding the best opportunity to sell your business can get complicated, since you don’t know whether your business could get “dethroned” the next year, so to speak. This gives us the cue to formulate the following question:
WHY WOULD YOU WANT TO SELL A PROFITABLE BUSINESS?
A lot of personal reasons may be involved in this decision (retirement, enrollment in other ventures, etc.) but selling after the most profitable year will ultimately have you reaping a higher number of rewards from your hard labor. In the hopes of having the best business valuation, Long Island business owners should not wait until success has already knocked on their door.
A sizable number of business owners would feel tempted to remain in charge after a very profitable season, which is not the “wrong” decision, either. However, they should assume the risks associated with this choice if they plan to sell in the future.
If you don’t know how to proceed in order to sell your Long Island business, a good business broker would point you in the right direction and get most tasks done for you, including marketing, paperwork, negotiations, and a fair business valuation. Long Island has a wide array of business brokerage firms that may be willing to assist you, in exchange for affordable rates.
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4 Questions to Ask Yourself Before Buying a Business
When in the process of buying a business, some buyers have accidentally overlooked important questions that need to be asked. However, you don’t want to find yourself in a situation where you wish you’d found out details that would have impacted your decision-making. With that in mind, let’s take a look at some often-overlooked inquiries.
1. What Is Included in the Sale?
It is possible to get so focused on the purchase of the business itself, that you overlook key details such as what is included. Don’t just assume that you’ll also receive important assets such as real estate, inventory, or machinery. All of this must be carefully outlined and documented. You will want to know exactly what you’ll be getting for your investment.
2. What Assets Are Included?
You’ll want to get the ins and outs of the proprietary materials and ensure that they are included with the business. If there is intellectual property, such as patents and copyrights, formulations, or software, you’ll want to ensure it is included. If it’s not included in the sale, you’ll want to know why. After all, the success of the business could depend on these.
3. How Can You Grow the Business?
Before you buy a business, it’s a good idea to ask yourself about its potential for growth. Many sellers will be prepared to provide you with ideas and strategies. If it is deemed that the growth for the business is limited, this is something you’ll want to determine in advance. Also, it is important to think about the amount of working capital you’ll need to not only run the business, but also to make any necessary changes.
4. What is the Staffing Situation?
You’ll want to think about how dependent the business is on the current owner or manager. If and when the current owner leaves, how much will that impact operations? You’ll also want to know in-depth information about who the management team is and how experienced they are. It is essential that your expectations are in line with reality.
As you can see, many variables must be taken into consideration before you sign on the dotted line. Much of this will be handled during the due diligence process. However, it is essential that you ask the right questions and speak up whenever you need clarity on an issue. When a business is properly vetted, you’ll not only be satisfied, but you’ll also be more successful.
Copyright: Business Brokerage Press, Inc.
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Legal Mistakes That Business Sellers Need To Avoid
In the process of selling a business, sellers will encounter a variety of hurdles. Most of these relate to paperwork, proper business valuation, New York City‘s taxation system (which is far more burdensome than that of most US cities), among others.
The amount of work that needs to be done can understandably intimidate any business owner with no prior experience in selling a business.
The worst part is that skipping any of these tasks will potentially have the owner immersed in serious difficulties and his/her credibility will also get harmed along the way. For this reason, it’s very important to get acquainted with all the stages of the process.
MISTAKES THAT BUSINESS SELLERS NEED TO AVOID
Among some of the most common mistakes that sellers make and must be avoided, we include the following:
1. NOT HIRING PROFESSIONAL HELP:
In the process of selling a business, you would need to rely on the work of qualified professionals that can handle things such as paperwork, taxes, banking, and business valuation. NYC is packed with lots of options in terms of brokers, attorneys, real estate agents, accountants, and bankers to get your sale fast-tracked.
The amount of competition in all these fields should also ensure that you get affordable rates to have these tasks done for you, within certain parameters. Nonetheless, make sure that you don’t just hire the cheapest professionals, for they may cause more trouble than they solve.
2. PERFORMING INCORRECT BUSINESS VALUATIONS (NYC BUSINESS BROKERS SHOULD PERFORM THESE TASKS)
Getting professional help is key to getting a more accurate business valuation. NYC business brokers ought to have the necessary pedigree and resources to calculate your business’s worth, but you’d have to play your role as an owner by providing the required financial documentation.
In order to perform correct business valuations, New York City brokers will make a series of calculations based on various metrics obtained from the company’s financial statements and spreadsheets, as well as the local market conditions. This is usually done with the aid of an accountant or accounting partner.
3. LACK OF PRIVACY CONCERNS
Privacy is one of the most overlooked aspects of business selling on the part of business owners. Making your sale publicly known could affect your venture in a variety of ways. You wouldn’t want your competition or your employees to know that you’re planning to sell.
Business brokers are versed in many strategies devised to protect the privacy of the sale. One of them consists of drafting non-disclosure agreements that potential buyers would have to sign before the details of the company are revealed to them.
4. SKIPPING LETTER OF INTENT
Out of fear of losing a potential buyer, business owners neglect to get a letter of intent signed by the interested parties. This may make you lose a bit more time in the selling process, but you’ll possibly waste much more from dealing with prospective investors who don’t take the sale seriously and who feel they can simply back down from the deal with no repercussions.
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