Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Buying a business can be a great move but it takes a lot of due diligence investigation. Due diligence is often thought of as “finding the bad stuff” but it is also important so that you understand what it will take to operate the business after you own it. OJT (on the job training) is helpful but preparation is even better.

Buying a Business

Know what to research

Keep in mind that these magnificent 7 aren’t the only things you need to investigate but they are 7 that are often overlooked or short-changed when buying a business.

  1. Cash Cycle – understand the cash cycle from when you incur cost to when you collect cash. 10 days? 30 days? 60 days?  Think through the stages, when do you spend money? When do you collect money? Every business has a cash cycle, dissect the steps to make sure you understand when cash is expensed and when you receive cash. If you have 10% profit you have 90% you owe other people. You’ll need to fill the “cash gap” with financing or cash injections from other sources.
  2. Hidden Costs – know the “hidden” costs in the system, warranty, call backs, inventory losses, un-billable hours, and uncollected AR. Most business owners only think about these things at year end when the CPA does the business taxes but this effects your cash every day.
  3. Specialized Knowledge – know the specialized knowledge of the current owner. Technical knowledge? Craft knowledge? Relationship knowledge? Supply source knowledge? The employees will judge you beginning day 1. Make sure you know what they expect you to know.
  4. Cash Needs -know your cash per sales growth requirements; don’t grow yourself into poverty. For every dollar in sales you’ll need to have some dollars available to fund expenses and products until you collect the cash from the customer.
  5. Pricing – understand how the current owner prices products and services.  Markup? GM? Guesses? Competitive comparison?  Is there room for improvement? Does current pricing have anything to do with the market? Who has special deals?
  6. Insurance – understand the current insurance coverages and make sure your coverages reflect your risk tolerance levels. Get an insurance audit. Make sure you review every aspect of insurance you need. Often we find sellers are under insured. Getting proper insurance could effect the biz earnings and the amount you might be willing to pay to buy the business.
  7. Licenses – make sure you research the licenses, permits and compliance requirements needed to operate the business. Don’t assume the seller knows everything. Buying a business not in compliance with current requirements is risky business.

While you may be itching to simply sign on the dotted line..

Thinking about what businesses might be for sale?

STOP:  your preparation and due diligence will save you a great deal of  hassle and surprise. Buying a business takes time, thought and research. As an entrepreneur, this is just your first step in creating a successful business.

Buying a Business in Texas – Define Earnings and Profits First

Buying a Business in Texas – Define Earnings and Profits First

When looking at buying a business in Texas and other parts of the U.S. there are many different terms used and the same term can be defined differently depending on who is using the term.

In this post I’ll try to define some of the terms commonly used to represent the “earnings” or “profit” the business generates.

The terms below are attempting to describe the operating profit available to the new business owner when the selling business owner, and all of the selling business owner’s non-business expenses, leave the business. Keep in mind that the vast majority of small business owners do their accounting with a single intent, minimizing taxes owed.

Here are some common terms you will see when looking at businesses for sale:

Cash Flow (CF or C/F) – This is a commonly used term for representing the “earnings” of the business and is definitely not the same definition of cash flow that a CPA would use. A CPA would include changes in accounts receivables, accounts payable, capital expenditures and a number of other items when calculating the true “cash flow” of a business. When you see the term “cash flow” used on Business for Sale sites what they likely mean is the “Earnings Before Interest Taxes Depreciation and Amortization” (EBITDA) plus Owner’s Compensation. Once you understand EBITDA and Owner’s Compensation you’ll have the code for the other definitions.

Net Income – Net income is a fuzzy one because lots of people include and exclude items that others might not find appropriate. You’ll have to have the person claiming the net income number explain EXACTLY what the source of the information is and what is included and excluded.

EBITDOC – This is a term I have created that I’m hoping the industry adopts. This was explained above when you piece together EBITDA and Owner’s Compensation. It’s the business earnings before interest, taxes, depreciation/amortization and owner’s compensation. With this definition it allows you to focus on the most critical of the elements which is proving the claims of the Owner’s Compensation, in all it’s forms. Many small business owners are very creative with their accounting. Make certain you understand the source and veracity of the numbers before you make any decisions.

EBITDA – This is a common measure of earnings in larger businesses but is less useful when buying a business in Texas. This earnings definition assumes that the “owner” or CEO of the company is receiving fair compensation for the job being performed and therefore no adjustments need to be made. This is rarely the case in small businesses for sale and therefore EBITDA, without Owner Compensation adjustment, is generally useless in evaluating the small businesses earnings. You will however see some representations of ebitda that make total sense as a stand alone number if embedded in that EBITDA number is an reconciliation for owners compensation. This number is often called Adjusted EBITDA.

Pre-Tax Income – This term is generally useless when evaluating the earnings of a small business. The problem is all of the non-cash entries and the owner compensation entries that happen before the pre-tax number is established. Often times this pre-tax number is manipulated so that the business owner reduces his taxable income.

The takeaway for this is that when evaluating buying a business in Texas or other places in the U.S. you need to take the time to understand how the advertised earnings were established and understand the items included. Don’t assume one business broker’s earnings is calculated the same way as another business broker, do your homework.

The Value Goes to the Prepared.

earnings of a small business.

Sunbelt Completes Sale of Medical Products Companies

We are pleased to announce the sale of two related companies. One is a 40 year old manufacturer of medical lotions, the other is a research company focused on medical lotions and compounds.

The products are manufactured in an FDA regulated facility in Houston, Texas.

The company is in it’s 3rd generation of family management but the time had come to bring in outside investment. The current leader, the grandson of the founder, will remain in an executive position with the new ownership.

These deal was complex due to the regulatory requirements of the FDA, the substantial intellectual property that had accumulated over the businesses 40 year history and the always challenging dynamics of multi-generational ownership.




Small Business Administration (SBA) Lending to Buy a Business

Small Business Administration (SBA) Lending to Buy a Business

The Small Business Administration (SBA) continues to be the primary source of financing when buying a business in Texas.

Technically speaking the Small Business Administration loan is not a loan but actually a guarantee to a bank who actually provides the loan. It’s commonly referred to as an SBA loan due to the standard regulations imposed on banks who offer loans under the SBA program ( known as a 7A or 504 loan).

In today’s market an SBA Loan for the purchase of a business that doesn’t have real estate as part of the sale ( the business is typically located in a leased space) will generally have the following terms:

  • 10 year amortization
  • Interest rate of 2.75% over the prime lending rate, adjusted quarterly
  • Buyer down payment equal to 15 – 25% of total business purchase price
  • Bank will likely add adequate working capital to the loan for business operations

The bank will have substantial due diligence requirements. Both the buyer (borrower) and the business (seller) must be able to pass the banks due diligence requirements. The bank will want all business financial information to be correctly stated on the business tax returns.

The bank will also want the buyer to me certain requirements regarding credit score, no problems with student loan payments, no issues with child support or alimony payments, clear history of any criminal issues.

A very important element of getting approved for an SBA backed loan is the banks comfort level with the buyers ability to succeed in the business they buy. A core element is known as buyer’s “applicable skills”. Basically this means what in the buyer’s experience can be applied to the new business.

Most small businesses that sell for under $1,000,000 are purchased by individuals who will own and operate the business on a day-to-day basis. These SBA Loans are rarely used for “passive” investments.

SBA Announces New Measures to Help Get Small Business Loans Into the Hands of Veterans

SBA Announces New Measures to Help Get Small Business Loans Into the Hands of Veterans

Release Date: 

Friday, November 8, 2013
Release Number:
Dennis E. Byrne (202) 205-6567
Internet Address:

WASHINGTON – The U.S Small Business Administration (SBA) today announced new measures to help get small business loans into the hands of veterans by setting the borrower upfront fee to zero for all veteran loans authorized under the SBA Express program up to $350,000.  This initiative will start on January 1 and continue through the end of the fiscal year.

“Our nation’s veterans are highly-skilled and highly-trained leaders in their communities,” said Acting SBA Administrator Jeanne Hulit.  “This initiative will set fees to zero for SBA Express loans to veterans up to $350,000, and is part of SBA’s broader efforts to make sure that veterans have the tools they need to start and grow a business.  As we honor our veterans and thank them for their service and sacrifice, let’s continue to identify ways to support them when they come home.”

Of all SBA loans that go to veterans, 73 percent are $350,000 and below.  The SBA Express Loan Program, which supports loans under $350,000, is SBA’s most popular loan delivery method, with nearly 60 percent of all 7(a) loans over the past decade being authorized through the program. Since the program’s inception, it has also been one of the most popular delivery methods for getting capital into the hands of veteran borrowers.

Building on SBA’s recent announcement that for the current fiscal year, fees on loans for $150,000 and under are set to zero, this policy announcement means that veteran borrowers will no longer have to pay an upfront fee for any loan up to $350,000 under the SBA Express program.  This new initiative will go into effect January 1 and extend for the duration of the fiscal year.  This will make the loans cheaper for the borrower, another way SBA is looking to serve small business owners as they look for ways to access capital.

Today’s announcement comes during SBA’s National Veterans Small Business Week, an initiative on the part of the U.S. Small Business Administration to reach out to veteran entrepreneurs and business owners.  During Veterans Small Business Week, SBA staff all across the country have been working with partner organizations on educational efforts, mentoring, and trainings to make sure veterans have the tools they need to start or grow their business.

SBA provides veterans access to business counseling and training, capital and business development opportunities through government contracts. In FY 2013, SBA supported $1.86 billion in loans for 3,094 veteran-owned small businesses.   And since 2009, the dollar amount of SBA lending support to veteran-owned firms has nearly doubled.

For more information about these and other SBA programs, visit the SBA website at, or contact your local SBA field office.  You can find contact information for your local SBA office at

Click Here for Information on SBA Small Business Loans available

Check here for Businesses Available 

Best Basic Accounting Book for Small Business Owners and Buyers

Best Basic Accounting Book for Small Business Owners and Buyers

I found this basic accounting guide and it’s the best I’ve seen at presenting basic small business accounting in an easy to follow manner.

This book is under 100 pages and under $10…if you’re a small business owner this could be the best $10 you ever spent.


Accounting Made Simple – Understanding Accounting Principles in Less Than 100 Pages

If you are considering buying a business or you own a small business and hope to sell it one day take the time to review this book and implement the simple solutions that will make your business more valuable.

When buying a business it’s important to understand accounting principles so that you can condut the proper due diligence. This book will help simplify the process and also help you prepare your financing when seeking a bank loan or support from investors.