What is Due Diligence and Why is it so Important When Buying a Business?

The acquisition of a business is often a life changing event involving a large financial commitment and a considerable amount of time.

Performing the proper research is critical to obtaining the necessary facts and information required to make intelligent decisions and mitigate potential risks and unknowns.

From a buyers perspective, due diligence is the term that refers to the investigation and verification of information involved in a potential investment or acquisition.  Doing your “homework” collecting the necessary legal, financial, and operational documents, and confirming the seller representations and material facts pertaining to the business sale are all part of the due diligence process.

While most professionals recognize the due diligence phase commencing after a binding agreement has been executed with earnest money being held in escrow, the process actually begins at the first point of contact with the seller and/or the seller’s intermediary.

Prior to receiving any confidential data about the target, buyers should be prepared to sign a Non-Disclosure Agreement in addition to providing basic personal, financial, and work experience information to the seller.

Most business sellers retain a business intermediary or broker for representation and it will be the business broker’s responsibility to verify that the prospective buyer has the financial capability and business experience to be considered viable.

If third party financing is required, it is recommended that the buyer consult a lender in advance and receive a pre-qualification letter.  A competent business intermediary should be able to provide a number of funding sources that are active in the small business lending arena.

Due Diligence Steps for an Asset Sale:

Step 1:  Exploration:

The initial step of an evaluation should be a review of the business Offering Memorandum often called a ‘Confidential Business Review’ (CBR).  While the content of this document will vary from seller to seller, it will often provide the following:

Detailed description of the business

• Business Entity (C-Corp, S-Corp, LLC, Partnership, Sole Proprietor)
• Location & History
• Products & Services
• Number of FT & PT Employees

Two to Three years of recast (normalized) financial statements

• Profit & Loss
• Balance Sheet

Asset List with Fair Market Prices Listed

Business Valuation & Listing Price

SBA Loan Preliminary Approval

Competitive Information

Operational Details

Photograph(s)

There is a delicate balance in providing the necessary information to the buyer to allow them to make a proper evaluation and protecting the sellers’ need for confidentiality.

In some situations, less information is provided upfront but will increase over time as the relationship between buyer and seller matures.  A review of the CBR should be sufficient to determine if this business meets the basic criteria established by the buyer based upon their goals, skills, and financial resources.

Step 2:  Analysis:

In the majority of cases the process will not extend beyond a review of the CBR.  In the event the buyer has confirmed an interest in pursuing the opportunity further, a teleconference or email exchange with the business broker is generally the recommended next step.

This communication should be used as forum to facilitate a Q&A from the reviewed documents and to perform a more comprehensive and analytical review of the operations, financials, and the business valuation.

Upon receiving clarification to the points of interest, the buyer should re-assess whether this business fulfills their personal acquisition requirements. The broker or seller will more than likely also make an assessment as to whether a mutually beneficial situation exists and will likely verify that the buyer is indeed financially qualified for the particular business.

Step 3:  Site Visit:

Prior to touring the business and sitting down with the owner, the buyer should have a thorough understanding of the business, the products and services offered, the organizational structure and staff, the financial performance and profitability of the company, and a comprehension of the valuation.

Most business owners are heavily involved in the daily operations and management of the company and it is important not to waste time and energy (for all parties involved) should the aforementioned issues not be keenly understood and acceptable prior to arranging a site visit.

The majority of small business sales are ‘confidential’ in nature and therefore the employees are unaware that the company is being marketed for sale, placing greater emphasis on covering as much ground as possible prior to a facilitating a company tour. The site visit and owner meeting is an opportunity for the buyer to make a firsthand assessment of the facility and operations.


Additionally, this meeting serves as an opportunity for both buyer and seller to determine if the proper synergy and chemistry exits for a successful transaction.  Prior to leaving the meeting, the buyer should have a firm understanding of all facets related to the business enabling them to provide a Letter of Intent should a decision be made to move forward.  Should additional information be required prior to the LOI, a data request via email or a brief teleconference can easily be arranged to elicit any remaining details.

Step 4:  Letter of Intent:

Once the buyer determines that they have a serious interest in purchasing the company, a Letter of Intent (LOI) is typically prepared.  An LOI is a written document that expresses the buyers’ serious interest to enter into a formal contract and continue the discovery further.

At its most basic level, the LOI says that, as long as certain criteria specified in the LOI is as represented by the seller, that the buyer will purchase the company and the seller will sell the company consistent with the terms outlined within the LOI. An LOI may also be referred to as a Memorandum of Understanding (MOU) or Term Sheet although the style of these documents can vary considerably.

The LOI is a relatively straightforward document defining the fundamental terms and conditions of the proposed acquisition including the type of acquisition (stock or asset), purchase price, financing method, contingencies, data required to complete due diligence, and timelines for the Definitive Purchase Agreement submittal and closing. LOI’s are typically not legally binding unless so captioned, however, most will contain certain provisions that are binding as in the case of non-disclosure agreements and no-shop (aka stand-still) provisions.

A no-shop clause will often trigger a request by the seller for an earnest money deposit as compensation for the time the business was off the market in the event of uyers failure to close.  LOI’s are beneficial to both the buyer and seller.

The fundamental goal of the LOI is to confirm that a ‘meeting of the minds’ has been reached prior to both parties making the large investments of time, energy, and expense required to execute a Definitive Purchase Agreement (DPA), aka Asset Purchase Agreement (APA).

It is important to note that in some cases, a buyer will have obtained and examined sufficient company records, financial statements, and tax returns whereby they feel comfortable foregoing the LOI and, in its place, will present the DPA. 

Step 5.  In-Depth Due Diligence:

With an LOI in place, due diligence continues.  The purpose of conducting due diligence is for the buyer to have an opportunity to verify representations made by the owner during the selling process.  The process will typically take 2-6 weeks and can often be completed with relative ease when the financials, tax returns, and company documents (leases, permits, licenses, employee manuals, etc.) are clean, well organized, and professionally packaged.

Larger business transactions involving multiple locations, intellectual property, and complex products will require more time.  It is important for the buyer to recognize that some highly confidential information, such as customer databases and contracts, may not be made available until after a binding DPA has been executed and the contingencies removed.


A competent business broker coupled with a CPA, and attorney with business transaction experience will bring enormous value in streamlining the DD process. Buyers who leverage third party financing, will also benefit from the involvement of a loan packager as they will be completing their own independent due diligence serving as another set of eyes for the buyer.

If not done previously, the buyer should be prepared to provide the seller with a loan proposal or commitment letter.  Putting together a realistic timeline in advance will ensure that each party is aware of what documents are required and when they should be produced; avoiding unnecessary frustration and delays.

Business Acquisition due diligence focus areas:

Finance:

• Revenue, COGS, & Adjusted Earnings
• Assets & Liabilities
• Accounts Receivable & Payable
• Inventory
• Furniture, Fixtures, & Equipment
• Real Estate/Lease
• Capital Expenditures

Legal:

• Tax Filings
• Business Entity (Sole Proprietor, LLC, C-Corp, S-Corp)
• Lawsuits
• Intellectual Property
• Environmental
• Contracts (Employee, Customer, & Vendor)
• Government Regulation

Operations:

• Products & Services
• Customers & Vendors
• Personnel
• Technology & Infrastructure
• Markets & Competition
• Non-competition Agreement

Throughout the due diligence process, buyers may perceive anomalies in data from information they had received previously.  In most cases, these issues can be successfully resolved through an open dialog between both parties.  The nature of the inconsistency and the financial impact the discrepancy has on the transaction, will determine whether it requires the renegotiation of any points of the transaction documents.

Step 6:  Definitive Purchase Agreement (DPA):

The DPA is a binding contract between a seller of a business or business assets and a buyer.  This document establishes the terms and conditions of the sale and will include contract provisions that discuss the cost of buying the business, contingencies involved, and the legal structure of the transaction.  The DPA is typically formulated upon acceptance of the LOI.

The DPA is a much more comprehensive document than the LOI and will include a variety of representations and warranties (legal assurance that certain facts are true) from the seller about the operations and assets of the company as well as conditions and provisions for indemnity.


The DPA will also contain covenants which are the buyer’s promises to the seller and the seller’s promises to the buyer to either do something or not to do something.   Additionally, it will describe in detail what assets, free and clear of all third party claims (unless specifically stated and agreed upon), are included in the sale or specifically excluded from the sale. This includes inventory, real estate, vehicles, FF&E, contracts, customer lists and anything else that the business actually has at any given time.  Lastly the DPA will contain a variety of boilerplate provisions and the conditions for closing.

The due diligence process continues through the submittal of the DPA.  Several steps that are commonly initiated after the DPA include:

• Lien & Lawsuit Search
• Property & Vehicle Title Search
• Review of leases (assignability)
• Valuation of sellable Inventory (typically finalized the day before closing) *
• Accounts receivable & payable analysis
• Finalization of dealership or franchise applications/approvals
• Employee, Customer, Vendor contract review

* Occasionally, last minute changes to the inventory are not permitted by a lender.  Therefore, the buyer and seller should have a written arrangement detailing how adjustments to the inventory will be addressed.

Transitional Activities:

During the diligence period it is recommended that the buyer develop a personal transition plan for the business to ensure that they are adequately prepared once the closing takes place.  Some of the more critical items recommended for the transition plan involve establishing the following:

Functional:

• Legal Entity / DBA / Assumed Name Certificate
• Business Checking Account
• Business Insurance
• Licenses / Permits

Operational:

• Owner training/consulting schedule
• Revise/Develop business plan

Financial:

• Pro-forma financial analysis

Step 7.  Closing:

Closing procedures will vary based upon the custom in specific geographies and the protocol of the individual attorneys.  The transaction closing is the time at which the appropriate documents are signed by all parties, often at the buyer’s attorney’s office, and is recognized as the date that the buyer becomes the new owner of the business.


Dependent upon the buyer’s last visit to the business, a final ‘walk though’ can be performed immediately prior to closing.

Provided that no unforeseen issues arise on the day of closing, the buyer/seller contingencies have been satisfied, the buyer’s funds have been deposited in the attorney’s escrow account and both parties are prepared to sign a considerable number of documents, the funds of the buyers will be released to the seller and the buyer receives legal title and the keys to the assets of the business.

Detailed below is a comprehensive due diligence checklist.  The number of items recommended for completion could vary based upon:  whether it is an asset or stock sale, a main-street or middle-market business, and the nature and parameters of the sale.

DUE DILIGENCE CHECKLIST

Finance

• 2 – 3 Years of re-casted Profit & Loss Statements
• 2 – 3 Years of re-casted Balance Sheets
• 2 – 3 Years of Tax Returns
• Complete list of all assets with current market (replacement) value and condition.
• Schedule of any indebtedness and contingent liabilities
• Complete inventory list
• Copy – Any other material contracts relating to the business

Analysis

• Analyze the P&L’s and Balance Sheets and compare them against the business tax returns.  Are the adjustments and add-backs realistic?  Are there material differences in the income and expense categories, and if so, are there reasonable explanations?
• Determine whether the company has ever been in bankruptcy.
• What have the trends been in the revenue, COGS, and expenses over the last three years?
• What steps can be taken to increase revenue and profitability?
• Does the company provide adequate cash flow and earnings to support potential debt service payments and the buyer’s income requirements?
• Is there a high concentration of business with a limited number of customers?  How secure are the customer relationships?  Are there contracts involved?
• Is the company in good standing with all of the vendors in the supply chain?
• Analyze the inventory and determine what percentage, if any, is obsolete, damaged, or unsellable.  How does the level of inventory compare with the industry averages?
• Analyze the real estate (if applicable) tax value and compare with the property selling price or appraisal.  Are the taxes paid up to date?
• Review the property and equipment leases (if applicable).  Is the lease assignable, and if so, under what terms and conditions.  If a new lease is required, make arrangements to meet with the landlord and determine the terms and conditions to execute a new lease.  What is the value of any leasehold improvements?
• Review the Opinion of Value or Business Valuation.  What method or methods were used to calculate the value?  How does the valuation compare with other companies in the industry or region?
• Compile a Pro-forma P&L and Balance Sheet based upon the company’s financial projections coupled with the buyer’s anticipated debt service, capital expenditures, expenses, etc.

• Evaluate those recurring expenses that the buyer will be responsible for after purchase.
• Compare the FMV of the business assets with the depreciated value on the Balance Sheet.  How was the FMV derived?
• Understand the nature of any company debt.  While debt is not often assumed in an asset sale, it will be important to understand how debt was utilized in the daily operations of the business.  Does the company have to rely on short-term debt or a line of credit for working capital purposes?
• Determine whether there are any prepaid or accrued expenses.

Operations

Details on the company’s physical location and whether it is leased or owned.  If there is more than one location, obtain the specifics on each location  and when each were opened

• Copy – Brochures, product/service descriptions, marketing materials
• Description of policies, procedures, and job functions
• Copy – Organizational Chart
• List of employees including positions, current salaries, vacation entitlement, deferred compensation, bonus structures, and benefit programs
• Description of health and insurance policies and details on payment or matching programs
• Copy – Employee handbooks
• Copy – Company business plan
• Copy – Agreements with vendors, service providers, insurance companies
• Description of product/service guarantees or warranty
• Description of advertising campaigns and promotion programs
• Details on all intangible assets including website URL’s, assumed/trade names, email addresses

Analysis

• Obtain a solid understanding of the history of the business.  When was the company originally founded and by whom?  Understand the reasons for why the owner is selling the business?
• Perform a market analysis on the business.  Understand the market that the company serves: The products and services (and any seasonality) produced or sold, the geographic boundaries and demographics of the market, the percent market share the business controls and the competing companies in the same or similar business.  Determine if there is any future direct and/or indirect competition.  Determine if there are there any industry trends that could affect the company – positively or negatively.
• Determine the role that the owner performs at the company.  Is it actively managed or run as an absentee owner business?  What are the primary duties and hours that the owner currently works per week? If the owner will need to be replaced with new management, understand the position, required salary, and benefits it would take to replace the owner.
• Understand the entire spectrum of products and services sold by the company.   What are the top performing products and who are the customers.  Determine the profile and demographics of a typical customer.  Understand the pricing structure and future pricing considerations, and bidding process, if any, for obtaining sales.
• Determine the accounting process and identify who is responsible for managing the books, filing the taxes, and performing the payroll functions.
• Confirm the businesses insurance provides the proper amount of coverage and that  the payments are up to date, including property, liability, fleet, fire, workmen’s comp etc.
• Determine the financial exposure for impending employee bonuses and vacation obligations.
• Obtain a list of the contract administrators for the company retirement plans, health insurance, and payroll.  Determine whether these accounts can be transferred and calculate the cost of future administration.
• Are the facilities leased or owned?

If Leased:

How long is the Lease?

What is the base rent?

What are the CAM charges?

Is it a triple net lease?

When was it signed?

Are there extension options

Is the lease assignable

Are there annual rate increases, and if so, obtain the details.

If Owned:

When was it purchased?

What was the purchase price?

If there is a note what is the balance?

Is the facility available for purchase, if so, at what price?  Could the facility be leased, if so, on what terms?

Is there a current appraisal on the building?

• What capital expenditures/improvements are necessary to meet the business forecasts?
• Review the vehicle and equipment maintenance records to ensure that all service work is up to date.
• Understand the technology that is utilized in the business operations.  Is this technology up to date?  Would newer technology increase efficiency? If so, what/how specifically?
• Does the company have e-commerce functionality on its website?  Is e-commerce a viable expansion opportunity?

Legal

Company’s Articles of Incorporations, Bylaws, and all amendments

List of shareholders, owners, partners, or members and percentages owned.

List of all states where the Business is authorized to operate

List of U.C.C filings

Copy – Any dealership or Franchise Disclosure Documents (FDD)

Copy – Material contracts relating to the business

Details related to employment agreements, non-compete agreements, and non-disclosure agreements

History of employee worker’s compensation and unemployment claims

List of all intellectual property including:  licenses, patents, & copyrights,

Copy – Real Property Agreement title policies, deeds, plats, zoning approvals, variance or use permits, and appraisals

Copy – All other lease agreements including equipment lease(s)

Copy of any Local, State, or Federal Tax Audits within the last 5 years

Details on any hazardous substances used in the business operations and specifics on any prior, pending, or contingent environmental liabilities.

Details on any prior, pending, or contingent business investigations, litigation, or indemnification obligations.

Copy – Environmental survey’s completed in the past including notices, files, or correspondence related to EPA, state, or local regulatory agencies.

Analysis

Note: It is recommended that competent legal council is retained. An experienced transaction attorney will be of enormous assistance in addressing all legal aspects of the due diligence process, the LOI, DPA, and closing.

• If the business is a dealership or a franchise, understand what the process is and the fees involved for a new buyer to purchase the company.  Franchises will typically have royalty and advertising fees.  In some cases a franchisor will charge the seller/buyer a transfer fee and could have a contractual clause stipulating that the franchisor has first right of refusal to purchase the business or match an offer.  The specifics of these issues will be detailed in either the dealership agreement or franchise disclosure document, which should be thoroughly reviewed.
• Thorough review of all contracts, agreements, leases, deeds, titles, surveys, plats, and environmental documents.
• Conduct a UCC filing and public records search to determine if there are any outstanding liens against assets that are being transferred in the sale and/or pending litigation.
• Determine what the buyer’s future exposure is to warranties and service guarantees on products sold by the owner.
• Ensure that the appropriate Representations, Warranties, and Covenants are contained in the DPA.

About the Author

Michael Fekkes is a Certified Business Intermediary (CBI®) at ENLIGN Business Brokers. Tel. 910.691.2202 ● Email: mfekkes@enlign.com ● Web: www.enlign.com

Image: Filomena Scalise / FreeDigitalPhotos.net

When starting a business from scratch, it is a foregone conclusion that a comprehensive business plan will be required.  Unfortunately, a formal business plan is often overlooked when entrepreneurs purchase an established company.

The fact that the business is already in place with recurring revenue, a trained workforce, and an existing customer base does not mitigate the significance and value of a business plan when applied as an essential and critical planning tool.  There are a number of factors, both strategic and tactical, that are involved in building a successful business, and many of these will revolve around methodical planning and the establishment of realistic expectations.

A business plan should be viewed as a written roadmap, typically over a moving 3 year period, that will assist the owner in planning the budgetary, marketing, and management tasks required to achieve forecasted sales and earnings.  Being well positioned to anticipate and quickly react to new opportunities, in addition to being prepared with contingency plans when those unexpected challenges that most if not all businesses face, is difficult to achieve without putting the ‘big picture’ on paper.

A strategic business plan should be viewed as a ‘living document’. It is established and lays the foundation when a business is started or acquired and is updated on a periodic basis as circumstances and goals change.  A business plan is a standard requirement by nearly every lending and financial institution when capital is required for either an acquisition or company expansion. The truism – ‘plan the work and work the plan’ – while sounding like a cliché, is nevertheless one of the more fundamental precepts of any successful business environment.

While there are a variety of formats and variations of business plans, a common set of essential elements will be required for the plan to be effective.  Plans are often customized based upon the business goals, the audience, and requirements (e.g. securing financing).  When acquiring an established business, it would be helpful if all owners/sellers had up-to-date plans in place that could be turned over to the prospective buyer but, unfortunately, this is rarely the case.

With proper market research, consulting with industry professionals, analyzing the competition, and receiving the necessary organizational, operational, and financial data from the targeted company, sufficient data should be in place to construct a comprehensive and effective business plan.

For some, an emotional attachment to an opportunity can be consuming, and many elements of the due diligence process are often neglected…something that is ill-advised. The business planning process, while taking considerable time, should be viewed as required investment spending that will afford good decision making, peace of mind, and a secure and more predictable future.

A business plan for an established company should have the following 10 elements and should be presented in a formal, concisely written, professional package that includes a table of contents:

1. Executive Summary
2. Business Description
3. Market Analysis
4. Sales & Marketing Plan
5. Operations Plan
6. Management and Organization Structure
7. Financial History and Projections
8. Transition Plan
9. Exit Plan
10. Appendices/Supporting Documents

I. Executive Summary:

The executive summary is a formal introduction to the business and a summary of the key points of the business plan including the range of products and services, specifics on the customer base and target markets, management overview, critical elements for success, and strategies for continued growth.  If the purpose of the plan is to obtain financing, it should state the amount of funding required, how the funds will be deployed, and the structure for repayment.

This will be the first section that the audience will review and will need to grab their attention.  Most experts would agree that this section should be two pages or less and should be concise, professional, and generate enthusiasm.  While this section appears first it is often easier to develop the entire business plan and then write the Executive Summary last.

II. Business Description:

The business description section should provide a thorough review of the business, describing the uniqueness of the company, its mission statement, and the value proposition.  At a minimum, the following elements should be explained:

• Corporate Structure: Sole proprietor, partnership, corporation, or limited liability corporation (LLC)
• Business Background/History: Who started the business, where is it located, and when was it founded?  What are the major milestones that have transformed the business into the company that it is today?
• Products/Services: Describe the business model of the company.  Does the business manufacture products, wholesale/retail products, or perform services.   Describe in detail the major products and services offered by the business?  What is the target market and what geographic areas are covered by the company?  Who are the strategic suppliers and customers?
• Industry: Define the industry or sector that the business operates in.  Historically, how has this industry performed?  What changes are anticipated in the future?
• SWOT Analysis: Detail the major Strengths, Weaknesses, Opportunities, and Threats of the business.  What activities (strategy & tactics) will be pursued to leverage the strengths and grow the business?  How will the business be prepared to face future challenges? 

III. Market Analysis:

The market analysis section is a comprehensive examination of the company’s target market (customers and geography), the competition (products and companies), and the industry economics (market size, demand, growth history, and barriers to entry).  During the due diligence process it will be instrumental to obtain as much information as possible from the current business owner.

While they may be reluctant to provide the specific names of customers, it is a reasonable expectation to receive general information on the number and type of customers, the products and services they are receiving, and specifics as to their relative location and geographic densities.  Armed with the data provided by the seller, independent research will need to be performed to systematically analyze the industry, company, products, and customers in the form of an in-depth market analysis covering the following areas:

a. Customer

What is the demographic profile of the targeted customer?  Descriptions will vary based upon the type of business and whether it is B2B (business to business) or B2C (business to consumer).  B2B channels will be further delineated if consumer products are sold through wholesalers and distributors, as the end user (consumer) will become an important consideration in addition to the business (reseller) customer.

b. Competition

The competition section should include a listing of the major competitors, where they are located, and what products/services they offer.  A competitive matrix should be prepared that analyzes each major competitor, describes how they rate against the business being considered for purchase, and documents the competitive advantages and disadvantages of each competitor.

c. Economics

The economics section should provide the facts about the industry in which the company operates, including:

• What is the size of the market?
• What is the percentage market share owned by the company?
• What has the growth history been and what are the projections for the future?
• What factors will affect future growth negatively and positively?
• What are the barriers to entry?

IV. Sales & Marketing Plan:

The sales and marketing plan will provide a general description of the company’s products and services.  A breakdown of sales for each product and service should be provided indicating whether there exists any obvious seasonality.  New products and services that are planned to be offered to expand the business should be detailed.

What has been the company’s go-to-market strategy?  Are products sold on a direct basis through the company’s sales force, the internet, or catalog sales –or- does the company perform retail sales, wholesale/distribution, or leverage independent representatives?  Each of the current methods utilized should be detailed and analyzed for effectiveness, highlighting the recommendations to position the company more competitively in the future.

The pricing strategy should be thoroughly reviewed.  Understanding the importance of price in capturing new business and retaining existing customers is imperative.  Would a price increase be supported in the market place?  What is the impact to the bottom line should prices increase or decrease in the near future? How competitive on price is the company relative to the competition? How are freight costs and payment terms being managed by the current company?

The advertising and promotion program should also be reviewed.  What type of marketing activities has created the most revenue?  Does the company have an internet presence?  What marketing/advertising should be considered in the future? The respective costs for any proposed/anticipated changes to the marketing plan (e.g. attending more trade shows, additional advertising, rebuilding the website, etc.) should be incorporated in the pro-forma financial plan.

Sales Forecast:

Using the historical sales as a base and modifying the data based upon the anticipated operational changes, a monthly or quarterly sales forecast should be incorporated in the business plan.  Depending upon the length of time that the company has been in business, the quality of historical data, and the stability and predictability of sales, two forecasts could be warranted -  one that is very conservative and represents a ‘worst case’ estimate and the other being a ‘best guess’.  For businesses where financing or funding is required, it will be important to support any differences between projected and historical sales with market or industry research.

V. Operations Plan:

The operations section of the business plan should provide an overview of the company facilities including the physical location, equipment, processes, people, and surrounding environment.  The following facets should be covered:

1. Location:

• Describe the facility in terms of square footage, production areas, offices, storage areas, accessibility (transportation, parking, shipping), and suitability for customer engagements (if applicable to business).
• Does the current facility allow for future growth in terms of supporting additional products/services and personnel?  What percent is utilized?
• Approximately how much has the company spent each year on capital expenditures/improvements?
• Are the premises leased or owned?
  • If Leased:
    • How long is the Lease?
    • What is the base rent?
    • What are the CAM charges?
    • Is it a triple net lease?
    • When was it signed?
    • Are there extension options?
    • Is the lease assignable?
    • Are there annual rate increases? Detail.
    • If Owned:
      • When was it purchased?
      • What was the purchase price?
      • If there is a note what is the balance?
      • Is there a willingness to sell the building?
      • Is there a current appraisal on the building?
      • What is the likely selling price of the building?
      • What will be the likely lease back of the building?

• To reach the projected sales, approximately how much will the company have to spend on capital expenditures/improvements each year?

2. List the days and hours of operation.

3. Are any licenses or permits required to operate the business? If so, which?

4. Who are the key suppliers, what products/services do they furnish?  Will new suppliers be required to support the business in the future?

5. Processes:

• Production/Manufacturing/Distribution
  • Explain the product/service distribution from initial call to collection.
  • Describe how customer service is performed.
  • What quality control processes are in place?
  • Describe the inventory process – storage, turnover, etc.  What kind of inventory is maintained, the average value, and rate of turnover?
  • Explain orders/billing/collection process and terms (A/R & A/P)

6. Employees:

• How many part-time and full-time employees are with the company?  Explain the number of employees you intend to hire and the estimated personnel costs (detailed in the pro-forma P&L).
• Describe the quality and pay of the existing staff.
• Do you have written job descriptions for employees?
• Explain the use of contract, 1099, or temporary staff.
• Describe the importance of any key employees, will they stay, and how hard will they be to replace?
• Is the business seasonal, and if so, how does this affect staffing?

7. Technology:

• Describe the technology used in daily operations.
• Is the technology up to date?
• Would newer technology increase efficiency? If so, what/how specifically?
• Does the company rely upon its own (proprietary) technology and if so, how often is it updated?

8. Are there any pending litigation matters or current lawsuits?  If so, explain.

9. Is there an Employee Stock Ownership Plan (ESOP)?  If so, when was it established?

VI. Management Plan:

The management section should provide background information on the existing management.  This should detail whether it was operated as an ‘absentee owner’ company or whether the owner was actively involved in the daily management of the operations including the hours per week they were involved.

Additionally, this section should explain who will be responsible for managing the business moving forward.  Bios of the prospective new owners and key management should be included detailing their work experience, specialties, and competencies.

In addition, any strategic employees who are anticipated to remain with the business should be included.  An organizational chart depicting the management hierarchy indicating who is responsible for the key functions should be part of the management plan.

Should an advisory board be formed in conjunction with the business acquisition?  A listing of the advisory members should be prepared as well as any professional support advisors:  attorneys, CPA’s, business brokers, etc.

VII. Financial Plan:

When evaluating the acquisition of an established business it will be essential to perform a comprehensive analysis of the company’s past financial performance prior to any attempt to project the future numbers.  Fortunately, the majority if not all of the documents required for this analysis should be available from the business seller.

During the review process it will be necessary to perform reality checks and to question the information sources. The buyer should assess the type of financial statements that are available, the individual that was responsible for preparing the numbers, and the type of accounting utilized.

Additionally, it will be important to determine if the financials received match what was reported by the company to the government (i.e. tax returns).  Individuals without a strong financial background should seek out assistance from a CPA, financial consultant, or a competent business broker to properly interpret the data and perform the necessary due diligence.

While a separate topic from this article, it will be important for business buyers to understand the importance of adjusted (re-casted) financial statements as it relates to analyzing financial performance.

A brief explanation is as follows: The net ordinary income, reported on the profit and loss statements for tax purposes, does not depict the true earnings of the company based on the non-cash (amortization & depreciation), discretionary, & non-recurring items expensed by the business owner.  Earnings are intentionally kept low to achieve the goal of mitigating income taxes.

Therefore, to determine the true earning capacity of the business, the profit & loss statements need to be re-cast during the valuation process to derive either SDE (seller’s discretionary earnings) or EBITDA. This re-casting process standardizes (or normalizes) the business earnings through the exclusion of discretionary, non-recurring, and variable items, allowing an accurate and objective determination to be made of the owner’s financial benefit.

The following documents will be needed for the Financial Plan:

• 3-5 years of Profit and Loss Statements (aka Income Statements) and Balance Sheets
• 3-5 years of business tax returns.
• Complete list of all assets including FF&E and inventory with current market value and condition
• Copy of Real Property Lease Agreement including any Amendments  -or- a copy of the real estate appraisal or tax assessment
• Copy of all other lease agreements including equipment lease(s)
• Copy of the (30/60/90+) Receivable Aging Report
• Copy of material contracts relating to the business
• Pro-forma income projections
• Pro-forma cash flow statement

One of the most critical components of the business plan will be the financial projections that are created based upon the analysis of the documents detailed above.  Understanding the financial workings of the business including how income is  generated, the cost to produce that income, and the related expenses in operating the company will be necessary to prepare a reliable forecast for the company’s financial future and the return on investment.

Explaining the cost to acquire the company, the type of financing that is being requested, and the amount of money available for a down payment should be covered in the financial plan.  Future projections are delineated through the preparation of pro-forma financial statements and each section should include a narrative that explains the major assumptions used in estimating the revenue forecasts, income, and expenses.

1. Pro-forma Profit & Loss Statements

• 12-month pro-forma
• 3-5 year pro-forma

The 12-month pro-forma P&L will be the central focus of the financial plan.  Extending the forecasts out in the future (3-5 years+) might be necessary depending upon the nature of the business and the extent and type of financing (Bank, SBA, Private Equity, etc) being sought.  Using the historical financial statements as a base and making the necessary updates to the anticipated debt service, the required living wage, and other forecasted changes (income and/or expense) will enable the pro-forma statements to be both realistic and reliable.

2. 12-month pro-forma Balance Sheet

The 12-month pro-forma Balance Sheet is a forecast of how the balance sheet will look at the end of the 12-month period, based upon anticipated changes to the assets and liabilities of the company.

3. 12-month pro-forma Cash Flow Statement

Proper cash management is one of the cornerstones to ensure that the company can sustain itself, as poor cash management is often the reason for a business failure.  Essentially, the cash flow statement is like a checking account register as it details the flow of cash in and cash out of the business. Fortunately, an established business will already have accounts receivables and payables in place and reasonable projections should be fairly easy to generate.

The structure of the transaction and whether the accounts receivable will be retained by the seller or purchased by the buyer will have an impact on the amount of working capital required to adequately operate the business.

The following components should be covered in the financial section:

• Does the company currently carry any debt?  If so how much, what was it used for and what are the note terms?
• Describe financial trends over the last 5 years.
• What factors have affected revenue and/or profitability?
• What could management do to increase revenue?
• What could management do to increase profitability?
• Does the company have to rely on short-term debt for working capital purposes?
• Explain the nature of the accounts receivable. Amount, aging, bad debt, etc.
• Are there prepaid expenses? If so detail.
• Are there accrued expenses? If so detail.
• Is inventory to be included in the listing price?
• What is the approximate cost value of inventory?  Is this high, low, or in line with industry averages?
• Has inventory been increasing? decreasing? remaining stable?
• Is there any slow moving or worthless inventory? Provide detail.
• What are the approximate Fair Market Value (Replacement) of Furniture, Fixtures, and Equipment?
• What is the approximate value of leasehold improvements?
• Is the business now, or has the business ever been in bankruptcy?
• List recurring expenses that the buyer will be responsible for after purchase.
• Identify any business resources that the new owner will be bringing to the company to enhance the operations.

VIII. Transition Plan:

The transition plan should explain how the intellectual property, owner experience, vendor relationships, and trusted advisor status with key customers will be transitioned to the buyer.  Many business owners have operating procedures, manuals, and materials which can greatly assist in transitioning the business.

Detailing how long and under what conditions the former owner will stay with the business to assist in transferring the customer relationships and business know-how, will be important points to clarify. Depending upon the goals of the seller/buyer and the complexity of the business being sold, the seller could be retained as an independent consultant.  The consulting agreement should specify the schedule of time (days or hours involved), type of training or services provided by the seller, the length of the agreement, and compensation.

IX. Exit Plan:

The final section of the business plan outlines the exit strategy. Formalizing the plans, projecting the time table, and detailing the terms and conditions under which a sale or business succession would be considered will be important points to clarify.   A clear, concise, and documented exit strategy will be essential from an operational standpoint, as it will have an influence on how the company is managed.  It will also have significance to potential investors or financiers should 3^rd party funding be involved.

X. Appendices/Supporting Documents:

The appendix section should include all of the supporting documents that are referenced throughout the business plan. Some of the more common documents will include:

• Business tax returns
• Personal financial statements for the acquiring principals
• Copy of contracts, leases, and real property appraisals or tax assessments
• Licenses and other legal documents
• Existing and Proposed lease or purchase agreements for the building space
• Resumes of all principals
• Copies of letters of intent from suppliers, etc

SUMMARY:

A comprehensive business plan is an essential tool when buying an established business.  By applying the necessary time, performing the required research, and actively managing the plan, it will become a powerful resource to assist the owner in making intelligent decisions, measuring company progress and achieving strategic goals.  Too few business owners have comprehensive plans in place, but the ones who embrace the process often find the business plan to be the roadmap for success.

Michael Fekkes is a Certified Business Intermediary (CBI®) at ENLIGN Business Brokers

Tel. 910.691.2202 ● Email: mfekkes@enlign.com ● Web: www.enlign.com

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Where To Find The Money To Buy A Business?

Obtaining capital to start up a new business enterprise, purchase an existing company, or grow an established business can be a daunting process for many entrepreneurs and business owners.  The sub-prime lending crisis and sluggish U.S. economy over the last 18 – 24 months has caused many traditional lenders to modify their lending criteria, and therefore restrict available credit and the flow of capital to many entrepreneurs and business owners.

Despite these economic conditions there still remain numerous funding sources to raise capital for either a start-up business or the acquisition of an established company. Engaging a financial professional to assist in evaluating the myriad of available funding options and finding the solution that best suits the business will streamline the process.

For those seeking capital to acquire an existing business or expand the current company, a variety of financing options are available, provided that the business has an established track record of positive cash flow and a healthy amount of collateralized assets (supported by three to five years of financials/tax returns).

Commercial Banks/Finance Companies

Banks and traditional lending agencies provide commercial loans, both asset and cash flow based, to entrepreneurs pursuing either a start-up venture or the acquisition of an existing business.  There are a large number and variety of commercial lenders and each institution will have different policies and standards that will determine the availability of funding.

The loan term and interest rate (including whether it is fixed or variable) can vary considerably, so it will be important to speak with a variety of financial institutions.  Unsecured loans can often be misleading as banks and other finance companies will always seek to obtain as much personal and business collateral as possible.

In addition, it will be necessary to have adequate cash to make a down payment (most commercial lenders will require at least 20%) and be prepared to sign a personal guarantee.   Working with a financial institution where an existing and favored customer relationship is already in place will assist in the loan process.

SBA Loans

The Small Business Administration (SBA), is a United States government agency that administers loan guaranty programs to promote development and growth of small businesses.  The SBA is not a “lending” agency that makes the actual loan but is the guarantor for the loan.

An individual will arrange to borrow the funds through an authorized SBA lender who then establishes the terms and conditions for the loan based upon the current SBA guidelines.  It is important to note that while all participating SBA lenders, both banks and non-banks, adhere to SBA eligibility guidelines, the terms and conditions of the funding offered can be dramatically different based upon the particular lender selected.

“It is not unheard of, for a borrower to be turned down for SBA financing by one institution but readily accepted by another.  This is often a result of the financing criteria of the individual lenders and whether it is asset or cash flow based”, indicated Steve Mariani, President of Diamond Financial Services.

Often transparent to the entrepreneur is the fact that there are several different types of SBA lenders in the United States, as described below.

1. General Program (GP): With GP designated lenders, SBA has complete responsibility for reviewing and analyzing the loan package as well as making the loan approval decision. This process typically adds 3 to 4 weeks to the overall approval time of the lender.
2. Preferred Lender Program (PLP): Lenders that receive this premier SBA accreditation are very unique as the final credit decision has been delegated to them.  They often have reduced paperwork requirements and will retain most of the loan servicing and liquidation authority.  PLP lenders are nominated based upon a successful historical record in SBA underwriting.  PLP is the highest SBA lending designation where the lenders provide the most expeditious process based upon the autonomy received to approve loans in-house without the requirement to submit for SBA review.

The Small Business Administration offers many different loan programs directed toward small businesses and entrepreneurs.  Each program offers different types of financing, providing flexibility and options for the borrower.  While a brief summary of each of the programs is detailed below it is recommended that the prospective borrower engage an expert on SBA loans to determine suitability. Here are some of the more common programs we see used in the market.

• 7(a) Loan Program: This is the most flexible and popular loan program offered through the SBA as it can be used for a variety of general business purposes for both start-ups and existing small businesses.  7(a) offers loans up to a maximum of $2mm with maturity terms up to 10 years for general business and typically up to 25 years for certain types of fixed assets (including real property).
• 504 Loan Program: The SBA 504 program is viewed as a long-term financing mechanism for economic development.  It is designed to provide owners of existing small businesses with “brick and mortar” funding typically for real estate and equipment purchases for both modernization and expansion.  These are most often longer term fixed-rate loans that cannot include any working capital, soft costs, or closing costs associated with the loan. Frequently, a Certified Development Company (CDC) will work with both the lenders and SBA to provide this form of financing.  For a business to be eligible for this loan, it must be a “for profit” enterprise and  have an average (after tax) net income not in excess of $2.5mm or tangible net worth not in excess of $7.5 million. Speculative investments in rental real estate is prohibited.
• Microloan: The SBA Microloan Program offers short term, small loans to businesses and to “not-for-profit” child-care centers.  The maximum loan amount and term under this program is $35,000 and 6 years.  These loans come with restrictions and are designed for use as either working capital or the purchase of supplies, furniture, inventory, machinery and equipment.  Microloans are managed through nonprofit community based lenders (i.e. intermediaries) which, in turn, will make these loans to eligible borrowers.

SBA Loan eligibility requirements, rules, and fee’s  change on a regular basis and they are not always easy to interpret.  Additionally, not all SBA lenders are active and proficient in all market segments and geographies.  The best way to pursue an SBA loan is to work with a financial services company that specializes in this area and has relationships with all of the national SBA lenders.  These companies have an expertise in pre-qualifying the application, developing the loan package, and presenting it to the lender that meets the specific criteria relating to your application for the greatest chance of approval.

Retirement Funds

Qualified retirement accounts can be an attractive source to obtain funds to finance business start-ups and acquisitions.  Utilizing the funds in an individual’s retirement account (IRAs, 401(k)s, 403(b)s, Keoghs, SEPs)  to invest in entrepreneurial endeavors has become a popular funding vehicle over the last 24 months given the very tight credit market.

This process is not a loan, requires no approval from a bank or lender, has zero interest expense and is based on long standing provisions of the Internal Revenue Service.  This funding vehicle is based upon repurposing pre-tax dollars from a qualified retirement plan to fund an acquisition or start-up without incurring early distribution taxes or penalties.

Here’s how it works:  An entrepreneur creates a new corporation and a corporate 401k plan for that corporation.  He or she then rolls over existing retirement funds from a former job and “invests” that money in corporate stock.  The cash from the stock sale is used as business capital and can even be used to receive a salary during startup.  Because the money is invested in stock, there are no early withdrawal penalties or taxes to pay.  Using retirement funds can reduce or even eliminate the need for business loans.

“Individuals may use a portion of the funds as a down payment on an SBA loan or could use 100% of the retirement account to invest in a new start-up company or fund the acquisition of an established business”, commented Doug Smith, Director of Business Development at Benetrends, Inc.

Friends and Family

Asking friends and family for financial assistance is probably the longest-standing method of funding entrepreneurial endeavors.  Friends and family can often be a good source to borrow money for a down payment or even to become a partner in the new company.

Some individuals may be hesitant for fear of straining relationships but when approached properly with an upfront detailed discussion to determine how much they are able to invest, the targeted business criteria and the terms for either repayment or business equity,  this form of capital can be the quickest and most cost effective form of financing available. Upfront discussions should be held reviewing how much is available for investing, what  is the targeted business criteria, and what would be the terms for either repayment of business equity.

Home Equity Loans

Home equity lines of credit are an excellent method to finance all or part of a business start-up or acquisition.   Typically, home equity lines of credit will charge a lower interest rate than commercial loans and allow the home owner to borrow money in increments as it is required.

Since lenders will typically seek to secure a commercial loan with the home equity, it may be more efficient for the borrower to take out a home equity line of credit and take advantage of the better rates and terms.  Entrepreneurs who plan on quitting an existing job to pursue business ownership should establish the home equity line of credit prior to leaving their current job. Also, there are several other special housing loans in some states like the california home improvement loans that can be explored.

Seller Financing

It is rare for a privately-held business to change hands for an all-cash price. More common in ‘small’ business sales would be to have a component of seller financing as part of the deal structure.  Seller financing is a mechanism where the business owner takes part of the purchase price in cash and the remainder in the form of a promissory note that the buyer will pay back with interest over a period years. This type of deal can be very flexible — the seller can adjust the payment schedule, interest rate, loan period, or any other terms to reflect the seller’s needs, business cash flow, and the buyer’s financial situation.

It is advantageous to the buyer as they are required to come up with less money up front and can pay back the seller’s note out of the business cash flow.   Many buyers will leverage bank financing to acquire a business and the majority of these lenders will require a component of seller financing to underwrite the loan. Seller financing, in the lender’s eyes, mitigates risk as they will have the additional confidence knowing that the seller has a vested interest in the future success of the business.

The seller, in this instance, will be providing secondary financing to the bank’s acquisition loan (i.e. subordinated debt) for the remainder of the price.  Seller’s are often able to maximize the transaction value by earning interest on the promissory note and could realize tax benefits should the sale be compliant with the IRS installment method of reporting.

Private Capital

Larger business start-ups or acquisitions often involve a package of different layers of capital which could include bank debt, mezzanine financing and private equity.  The type of business being acquired, the valuation of assets and cash flow, perceived market risk, as well as the growth plans, will be the characteristics that determine which capital sources and financing structure will be the most appropriate.

There are a variety of options and capital sources in the market providing both equity capital and debt financing including commercial banks, commercial finance companies, mezzanine investment firms, private equity groups and small business investment companies.  Securing capital for a privately owned ‘middle market’ acquisition can be a daunting and challenging task, based upon the large number of institutional capital and financing sources that operate in the markets of today.

Each of these private capital sources will have a unique investment criteria and it is recommended to receive professional assistance to determine which financing is appropriate, competitively priced, and structured to meet the needs of the company.   A competent capital broker can be of immeasurable assistance in formulating a solid business plan and strategy for funding the business.  Experienced capital brokers typically have relationships with hundreds of lenders and investors and are positioned to provide a wider selection of options and assistance in matching sources to the specific parameters of the requirement.

Senior Debt

Senior debt financing refers to any type of outstanding obligation that takes priority over unsecured or other junior secured debt.  Senior debt will often be secured by assets pledged by an individual or business (i.e. collateral) where the lender has put in place a first lien entitling them to the first claim on those assets in the case of a bankruptcy or liquidation.

Senior debt financing is generally made available through banks, finance companies, and private capital investors where it is recognized as the least risky form of secured lending.  The amount of senior debt that is provided will be dependent on the type, quality, and value of the assets securing the loan in addition to the historical track record and stability of the operating cash flow.

Debt financing can be an excellent method to obtain capital to fund an acquisition or fuel future business growth without surrendering control of the company’s management decisions or giving up equity in the business.  The interest rate, which may be fixed or variable, the term of loan, and the requirements for financial covenants will largely be based upon the strength of the balance sheet and the consistency of the cash flow.

Mezzanine Debt

Mezzanine financing is a hybrid form of capital with features of both debt and equity that is typically used to finance the expansion of existing companies or for use in business acquisitions. Mezzanine financing is unsecured debt that is subordinated to traditional loans or senior debt and relies on cash flow from operations for repayment.

Mezzanine denotes the pecking order in a standard transaction. Mezzanine debt resides in the middle, junior to bank debt yet senior to equity – hence the use of the term mezzanine.  Mezzanine debt has a much higher risk profile based upon the lack of collateral requirements and its subordinated status to both senior debt and secured junior debt.    It is a blend of traditional debt and equity financing that incorporates equity based options, such as warrants, with lower-priority debt to provide flexible longer term capital.

This form of financing can be very expensive with lenders looking for 20 percent or greater returns. The debt is typically retired through either a recapitalization (new round of financing) or, in some cases, by the company going public.  While mezzanine financing may require the business owner to relinquish some measure of control over their company, the involvement of a mezzanine lender can be extremely beneficial as most are very financially astute and can offer helpful and strategic business advice.

Private Equity

Private equity is a field of finance where large funds purchase stakes in companies and/or entire business units to restructure its capital, management,  and organizational framework. Typically, money is invested in companies that are not publicly traded or are invested as part of buyout of a publicly traded company in order to make it private.

Private equity investors often seek to partner with companies that have an experienced management team where they will usually purchase a controlling interest. It is an attractive solution for business owners who are either interested in obtaining funds for expansion or diversifying their investments and creating liquidity by taking cash out of the company in exchange for equity in the business.

The company is recapitalized permitting the business owner to sell part of the enterprise while maintaining a continued ownership position.  Private equity groups seek to grow the business, and will often provide assistance to the owner in removing personal guarantees, paying down bank debt and injecting capital into the business for growth.

Their primary interest is to receive a return on their capital and, in many cases, to sell the business in 3-7 years.  This model is very attractive to many business owners as they are in a position to reap the benefits of the growth and eventual sale of the business.

Angel Investors

Angel investors are individuals who provide capital for start-up businesses usually in exchange for ownership equity.  Typically, angel funding is a bridge from the early self-funded stage of operation to the time that venture capital would be available.  Angel investors often affiliate in the form of a fund or an accredited investor group where they are able to pull capital together and collaborate on investments.

Most angel investors are successful wealthy entrepreneurs, who are seeking to assist other entrepreneurs get a business off the ground in exchange for a higher return on capital than is typically available from traditional investments.  ”Angel investors differ from traditional venture capital firms in that they invest smaller sums of money per round. Typically, angel investors will target 100k to 500k per round with venture capital firms usually starting around 1mm.

Angel investors/groups like to make decisions quickly and strive to take a board seat for investor protection.” commented Jason Denenberg, Director with Angel Capital Group.  Angels can be an attractive source of capital for an entrepreneur as the business is not burdened with expensive monthly debt payments during the critical start-up phase.  The entrepreneur seeking capital from angel investors should be prepared to relinquish some control of the company in exchange for the equity investment.

Angel groups typically hold meetings for their entrepreneur investors where they establish the investment criteria for companies that will be targeted and raise required levels of funding.  Most Angel groups are highly experienced, and possess significant resources to evaluate and perform due diligence on prospective portfolio companies.

Securing financial capital is one of the most critical issues for those entrepreneurs pursuing a business acquisition.  As discussed in this article, despite the tight credit market and pull back in lending from the traditional sources, there remain a considerable number of different financing options available.  Each of these options will vary considerably and carry a number of distinct advantages and disadvantages.  Borrowers who are open to creative solutions, willing to take some risks and consult with experienced advisors will be successful in finding the optimal funding source for the given opportunity.

Michael Fekkes is a Certified Business Intermediary (CBI®) at ENLIGN Business Brokers

Tel. 910.691.2202 ● Email: mfekkes@enlign.com ● Web: www.enlign.com

Image: Salvatore Vuono / FreeDigitalPhotos.net

A mid-sized business in the Washington D.C. area branded itself as the Project Management Company. The truth is that hundreds of companies within 25 miles of the Nation’s Capital routinely provide project management services to government agencies, many of them as effectively and at lower cost. But this company clearly communicated to customers and employees that its corporate purpose was Project Management. When a government agency needed project management services, this company was among the first they thought of.

Their clear brand also attracted employees whose goal was to be project managers. They instilled project management in the culture by requiring employees to become certified as project managers, by having a written methodology and extensive tools, and by offering a wide range of project management training. Employees knew the company’s brand and their role in its strategy. The company grew rapidly by linking its brand with customer and employee needs. A few years ago, that company was sold to a publicly–traded company for a high multiplier.

Customers, employees, and buyers are drawn to businesses that have a clear brand. In fiercely competitive industries, branding is as important to success for start-ups as it is for Fortune-500 companies. One element of branding is your intellectual property – use it to distinguish your company from its competitors. Branding also builds lasting customer and employee bonds as surely as superior service, quality products, and generous benefits. Businesses that communicate their brand effectively in the market place create more real and perceived value than their competitors, and retain their customers longer.

What you do, how you do it, and the results you help your customers achieve are the essence of your company’s brand.

Once your brand is clear, communicate it to customers and employees through multiple channels by:

• Participating actively in associations
• Publishing articles in industry periodicals
• Conducting seminars and workshops, and publishing books
• Obtaining corporate certifications (e.g., CMMI and ISO),
• Adopting copyrighted trademarks and logos,
• Distributing attractive and informative marketing materials, and
• Maintaining a proactive presence on the web (not just a website).

Use these techniques in tandem to differentiate your company from competitors – stop looking like everybody else. Buyers pay a premium to acquire a company that is well-known and well-respected because that company has a competitive edge.

In today’s global economy, like previous times, the more you please customers, the more they will buy and refer new customers.  Simple, yes; easy, no.  Lacking a brand, you may find that your company is trying to win business from any customer who is willing pay you. But if your company delivers a product or service that is perceived as unique and superior to other choices, you have a clear advantage. Furthermore, if you deliver that product or service using unique tools or a proprietary process that is hard to duplicate, that intellectual property is worth even more to a buyer.

How can you tell if you have a brand that is widely recognized by competitors and customers?

Ask yourself the following ten questions to assess the strength of your brand:

1. Do my customers believe they get something from my company that they can’t get anywhere else?
2. Do customers buy from my company with full confidence in the quality and utility of the products and services they will receive?
3. Do customers often switch from competing businesses to buy from my company?
4. Are customers willingly to pay a premium price to purchase my company’s products and services over competing alternatives?
5. Do my customers return again and again for follow-on purchases without advertising and discounts?
6. Do my customers and suppliers routinely refer other customers because they have received excellent service?
7. Have my revenue, margins, and profits increased annually for at least the last three consecutive years?
8. Does my sales volume increase even when my prices go up?
9. Is my company known for using unique processes or tools to produce the products and services we sell?
10. Is my company and my employees frequently cited in well-known industry publications for their expertise and accomplishments?

If you answered YES to eight or more questions, your company has a strong brand. If you had five to seven YESes, you are well along the path toward building a brand. If you had less than five YESes, then you have some work to do to distinguish your company from its competitors.

When you sell your company, you won’t be paid explicitly for your brand. Instead, its economic value will show up as a revenue multiplier that is on the high end of industry averages. That being said, the value of your brand can be calculated. Its replacement value is the amount a new owner would have to pay for the trademarks, logos, publicity, websites, advertising, and marketing materials that would be required to build the level of name recognition and customer loyalty that your company enjoys in the market.

Your brand also has an immediate economic value in terms of how much more customers are willing to pay for your products and services than they would pay for your competitors’ offerings. Increasing the value of your company when the time comes to sell is a plus, of course, but the compelling reason to brand your company is that, without a brand, you will be challenged to produce profitable growth year after year and you may be forced to sell your products and services for less than your competitors. So stop looking like everybody else – brand your company!

About the author

Richard G. Stieglitz, PhD, (www.dickstieglitz.com) consultant to owners of privately held companies and author of the best-selling book: “Expensive Mistakes in Buying & Selling Companies – And how to avoid them in your deals.”

Image: Simon Howden / FreeDigitalPhotos.net

Start a Business or Acquire a Company

Individuals considering a decision to own a business have a number of available options, each with corresponding advantages and disadvantages.  The choice to start a business from scratch versus acquiring an established business is a decision that should be well thought out and carefully researched.  Performing a thorough self evaluation will greatly assist in weighing the available options, ensuring that the ultimate direction chosen is compatible with individual life style requirements, risk tolerance, goals & expectations, skill set & capabilities, personality and financial where-with-all.

Find below some of the advantages and disadvantages of starting a new business from scratch versus buying an existing business.

STARTING A NEW BUSINESS:

Advantages:

1. Personalization. The business is modeled exactly how you want it without restrictions from an existing organization structure or encumbrances of established contracts, agreements, policies, and compensation plans that may not benefit the business.  The entrepreneur is in complete control of every aspect related to the business, ranging from the business name, geographic location, product and service offering, price structure, and branding.
2. Unique Product. The product or service offering may be new to the market thus making it  easier to start from scratch than to retrofit and re-brand an established company.
3. Clean Slate. The individual is not inheriting any ill-will, restrictive business practices, or challenges in transitioning customers and employees.  The entrepreneur has the opportunity to create a company that is shaped solely around their intellectual property, prior work experience, and creativity.
4. Sense of pride. The individual has free reign to capitalize on their entrepreneurial spirit, and launch the new business with their own measure of risk and intestinal fortitude.

Disadvantages:

1. Financing Challenges. Securing capital or bank financing to fund the start-up business can be very difficult, especially in today’s economic environment.
2. Delayed Cash Flow. The timetable to be cash flow positive could be 12 months or longer.  Absorbing an initial loss and meeting the financial obligations associated with the ramp-up stage could require significant cash reserves.
3. Stiff Competition. The competition could be stronger than anticipated and the marketplace might be unable to support another service or product supplier.
4. Lack of Infrastructure: It is extremely time consuming and expensive to establish the basic business infrastructure. Examples include: Fine tuning the business model, hiring employees, finding a location, obtaining licenses, establishing a supply chain, and up-fitting the facility.
5. Higher risk. There is not a successful track record or proven formula in place and the projections may not be realistic.  The great idea and solid business plan may not prove successful in the marketplace.
6. Un-established Brand. The company is an unknown entity lacking a track record.  The time table to establish brand awareness and a loyal customer base may take longer than projected.

ACQUISITION OF AN EXISTING BUSINESS:

Advantages:

1. Immediate Cash Flow. In many instances, the new owner will be inheriting an existing cash flow.  This cash flow is able to be utilized to service the company debt, pay the owner a salary, and to reinvest to expand the business.
2. Lower Risk. There is considerably lower risk of failure involved in acquiring a company with established products & services, proven processes & methods, and with a history of solid revenue and earnings.
3. 3. Available Financing. There are a number of readily available financing sources to fund the acquisition of an established business with a proven track record of earnings.  An established company will already have a relationship in place with a bank (loans, merchant credit cards, lines of credit, checking accounts, etc) and the bank will have a vested interest in retaining the account.  Additionally, the former owner will often provide ‘seller financing’ to assist in the funding of the transaction.
4. Vendor Relationships. An established company will have pre-existing relationships with suppliers and partners that often took years to establish, and which frequently offer favorable pricing, payment terms, and product training.
5. Key Personnel. The value of having a trained, experienced, and ‘in-place’ workforce is often overlooked.  In many cases, this is one of the most valuable assets in acquiring an existing business.  The seller will often stay on to assist with the business transition and getting the buyer up to speed on the business operations, company personnel, key customer meetings, and vendor introductions.
6. Revenue Productivity. A new buyer is able to dedicate most of their time to revenue generating activities and focus on enhancing and growing the business.
7. Favorable Location. In many cases an established business has an ideal location or favorable lease.  Acquiring a business that is at a known location is very beneficial.
8. Established Brand. The buyer is acquiring the name and reputation from the established business.   Purchasing a successful company with a solid track record of success is an immeasurable intangible asset.

Disadvantages:

1. Troubled History. There may be problems with the business that are not advertised by the seller.  A loss of a critical customer, a new competitor in the area, cash flow problems, vendor challenges, product obsolescence are a few examples.  The buyer may be inheriting a considerable amount of unknown ill-will from the seller’s business practices.
2. Personal Goodwill. The company success may be based largely on the personal goodwill of the seller.  It could be very challenging to retain all of the customers loyal to the prior owner, obtain the respect and productivity out of the employee’s, and maintain the successful partner and vendor relationships that the seller had established.
3. Outdated Equipment. The machinery, equipment, and/or vehicles could be worn out and performing poorly. Unanticipated repairs or equipment replacements could have an adverse impact on future performance, productivity, and cash flow. There might also be a considerable amount of unsalable or obsolete inventory.
4. High Valuation. The price to acquire the tangible and intangible assets might be too high.  Purchasing a business that is overvalued could create problems in meeting the company obligations should the new owner be unable to grow the business proportionately.
5. Growth Challenges. The business may have peaked and be in a decline mode.  There could be few opportunities to grow the revenue and profitability of the business based upon competitive and market conditions.
6. Company Culture. It may be difficult to change the company culture around the principles, goals, and policies of the new owner.
7. Lack of Expertise. The buyer may not have the necessary skill set and experience to replicate the financial performance that the seller had achieved.

Regardless of whether you seek to start a business or acquire an existing company, it is advised that a thorough personal assessment is performed. Completing a thorough personal assessment will assist in the strategic planning for a start-up company, and help refine the acquisition criteria (size, industry, location, price) for a business purchase.

Personal Assessment:

1. Core Competency. It will be critical to take an inventory of one’s personal skills, intellectual property, and work experience, and determine what type of business would be best suited to this profile.
2. Life Style. Ascertaining which business would complement the entrepreneur’s personal and family lifestyle is also important.  Will there be extensive business travel requirements?   Some businesses may also necessitate working evenings or weekends.
3. Income Requirements. Determining how much income is required to support personal or family obligations as well as servicing any debt associated with a start-up or acquisition should be known prior to starting a company or pursuing an acquisition.
4. Financing. Calculating the amount of money the buyer has available to invest in a business will be critical.  Even if third party financing was available, a sizable down payment will be needed as well as funds for working capital.  Having a clear understanding of the amount that is available to invest will help determine the types of opportunities that can be pursued.

Business:

If pursuing a start-up business, a comprehensive business plan should be assembled detailing the business model, products and services offered, targeted customers, pro-forma financials, market & competition analysis, and company growth plans.  If evaluating an acquisition of an established business, due diligence should be performed with a focus on the following four areas:

1. Financial statement Analysis. Review the last 3-5 years of P&L’s and Balance Sheets.  Calculate the adjusted earnings (SDE or EBITDA) to determine the owner benefit.
2. Business Valuation. Ascertain how the asking price was formulated and what methodology was used to value the company.
3. SWOT Analysis. Perform a SWOT analysis on each of the business opportunities being considered to effectively evaluate the Strengths, Weaknesses, Opportunities, and Threats.
4. Future Growth. Determine the plan to grow the business or make it more efficient.  Assess the potential to penetrate new markets with current products and measure the impact of  adding new products and services for sale to existing clients.

Starting or buying a business can be an extremely complex process and should be well planned and pursued in a non-emotional manner.  Receiving professional advice and not relying solely on personal judgment will assist in qualifying the best opportunities based upon individual situations.   There are number of excellent resources available.  For business start-ups, the local SCORE chapter, typically accessible through the Chamber of Commerce can be extremely helpful in fine-tuning the business plan and assessing available options.  For business acquisitions, a competent business broker can be an invaluable resource.  Most experienced business brokers have a team of professionals (CPA’s, transaction attorney’s, SBA lending sources, etc) already in place.  Regardless of the avenue that is pursued, proper business, legal and tax counsel should be retained. Consulting with a variety of experts will be an empowering process and will help to avoid many pitfalls and risks.  Any fees associated with these professionals are typically offset by the considerable value they bring through their involvement in the process.

Michael Fekkes is a Certified Business Intermediary (CBI®) at ENLIGN Business Brokers

Tel. 910.691.2202 ● Email: mfekkes@enlign.com ● Web: www.enlign.com

Image: Francesco Marino / FreeDigitalPhotos.net

By Richard Parker, President of The Business For Sale Buyer Resource Center™ and author of the most widely used reference resource and strategy guide for buying a business for sale – How To Buy A Good Business At A Great Price©

It’s One Thing to Buy A Business, Now You Have To Run It!

The first 90 days after you close on a business purchase will prove to be the most critical time in you new venture’s short-term future. There are several key factors that if done right, will set the foundation for your success. It is very important for you to lay out your plan for post-closing before you take over so as to ensure the smoothest transition possible.

Don’t Change Anything…. Yet!

Unless you have an intimate knowledge of the business and the industry, much, if not everything will be new to you. While it is normal for you to jump in full-steam ahead and implement many changes that you’ve thought about, the best thing that you can do is nothing, at least at the very beginning.. That’s right, no major changes at all, at least for now. Most businesses experience a downturn in the first three to six months after a new owner takes over. Don’t panic, it can happen. However, if you avoid any substantial changes, things should rollover effectively.

Since so much is new, it would be impossible for you to set forth any policies or procedures that make sense. What you want to do is to first learn the business: who are the customers, what do they want and expect, understand the employees and determine their role and contribution to the business. Avoid drastic changes. The old saying that you’ve got to learn before you can earn is most applicable in this situation.

Get in, get comfortable, get smart and then get going.

A good friend of mine has a great line: “you’ve got to know it before you can grow it”.
The Seller’s Role
Typically, there will be a period immediately after the acquisition where the former owner will be around for a transition period. This varies from deal to deal. In some cases, it can be as short as a couple of weeks while others may involve a long-term training period and even an ongoing consultation/employment relationship. This can be a difficult time. Regardless of the length of the relationship, keep in mind that the seller will still have a very strong attachment to the business and the employees will take some time getting used to a new boss.

Interestingly enough, no seller has ever made it through the entire training period for any business I’ve acquired. Sure, they have a role to offer some insights, but I’ve always found them to be more of a hindrance than an asset. Of course, if it’s a complicated business, then this may not always hold true. If the business is far too difficult for you to take over, or, if it relies on them completely to succeed, you probably shouldn’t buy it.

Pick their brains as best you can. Always keep the relationship friendly; you never know when you’ll need them and they can remain a good source for brainstorming down the road. However, this is now your business, you’re the new boss, it’s your show, and it’s time to get the show on the road.

Prepare a comprehensive list of everything that you want them to cover during training. This includes everything from how to operate the alarm systems down to providing you with their evaluation of the employees. One subject that should be covered at length is to ask them what they would do in your situation. Ask them to outline what their business plan would like and what things they feel you should explore as the new owner.

For the first couple of weeks, let them keep their office as-is. Set yourself up alongside them as watch what it is that they do each day. Observe the flow of communication with clients, employees, etc. Continually ask questions. Do not simply allow them to do their job as they did before; you need answers, so question everything.
Meeting with Employees
Set up a meeting the first day with all the employees. These people are naturally going to be nervous about you, their job and their future. Most people abhor change so be sympathetic to their situation. No matter what plans you have, let them know:

• There are no major changes planned.
• You are very optimistic about the business’s future.
• Each one of them has a role to play.
• You’re eager to build the business.
• You are available to speak to them at any time regarding any concerns they have
• They are expected to contribute to the success of the business.
• You’re counting on their support to build the business.
• You realize that there will be a transition period and it may take some time for them to get used to you and vice-versa.

The objective of the first meeting is to set their minds at ease. Open up the floor to questions. Do not worry if not a single person has a question; they’re nervous, so don’t interpret this as anything other than a demonstration of their anxiety. Don’t feel pressured to reply to anything that you haven’t thought through and never make any promises simply to win them over.

End the meeting by asking each one of them to prepare a report, due within one week, that outlines: what they believe can be done to make them more effective at their job, and second, if they were the new owner, what suggestions they would have for the overall business. Tell them that all reports will be kept confidential, that you will review it with them individually and that you expect everyone to have it submitted on a timely manner (a note here: if any of them are late, you can expect that person to be a trouble employee and chances are they will not last).
It’s Time To Get Busy!
So you’ve got the transition period completed, you’re feeling comfortable with the business, the employees are feeling positive, you’ve reviewed their reports, it’s now time to get down to business.

Step One: Make the Place Your Own.
Get the place cleaned up. Throw on a new coat of bright paint, have everyone clean up their work areas, remove old files and throw out unwanted furniture, old posters, etc. Give the place a new look. You do not have to spend much money at all. Set the standard by keeping your work area spotless. There’s no need to be a mess, no matter what your prior work habits were. You cannot expect any employee to do anything different than you so if you, want to run a well-oiled, organized business, it all starts with you.

Step Two: Learn the Business and What Oils the Engine.
Perhaps the most critical thing you can do in your initial tenure is to really learn the guts of the business. The answers are readily available but you have to ask the questions. Make it your goal to speak with customers, suppliers, employees, competitors and anyone else associated with the business to get a true picture about the business and the industry and where you fit in. Generally, the customers have the answers, and quite often businesses do an awful job of satisfying the clients. They may think they do, but the truth is that most don’t. As such, dig into your customers’ wants so that you position the business as a place where they want to do business.

Your employees are a pivotal link in this process. Get them involved. They will be far more effective carrying out plans they have helped develop than they will executing strategies that have been dumped on them.

Based upon employee reports and fact-finding, compile a detailed listing of everything you want to do in the business… eventually. You can’t do it overnight. However, by noting these potential items, your business plan will begin to marinate. Work at organizing your list by the area within the business (sales, marketing, accounting, operations, etc.) and keep it up to date.

Develop a 30/60/90-day plan for each specific area of the business. Follow up diligently to ensure timelines are respected. Change does not have to be monumental or drastic; it’s improvement that you’re striving to achieve.

Step Three: Sell Off Useless Assets if Applicable
If the business has acquired useless inventory, equipment, or any other obsolete asset, then get rid of it. There’s no need to keep any assets around that take up space and do not produce revenue.

Step Four: The Marketing Plan
In concert with StepTwo, assemble the marketing plan for the business. Keep in mind that market, is without a doubt the simplest thing to do in a business and something that is made overly complicated by most companies. Marketing is simply a matter of finding out what the customers want, and then giving it to them at terms that make sense to you and them. End of story. You may buy a business that excels at marketing, which is great. However, marketing also requires continuous testing and measuring. So even if they’re great at it, make certain that you set forth additional strategies within this discipline.

Step Five: The Business Plan
Personally, I think most business plans stink and are completely unrealistic. Companies put them together to make themselves feel good and generally little of it ever gets executed. On the other hand, it can prove to be an invaluable document and a blue print for success, Therefore, it is needed, but must be done correctly. A business plan does not have to be a long document with unrelated information and useless pie-charts and graphs. On the contrary. Done right and it can be a bullet-point description of:

• Everything you want to do
• Who is going to do it?
• How it’s going to get done
• When is it going to be completed?

Now you’re set. You’ve got a solid understanding of the business. You know what the customers want. You have a plan to deliver it. Your employees are sold on you; they’ve contributed to the company’s plan. Focus like a laser beam and execute. Measure absolutely everything. Strive to get better in every way and everyday! If you constantly think about how you can make your business bigger, better and faster then you cannot help but be successful!

Richard Parker is President of Diomo Corporation – The Business Buyer Resource Center™ – www.diomo.com. He is the author of the most widely used reference resource and strategy guide for buying a business – How To Buy A Good Business At A Great Price ©. His materials are used by prospective business buyers in over 80 countries. Mr. Parker’s articles, syndicated columns and other “how to” guides have been published extensively online and in various print media He is also one of the most successful business brokers in The United States, assisting both buyers and sellers. Mr. Parker has personally purchased eleven small businesses since 1990. Visit t his website to learn more strategies and tips for buying a business.

This article is © Copyright 2001-2009 by Richard Parker and may not be reproduced in any format whatsoever without prior written consent of the author.

By Richard Parker, President of The Business For Sale Buyer Resource Center™ and author of the most widely used reference resource and strategy guide for buying a business for sale – How To Buy A Good Business At A Great Price©

With so many options available to you, the question will become which vein of the business- ownership arena should you pursue? Between franchises, existing businesses, start-ups, home- based businesses and MLMs, it does become a bit overwhelming. When reviewing all of the possibilities you have to decide what will work best for you; however, your chances of success are clearly best when you buy an existing business or franchise resale for many reasons. With any new business you have two challenges: developing the product or service and then seeing what, if anything, people are willing to pay you for it.

Regardless of a company’s past performance, an existing business or franchise will, at the very least, have a history from which you will be able to make certain decisions. Even if the company was not profitable in the past, your strengths may lend themselves perfectly to turning it into a viable venture. Furthermore, you have the ability to verify what the company did in the past that resulted in the current status of the operation.

Ease of Investigation

In order to buy the right business or franchise, you will be required to do a thorough investigation of its past activities, its operations, its current status, the competition, the industry and its future potential. You will accumulate this information and then you will have to determine how it measures up with you at the helm. Clearly, this information gathering will be substantially more accurate and easier to obtain when dealing with an existing business or franchise, as you will have the resources available from which to get the details.

Infrastructure

You will have the benefit of purchasing a company that has an infrastructure, including customers, suppliers, employees, equipment and systems. This will allow you to focus on building the business as opposed to a start-up or new franchise where everything begins at from point zero.

Purchase Price Differences

Buying an existing business or franchise does not mean that it will cost you more. In fact, many times it’s less expensive than building a new franchised location or launching a start-up. Even in those cases where it may require a premium, at least you know what you are getting if you investigate it properly.

With a new franchise, a good Master Franchiser will do demographic studies on population, drive-by traffic, potential customer base and a whole series of studies that will indicate that “theoretically” the business should do well. However, the only thing they cannot guarantee either by law or in reality is whether or not you will be successful. Also, new locations can take a year or more to build. You can avoid all of this when buying a resale.

Flexibility in Negotiating

You will have far more flexibility when negotiating the purchase of an existing business or franchise versus any other options available; it’s not even close! Everything from the purchase price to financing is open to negotiation. Doesn’t it make more sense to put yourself into an environment where you have the greatest number of options available?

Richard Parker is President of Diomo Corporation – The Business Buyer Resource Center™ – www.diomo.com. He is the author of the most widely used reference resource and strategy guide for buying a business – How To Buy A Good Business At A Great Price ©. His materials are used by prospective business buyers in over 80 countries. Mr. Parker’s articles, syndicated columns and other “how to” guides have been published extensively online and in various print media He is also one of the most successful business brokers in The United States, assisting both buyers and sellers. Mr. Parker has personally purchased eleven small businesses since 1990. Visit t his website to learn more strategies and tips for buying a business.

This article is © Copyright 2001-2009 by Richard Parker and may not be reproduced in any format whatsoever without prior written consent of the author.

Image: FreeDigitalPhotos.net

The statistics for the success of start up businesses is really bad. More than 95% of businesses fail in the first 5 years. But there is a way for you or your business to skip this vulnerable step.

Buy a business that is already profitable.

When you start from scratch, your revenues are going to be uncertain and so will your profits.

When you buy a business that is already profitable, that business has gone past it’s most testing times. And, the best part is you get profits from day 1.

The previous owner has already tested several methods and has identified a system that works for the business. So you don’t have to break your nerve about beating out an operating system before you run out of money.

There is a small warning though before you buy a business. There is a lot of due diligence that is involved in buying a business. It is not as simple as buying candy in a grocery store.

If you are looking to buy a business I insist that you do Richard Parker’s course on buying a business.

Richard says “The Average Small Business Purchase Involves 36 Critical Questions You Must Ask Every Seller, 200 Individual Points To Investigate, 54 Specific Clauses To Negotiate and 73 Key Issues To Review
In Every Business For Sale Listing.”

This is the link to Richard’s course on buying a business

http://www.killerbusinessopportunities.com/biz/diomo

Image: FreeDigitalPhotos.net