Here are his hints and questions to consider for both purchasers and sellers:
1. Is the Business What it Seems?
If you find a business you think you would like to own, make sure it is what you think it is. This may sound like simple advice, but it is routinely ignored. You must vet the business before buying it! How? First, ask the operating owner to allow you to shadow him/her over the course of two weeks. This way you can see whether you have the physical stamina and mental acuity to handle the management of its operations.
2. Look and Listen
Observe firsthand the employees and key management people. Do they know what they are doing, or are they incompetent friends and family of the owner? Is your style and their management style compatible? Do the employees get along or are you buying a hornet’s nest? What is the corporate culture?
3. How Much Money Are They Really Making?
What is the business grossing in income? Netting? Unless you’re a forensic accountant, you may need some help on this one. Aside from hiring an accountant that specializes in this type of investigation, you too should look at cash receipts, bank deposits, and past bank statements. Those figures can’t lie; the owner can. Do a judgment and lien search on the company to see if there are liens against any equipment, or tax liens, judgments, and liabilities. This may tell you if the business is in distress. You may enjoy revitalizing a depressed business, but make sure the purchase price reflects that.
4. Be Careful of Leases
If you are negotiating a new lease with the current landlord, be sure to inform the landlord that the tenant will be a corporation as you want to limit personal exposure. The landlord may want a personal guarantee, but I would advise against this. However, if you feel it is a must, either to get the space or because you think the risk is worthwhile, be sure to limit the time frame of the guarantee and get a “good guy” clause in the lease. This will essentially allow you to be released if you surrender the security, are paid up to date on the rent, and the premises are in good condition when you surrender the key.
5. Hire a Business Broker
When selling, get a good business broker that has some experience in your type of business. Put the business up at a reasonable sales price. There are standard multiples in certain businesses depending upon their yearly gross. Decide if you want to finance part of the transaction, for how long do you want to finance the note for, and at what interest rate.
6. Obtain a Guarantee
If you do finance the business purchase, try to get a personal guarantee on the promissory note. Get security, either on the business equipment and/or accounts receivables, or even secure it by a mortgage on the purchaser’s home or other property. Be sure to take back an assignment of lease if you are financing. Why? This way, you can come back into the business and run it if the purchaser defaults, protecting the investment you sold. The landlord must allow you back if the lease is not in default and you have the assignment.
7. Vet the Purchaser
A seller must vet the purchaser. What is the purchaser’s background? Can this person run the business competently? This is only important if you are financing the business. Otherwise, it is not an issue when the buyer is paying the purchase price in full upfront.
8. Avoid Trouble by Selling to a Reasonable Buyer
Still, no matter what is written in a contract, unreasonable buyers can make your life hell. Sell to someone who does not have obvious defects in their personalities. You will discover this when negotiating with them. Why is this important? You don’t need a lawsuit commenced by the buyer after you’ve sold the business. Even if the lawsuit has no basis, it still costs money to defend. I would advise against representing in the contract any sales figure. Let the buyer vet the business and decide on the purchase based upon his accountant’s advice or his own instincts.
“There is much more advice that I have for these situations. If you are buying or selling, retain my 38 years of experience to ensure a smooth process.” – James Misiano
Contact James Misiano today at 631-396-0255 if you are planning to buy or sell a business.