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David now had found a related business that had been listed with an agent who did not understand
business he was marketing and could not sell it. David was now talking to seller directly. The seller wanted $550,000. David wanted me to negotiate, on a consulting fee bases with seller to get price down.
I instructed David that I would appraise business, and convince seller that my appraisal was accurate, but David had to do negotiations. The seller would never talk to me about inside details if he was negotiating with me directly. This time I spent 5 hours with seller, not books, to determine business was worth $350,000. The seller would not take price, but felt I had done an excellent appraisal. I suggested to David to wait 60 days and open discussions again. I also told him seller would eventually take $350,000.
I again didn’t hear from David, this time for 6 months. When David called I asked for his report on what happened. The seller called him after one month and sold business to him for my appraised amount, just as predicted. What did David want this time? Two guys wanted to buy business and David wanted me to justify a price of $500,000? I did my updated analysis and got paid. I will not find out what happened until David calls me with my next assignment.
Get word out - Now that you have got all of your preliminary work done you are ready to go looking for businesses. You are ready to look for businesses for sale. Go on to Internet and look at sites that have businesses for sale. Look in classified section of your county newspapers and look at what is for sale. Contact business brokers and tell them what you are looking for in detail. Call on broker listings and FSBO (For Sale by Owners.) When you find something interesting you move through steps with a broker, accountant or attorney or without a broker, accountant or attorney.
Find out what financial records they have. This will eliminate 75% of businesses. The records are false because of cash sales and/or cash payroll. A lot of auto repair shops pay their mechanics a base salary on books and balance in cash. This is crazy and illegal. They have cash sales, which are illegal, and not reported and then they give this money to employees illegally. Have fun figuring out profit on these businesses. Some businesses do not want to give you any financials. They do not even want to lie to you about numbers; they just do not give them to you. You need financials even to just see what operating expenses are.
Cash income -- The problem with cash income, besides being illegal is it is unconfirmed. Jack bought a body shop doing $60,000 sales on books. The seller showed Jack records that proved to Jack, an experienced body shop owner that business was really doing $125,00 month in sales. After escrow closed Jack was given production records for last 5 years by general manager that stayed with company. The business was doing $60,000. Exactly what was on books! There was no cash. The seller reported every dime. I hate to say it but if someone were willing to lie to government and their business broker, why would they tell you truth? Find out what seller wants – next key step is to ensure that you find out exactly what seller wants. You have already stated what you wanted when you got word out. Now, you need to make sure you understand what seller wants. Make sure you get full information on this from broker or seller. On this step, you are basically finding out what seller wants for his or her business exactly. That includes, down payment, seller carry back terms, time he is willing to train you to run business, and what he is including in price. Inventory can be included or extra. Leased equipment basically has you as buyer assuming debt, where financing on owned equipment is paid off in escrow or price is lowered because you are assuming debt. With all of this information, you can begin your negotiations.
Negotiate – Ok, now you know what seller wants and you know what you want. On this step, objective is to get two wants to match up and agree with each other, so that deal can take place. What you are trying to do at this stage is decide if you are going to go ahead with deal or if you are going to continue talking with broker and seller until what they want is closer to what you want. The key here is keeping conversation going (negotiate). As long as conversation is going, it is much more likely to result in deal taking place. So keep conversation going!
Almost final action – after negotiations and an agreement has been reached, there is one final action that is vital. Your offer is in, but you are not done yet! Due diligence is required. Here you must get documentation on financial figures you have been given. You want to verify that what you have been told is indeed case. Get Profit and loss statements, business tax returns and other important documents. If you have been told that a body shop has a contract with local city to service all their vehicles, or some such story, ask for and see contract and verify that a valid contract does indeed exist. Part of this final action is ensuring that you have advise of a competent professional as well.
Escrow - Never buy an asset sale purchase without an escrow. We have already established that sellers may be lying to you about any number of things, but they may have debts that they do not even know about. The escrow will do a “bulk sale notice” that gives creditors of business a chance to file their claims, and if they do not buyer cannot be held liable. The escrow also makes sure that payroll taxes; sales taxes; federal and state income taxes are paid in full. The IRS has come into companies and assessed for many years of unpaid taxes. As buyer you would get stuck with this bill, if you didn’t do an escrow.
Conclusion - Following above steps will see you through most of pitfalls in buying a business.
Willard Michlin is a Business Broker, California Real Estate Broker, Accountant, Well known Public speaker and Administrative/Business Consultant. He can be contacted at his Ventura, California office by calling 805-529-9854 or by e-mail at kismetrei@earthlink.net. See other articles by Willard Michlin at http://www.kismetbusinessbrokers.com
