There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history.
The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times?
The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.”
Both owners and potential buyers can learn about the customer service, etc., by having a family member or close friend patronize the business.
Interestingly, these methods are now being used by business owners, franchisors and others. When used by these people, they are called mystery shoppers. They are increasingly being used by franchisors to check their franchisees on customer service and other operations of the business. Potential sellers might also want to have this service performed prior to putting their business up for sale.
An existing business is a known entity. It has an established and historical track record. It has a customer or client base, established vendors, and suppliers. It has a physical location and has furniture, fixtures, and equipment all in place. The term “turnkey operation” is overused, but an existing business is just that, plus everything else. New franchises may offer a so-called turnkey business, but it ends there. Start-ups are starting from scratch.
2. Business Relationships.
In addition to the existing relationships with customers or clients, vendors, and suppliers, most businesses also have experienced employees who are a valuable asset. Buyers may already have established relationships with banks, insurance companies, printers, advertisers, professional advisors, etc., but if not, the existing owner does have these relationships, and they can readily be transferred.
3. Not “A Pig in a Poke”.
Starting a new business is just that: “a pig in a poke.” No matter how much research, time, and money are invested, there is still a big risk in starting a business from scratch. The existing business has a financial track record and established policies and procedures. A prospective buyer can see the financial history of the business — when sales are the highest and lowest, what the real expenses of the business are, how much money an owner can make, etc. Also, in almost all cases, a seller is more than willing to stay to teach and work with the new owner — sometimes free of charge.
4. Price and Terms.
The seller has everything in place. The business is in operation and a price is established. Opening a new business from scratch can be the proverbial “money pit.” When purchasing an established business, the buyer knows exactly what he or she is getting for his money. In most cases, the seller is also willing to take a reasonable down payment and then finance the balance of the purchase price.
5. The “Unwritten” Guarantee.
By financing the purchase price, the seller is saying that he or she is confident that the business will be able to pay its bills, support the new owner, plus make any required payments to the seller.Read More
For a business to sell, there has to be a seller – and a buyer. The buyer of today is a bit different than the one of yesterday. Today’s buyer is not a risk-taker, is concerned about the financials, and seems to be overly concerned about price. Unfortunately, buyers have to understand that they cannot buy someone else’s financial statements. The statements might be a good indication of what a new buyer can do with the business, but everyone does things differently. It is these differences that ultimately determine how the business will do. The price may not be the right question for the buyer to ask. What is usually the most important question is how much cash is required to buy it.
Today’s buyer is finicky, due certainly in part to the fact that, he or she is not a risk taker. Quite a few buyers enter the business buying process and, at the last minute, cannot make the leap of faith that is necessary to conclude the sale. The primary reason that buyers actually buy is not for the reason one might think. Money or income is about third, maybe even fourth on the list.
Buyers buy because they are tired of working for someone else. They want to control their own lives. In some cases, they have lost their job, or are being transferred to a place that they don’t want to move to, or are very unhappy in their job. Surveys indicate that about half of the people in the county are unhappy in their jobs. People buy a business to change their lifestyle. A recent newspaper article quoted a very successful business woman, who left her job and bought a book store because she was “looking for a change, a way to be more rooted and be at home more.”
The make-up of a typical buyer
The typical small business buyer usually has many of the following traits:
- 90 percent are first-time buyers. In other words, they have never been in business before.
- Almost all of them are looking to replace a job. Business brokers primarily sell income substitution.
- Most buyers will have about $50,000 to $100,000 in liquid funds to use as a down payment.
- Most buyers are looking at businesses priced at about $100,000 to $250,000.
- Most buyers will not have sufficient funds to pay cash for a business.
Obviously, many other types of people go through the process of looking for a business. However, those buyers who will eventually purchase a business have most of the characteristics outlined above. Going a step further, the serious prospective buyer usually possesses the attributes described below:
Who is a serious buyer?
- Has the necessary funds and they are readily available
- Can make their own decisions
- Is flexible in the type and location of a business he or she will consider
- Has a realistic and sincere need to buy
- Has a reasonably urgent (within three to four months) need to buy a business
- Is cooperative and willing to listen
Sellers should take a second look at those who express interest in their business. If the prospect has very few of the above traits, perhaps the seller should move on to the next potential buyer. On the other hand, if you are a buyer, or think you are, take a second look at the traits of the serious buyer. If you don’t have many of them, you may not be as serious as you think. You might want to rethink the reasons for owning a business and be sure that this is the right decision for you.
Most prospective business buyers really don’t know from the outset the exact type of business they want to buy. Experienced business brokers and intermediaries know that many business buyers end up with what is sometimes a far cry from what first captured their imagination.
Take, for example, the old story of the buyer who saw (and probably smelled) a doughnut shop in his business dreams. This was the business he was sure he wanted to own and operate – until he discovered that someone, most likely him, had to get up at 3 a.m. to make the day’s baked goods. It is important that, before making the dream a reality, those prospective buyers understand just what the business is and how it fits their personalities – what they want to do and what they don’t want to do! Obviously, if getting a good night’s sleep is important, owning a doughnut shop is not a good idea.
In searching for the right business, here are some of the crucial questions a prospective business buyer might ask himself or herself:
Does the business look exciting and interesting to me?
Do I feel that I can improve the business?
Would the business offer me pride of ownership?
Would I feel comfortable operating the business?
Professional business brokers can offer many different businesses for a prospective buyer to consider. Prospective business buyers can discuss their needs and wishes with a professional business broker who can then show them opportunities that they might never discover on their own.
Statistics reveal that out of about 15 would-be business buyers, only one will actually buy a business. It is important that potential sellers be knowledgeable on what buyers go through to actually become business owners. This is especially true for those who have started their own business or have forgotten what they went thorough prior to buying their business.
If a prospective business buyer is employed, he or she has to make the decision to leave that job and go into business for and by himself. There is also the financial commitment necessary to actually invest in a business and any subsequent loans that are a result of the purchase. The new owner will likely need to execute a lease or assume an existing one, which is another financial commitment. These financial obligations are almost always guaranteed personally by the new owner.
The prospective business owner must also be willing to make that “leap of faith” that is so necessary to becoming a business owner. There is also the matter of family and personal responsibilities. Business ownership, aside from being a large financial consideration, is very time consuming, especially for the new business owner.
All of these factors have to be weighed very carefully by anyone that is considering business ownership. Buyers should think carefully about the risks – and the rewards. Sellers should also put themselves in a buyer’s position. The services of a professional business broker or intermediary can help determine the relative pros and cons of the transaction.
Today’s independent business marketplace attracts a wide variety of buyers eager for a piece of ownership action. Buyers of small businesses are most likely replacing lost jobs or searching for a happier alternative to corporate life. Buyers of mid-sized and large operations are, typically, private investment companies seeking businesses to build and eventually sell for a profit. This is the broadest possible look at the types of buyers out there. Business owners considering putting their business on the market should be aware of the finer “distinctions” among buyers, as well as what they are looking to buy, and why.
1. Individual Buyer
This is typically an individual with substantial financial resources and with the type of background or experience necessary for leading a particular operation. The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both time and money. If these buyers do not have the amount of personal equity required for acquisition, they most likely will turn to family members or venture capital sources for financing. (Buyers and sellers should be aware that, in many cases, seller financing will be an essential element, benefitting both parties in the long run.)
Even when such sources are available, the individual buyer will hit a strong bottom line when it comes to price. Therefore, these buyers will usually limit themselves to transactions involving less than $1 million, cash.
2. Strategic Buyer
This buyer is almost always a company, having as its goal to enter new markets, to increase market share, to gain new technology, or to eliminate some element of competition. In essence, it is part of this buyer’s “strategy” (hence the name) to acquire other businesses as part of a long-term plan. Strategic buyers can be either in the same business as the company under consideration, or a competitor. Example: a bank in one part of a state purchases or merges with one in another part of the same state. The acquiring bank enters a new market and “eliminates” competition at the same time.
Strategic buyers will be looking chiefly at businesses with sales over $20 million, with a proprietary product and/or unique market share, and effective management both in place and willing to remain.
3. Synergistic Buyer
The synergistic category of buyer, like the strategic type, is usually a company. The difference is that, with this buyer, the acquisition or merger flows from the complementary nature of the purchasing company and the company for sale.
Synergy means that the joining of the two companies will produce more, or be worth more than just the sum of their parts. Example: a large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.
4. Industry Buyer
Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well and, therefore, does not want to pay for the expertise and knowledge of the seller. The industry buyer is interested mainly in combining manufacturing facilities, consolidating overhead, and utilizing the combined sales forces. These buyers will pay for assets (but probably not what the seller thinks they are worth); they will not pay for goodwill, covenants not to compete, or consulting agreements with the seller. There can be some cases in which the industry buyer is also a strategic buyer, with the price determined by motivation.
5. Financial Buyer
Of all the buyer types, financial buyers are most influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible. Working on the theory that debt is the lowest cost of capital, these buyers purchase businesses with the sole purpose of making the maximum amount of money with the least amount of their capital invested.
Each type of buyer has distinctive characteristics that correlate to the motivation behind the purchase of a particular company. In addition, the price each is willing to pay for a company is directly proportional to the motive. The relative sizes of acquisitions by different buyer types (compressed into their broader categories), is shown in the accompanying chart (keep in mind that all figures are approximate):
Type of Buyer (Less than $3 million) ($3 to 10 million) ($10 million):
Sole Proprietors (45%) (25%) (5%)
Public Companies (30%) (20%) (20%)
Private Companies (10%) (15%) (15%)
Investment Groups (20%) (30%) (20%)