Ready to Buy a Business - Your 401(k) could be your best friend!

Ready to Buy a Business – Your 401(k) could be your best friend!

Using 401k to buy a business solves a lot of financing problems. Buying a business is a complex and, at times, frustrating exercise. The easy part is finding a business worth buying, the difficult part is jumping thru the hoops to get the business  purchase financed. Getting financing to purchase a business makes financing a home purchase look like a walk in the park.

If you are buying a business don’t overlook using a 401k without triggering a tax bill. There are CPAs who specialize in this investment vehicle. The IRS code currently allows, if structured properly, you to access your 401(k) without triggering income tax or early withdrawal penalties.. A qualified 401k business purchase rollover expert should be consulted. Tax laws are complicated and require expertise to navigate.

Your 401(k) and an SBA Loan from the Small Business Administration could provide the financing you need to buy a business and build the wealth that is often created when you own and operate a successful small business.

A typical financing structure when buying a business is (20% down often using a 401k to buy a business) 75% financing from an SBA loan and 5% financing from the seller.

Typical business acquisition loans are 10 year loans, with interest rates at prime + 2 3/4%. These terms can be improved if the business purchase includes the purchase of real estate. Purchase of the real estate will significantly lengthen the term of the loan and can also improve the interest rates.

SBA loan terms are typically far better than terms from conventional financing (when available and most times convential financing is not available). The SBA loan guarantee program is utilized by many banks who particiapte by making SBA guarantee backed loans to individuals and small businesses looking to acquire a business. Here is some info from SBA regarding this option.

 

 

Could there be a better investment than investing in yourself?  For free information and complete details click here.

Buying a Business:  What The Buyer Gets

Buying a Business:  What The Buyer Gets

The vast majority of business purchases are defined as “asset” purchases. On some occasions a buyer will actually buy the stock of the corporation. For our purposes here we will outline an Asset Purchase transaction. (For discussion purposes only. This is NOT legal or accounting advice.)

Asset Purchase

An asset purchase is a method of acquiring a business that specifically identifies the assets and liabilities that the buyer is purchasing or assuming. Most business owners own their assets inside of a corporation and the business owner actually owns the Stock in the corporation and does not own the assets directly. The corporation owns the assets and the business owner owns the stock. A buyer typically forms their own legal entity (LLC, S corp, etc) to purchase the assets from the seller’s corporation.

2 Types of Commonly Purchased  Assets

Typical tangible assets include inventory, equipment, machines, vehicles, furniture, computers, fixtures, etc. Typical intangible assets include business name, goodwill, customer lists, contracts, non-compete agreements, phone numbers, websites, trained employees, etc. Asking prices normally include all the Tangible and Intangible business assets (unless otherwise identified).

Exceptions

Cash and cash equivalents on hand and in checking or investment accounts, accounts receivable, prepaid items and deposits. Also included are any items in the seller’s corporation that are not used by the business (ex., personal cars, vacation homes, etc.).

Typical Liabilities Retained by the Seller

Accounts Payable and all debts. 

Typical Liabilities Assumed by the Buyer

Most buyers want the business to remain in the same location and will want to have the facility lease put in their name. Any contracts where the future benefit goes to the buyer. For instance, Yellow Page Advertising may be an annual contract to be paid monthly. The buyer would assume the remainder of contract payments due after closing. Buyer will want to keep the customer sales.
Often times the business has leases for equipment that the buyer will need to assume. These leases are common. The most common are the facility lease and a postage machine lease but there are many others: Brake machines in auto shops, printing presses in print shops, vehicles in delivery businesses, etc. Buyers should make certain they understand what assets they are buying and what liabilities they are assuming. Buyers should make certain that any liabilities to be assumed or assets not included are clearly identified prior to or at closing.

Real Estate

Sometimes the owner of the business corporation also owns the real estate personally and the corporation pays rent to the owner. This appears to be moving money from one pocket to another but is often done for tax purposes. When the real estate is available for sale from the same owner as the business it should be identified. Should buyer purchase the business and the real estate under these conditions the transaction will actually appear to be two transactions. Concurrently buyer would buy the assets of the business from the seller’s corporation and purchase the real estate from the seller personally.

The Importance of Maintaining Confidentiality in the Business Sale Process

The Importance of Maintaining Confidentiality in the Business Sale Process

When a business owner decides to sell their business, one of the biggest issues discussed with Sunbelt Business Brokers is how to maintain confidentiality during the process. When a business owner states they want the business sale to be done confidentially they mean they don’t want the employees, customers, vendors, lenders, etc. to know the business is being sold or even that it is for sale. In addition, confidentiality means that none of the important and confidential information about the business should be tossed about carelessly and wind up in the hands of someone that could use the information to harm the business and the seller. The protection of confidential information is a very important element of buying a business in Texas.

Confidentiality Agreements

Confidentiality Agreements (CA) are also often called Non-Disclosure Agreements (NDA). Nearly every business owner and business broker will want a potential buyer to sign a Confidentiality Agreement before releasing information specific to their business. In all likelihood a CA will need to be signed before the buyer is even told the name or location of the business. It is very important that you, as a buyer, understand the requirements in the Confidentiality Agreement. You will be expected to honor what you sign and commit to do. Failure to honor the terms of the confidentiality agreement could subject you to legal action and possible damages. If you are unable to understand the terms and commitments in the Confidentiality Agreement please seek appropriate legal advice.

Common Elements in Confidentiality Agreements

Time Frame: You will be expected to maintain confidentiality for a specific time.

Return of Materials: You will commit to return or destroy the information at the request of the seller. This includes all hard copy and digital copies. The seller can insist that you do this at any time the seller chooses. Also, you will likely be required to confirm in writing that you have destroyed the information.

Restrictions on Use of Information: Confidential information can only be used by you to evaluate YOUR interest in purchasing the business. For instance, you cannot “pass it along to a friend that might be interested in purchasing the business. You won’t even be allowed to state the name of the business for sale to non-professional advisers. You can only release the information to your professional advisers(CPA, Attorney, etc.) who you must then advise that the information is bound by a confidentiality agreement. Furthermore, you will be responsible for what your advisors do with the information. Make sure you tell your advisors the information you give them is bound by a Confidentiality Agreement.

Employee Contact: You will likely be prohibited from talking to or contacting employees without permission of the seller. You will also likely be prohibited from hiring employees or providing information to anyone who could use it in another business to hire or recruit the seller’s employees.

Vendors, Suppliers, Customers, Lenders Contact: The same restrictions as Employees, basically, without written approval from Seller you cannot contact any of these parties nor provide information so that others can.

Important Note: There are many different forms of Confidentiality Agreements, some have many more terms and very different terms than above. Make sure you read the agreement carefully and thoroughly understand your obligations before signing any Confidentiality Agreements.

Buyer Insider Tip #1: In order to buy a business on the best price and terms it’s important for the buyer and seller to establish a good relationship. A buyer can get an advantage over other buyers by telling the seller they understand the need for confidentiality and that they will absolutely honor the non-disclosure agreement. The seller will appreciate it and will likely be more comfortable releasing the critical information you expect to receive.

Why is Confidentiality During the Business Sale so Important to the Seller and Buyer?

The sale of a good business is not like the “going out of business sales you see on TV. If there is a going out of business sale the business owner has no interest in preserving the ongoing value of the business. Their only concern is selling the inventory and fixtures. In selling a good business the buyer and the seller both have an interest in preserving the value of the business in the process. Obviously, the Buyer wants the value of the business preserved so that its continued success is possible.

Employees

When word gets out that a business is for sale often the employees assume the worst. Employees may assume the buyer is going to fire them. When buying a business a significant part of the value is in the trained employees. A business buyer does not want the employees to quit. The employees and buyer have a common interest to keep the employees employed in the business. If the business sale rumor causes employees to look for other jobs then the seller is harmed and the buyer is also harmed.

Buyers occasionally want to talk to employees before they buy the business to make sure they aren’t going to quit. This is almost always a bad idea for the buyer and the seller. What we have found works best in most cases is that the employees aren’t told of the business sales until the sale is complete and then the buyer and seller together announce the sale to the employees.That way the seller can endorse the buyer and the buyer can assure the employees that they all have jobs. This sudden announcement might seem uncomfortable but actually, it eliminates uncertainty for the employees that might be created if they hear the business is for sale weeks or months before an actual sale.

Buyer Insider Tip #2: As you near the actual purchase date work closely with the seller on a plan to announce the purchase to employees. Experience tells us you want to make the sale announcement on the first day of the work week so that you, the buyer, has all week to start building a relationship with the employees. You probably don’t want to announce a sale on Friday afternoon then send the employees home for the weekend to sit around worrying about things.

Vendors, Suppliers & Lenders

If suppliers hear a business is being sold they may choose to alter their credit policies until the new owner is in place. If a seller has a vendor that normally sells a product to the business and allows the business 45 days to pay the bill and, because of a rumored sale, changes its policy to want payment in 10 days, that could have a significant and harmful impact on the day-to-day operation of the business.

Customers

For retail businesses, the buyer usually has no concern about the need for contacting the customers before the business purchase. However, for business-to-business companies, there are often concerns and issues to be addressed. If the business has significant customer concentration issues (i.e.,one customer represents 50% of the total sales of the business) the buyer may want to have some assurances that the business will continue after the sale.These assurances can be provided in a number of ways. Examples are contracts in place and/or service agreements that can be assumed by buyer. The Seller and Buyer must work together to determine how to accomplish the goals of both parties how to complete the business sale without damaging the business and also assure that the buyer has a good opportunity to continue the relationship with the customers.

Business Insider Tip #3: Virtually all business sales have a few areas where the buyer and the seller need to be creative to resolve a risk issue for the buyer that is a confidentiality issue for the seller. Buyers who work with the seller openly, reasonably and respectfully usually end up with the most favorable solution.

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.

So You have a Deal to Buy a Business, now what?

So You have a Deal to Buy a Business, now what?

Congratulations but don’t pop the champagne yet. Now is when the real work begins in your quest to buy a business.

Essentially, there are 3 fundamental phases to orchestrate before your final takeover of the company. Keep in mind that each business or industry may have several variations of the progression. Here are some general guidelines but you and your advisers may have other steps or systems to add to this buying chain.

Please keep in mind your agreement to purchase likely has important dates identified. Keep track of those dates and take the action necessary to comply with those.

Phase 1 – Initial Due Diligence and Lender Commitment

This phase is mostly about the financials of the business and your personal financial situation.

Basically your lender will want to make sure that the likely cash-flow of the business fits your overall financial situation. Get with your lender immediately and begin the financial due diligence. Your lender will provide you with a list of items they need. The goal here is to do enough due diligence to get your loan commitment as quickly as possible. Get your advisors (typically at least an attorney and CPA) lined up quickly so they can help on the tricky items

Phase 2 – Full Due Diligence

This is where you and your advisers come up with a list of everything you want to know about the business. It’s important to have the loan commitment in hand when you get to this stage because sellers want to make sure they have a qualified buyer with the funding lined up before they release very highly confidential business information.

This due diligence takes a lot of time.

You need to commit to move thru it quickly, in a very organized manner. Remember, this stage is where you personally and along with your advisors, review, confirm, and challenge all aspects of the information. When conducting due diligence, forget about what the broker or seller or your buddy has said, it’s your job to review and confirm things yourself.

Remember, due diligence is about you, the buyer, managing your risk by knowing the facts.

Put in the work, it’s important.

Phase 3 – Closing Process

This begins after you have completed Phase 1 & 2. At this stage you’ll likely be asked to release or waive the contingencies in your offer and authorize the closing company to begin preparing closing documents.

At the same time you’re working thru the closing documents, you’ll also need to be focused on what’s involved in taking over the business and all of the details.

  • Is your insurance in place?
  • Do you have required licenses and inspections?
  • Is your merchant services account ready to go?
  • How will you introduce yourself to the staff? Is your payroll service set up and ready to go?
  • Have you formed your new entity or LLC?
  • Do you have your sales tax #?
  • Do you have your Fed ID #?

Make sure you’ve created a complete inventory beginning with the above suggestions. While it seems like an endless list, knock them off 1 at a time to create an even stronger foundation for the success of your new business venture.

After Phase 1, 2 & 3 you’ll be a new business owner.

Working thru these 3 phases can be exhausting and frustrating for both the buyer and seller but we’ve had 100s of people make it thru.

Keep a good attitude, try to avoid ultimatums, stay on good terms with the seller and realize there are lots of 3rd parties (banks, landlords, inspectors, etc) who often move at their own pace.

IT Due Diligence when you Buy a Business

IT Due Diligence when you Buy a Business

Intellectual Property Due Diligence (this includes information technology I.T.) when you buy a business is critical and often overlooked, along with the Intellectual Property element of Due Diligence.

I.T. and Intellectual Property (IP) Due diligence are closely related and both are often done at the same time. This process can be very technical and often involves complex federal law. If your attorney is not familiar with intellectual property law you might, dependinging on the value you assign to the intellectual property, want to seek an attorney or  Intellectual Property Due Diligence expert who specializes in these somewhat arcane issues.

I.T. & IP due diligence have some common elements and one of the most important is to make certain who actually owns the IP often associated with I.T. value in a business.

Note: To mitigate risk, “involve IT professionals as part of the deal team to help assess a broad overview of the IT landscape of the target firm and identify any substantive issues that may exist early in the deal making process.” John Beauford, director of IT at Doctors in Training.

The law related to ownership of Intellectual Property can be confusing. A common question is, when the business had it’s website developed does the business have written confirmation that the intellectual property (i.e., the website content and design) is owned and is the legal property of the business? Just because an employee did the work it doesn’t necessarily mean the business owns the IP. This is something to think about as a business owner regarless of if you are considering buying or selling a business.

Another area is IP related to Trademarks, Patents and Pending Patents all of these usually require third party confirmation or transfer.

If the IP and I.T. of a business is a significant part of the value of the business you are buying it’s probably a good idea to put in the time to investigate the issues and engage some legal expertise to make sure that you will own or have the rights to the IT/IP after you purchase the business.