The Importance of Understanding Leases

Leases should never be overlooked when it comes to buying or selling a business.  After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business.  It is easy to get lost with “larger” issues when buying or selling a business.  But in terms of stability, few factors rank as high as that of a lease.  Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.

The Different Kinds of Leases

In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease.  These leases clearly differ from one another, and each will impact a business in different ways.

A sub-lease is a lease within a lease.  If you have a sub-lease then another party holds the original lease.  It is very important to remember that in this situation the seller is the landlord.  In general, sub-leasing will require that permission is granted by the original landlord.  With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord.  Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.

The third lease option is the assignment of lease.  Assignment of lease is the most common type of lease when it comes to selling a business.  Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating.  In short, the seller assigns to the buyer the rights of the lease.  It is important to note that the seller does not act as the landlord in this situation.

Understand All Lease Issues to Avoid Surprises

Early on in the buying process, buyers should work to understand all aspects of a business’s lease.  No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.

Summed up, don’t ignore the critical importance of a business’s leasing situation.  Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation.  Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.

Copyright: Business Brokerage Press, Inc.

Chinnapong/BigStock.com

What Should You Evaluate When Buying a Business?

Buying a business can be an exciting prospect. For many prospective business owners, owning a business is the fulfillment of a decades long dream. With all of that excitement comes considerable emotion. For this reason, it is essential to step back and carefully evaluate several key factors to help you decide whether or not you are making the best financial and life decision for you. In this article, we’ll examine five key factors you should consider before buying a business.

What is Being Sold?

If you hate the idea of owning a clothing store, then why buy one? The bottom line is that you have to have a degree of enthusiasm about what you are buying otherwise you’ll experience burnout and lose interest in the business.

How Good is the Business Plan?

Before getting too excited about owning a business, you’ll want to take a look at the business plan. You’ll want to know the current business owner’s goals and how they plan on going about achieving those goals. If they’ve not been able to formulate a coherent business plan then that could be a red flag.

You need to see how a business can be grown in the future, and that means you need a business plan. Additionally, a business plan will outline how products and services are marketed and how the business compares to other companies.

How is Overall Performance?

A key question to have answered before signing on the bottom line is “How well is a business performing overall?” Wrapped up in this question are factors such as how many hours the owner has to work, whether or not a manager is used to oversee operations, how many employees are paid overtime, whether or not employees are living up to their potential and other factors. Answering these questions will give you a better idea of what to expect if you buy the business.

What Do the Financials Look Like?

Clearly, it is essential to understand the financials of the business. You’ll want to see everything from profit and loss statements and balance sheets to income tax returns and more. In short, don’t leave any rock unturned. Importantly, if you are not provided accurate financial information don’t hesitate, run the other way!

What are the Demographics?

Understanding your prospective customers is essential to understanding your business. If the current owner doesn’t understand the business, that is a key problem. It should be clear who the customers are, why they keep coming back and how you can potentially add and retain current customers in the future. After all, at the end of the day, the customer is what your business is all about.

Don’t rush into buying a business. Instead, carefully evaluate every aspect of the business and how owning the business will impact both your life and your long-term financial prospects.

Copyright: Business Brokerage Press, Inc.

pressmaster/BigStock.com

Interested in Buying a Business? Check Out These 3 Commonly Overlooked Areas

When it comes to buying a business, nothing is more important than the factor of due diligence. For most people, this investment is the single largest financial decision that they will ever make. And with this important fact in mind, you’ll want to leave absolutely no stone unturned.

Let’s examine the three most commonly overlooked areas when it comes to buying a business: retirement plans, 1099’s and W-2’s, and legal documents.

1. Examine All Legal Documents

While it may sound like a “pain” to investigate all the legal documents relating to a business that you are vetting for purchase, that is exactly what you have to do. The very last thing you want is to buy a business only to have the corporate veil pierced. Everything from trademarks and copyrights to other areas of intellectual property should be carefully examined. You should be quite sure that you receive copies of everything from consulting agreements to documentation on intellectual property.

2. Retirement Plans

Don’t forget about retirement plans when you’re buying a business, as this mistake can quietly translate into disaster. Before signing on the dotted line and taking ownership, be sure that both the business’s qualified and non-qualified retirement plans are 100% up to date with the Department of Labor and ready to go.

3. W-2’s and 1099’s

If 1099 forms were given out instead of W-2’s, you’ll want to know about that and be certain that it was done within the bounds of IRS rules. Imagine for a moment that you fail to do your due diligence, buy a business and then discover that you have problems with the IRS. No one wants IRS problems, but a failure to perform due diligence can quickly result in just that. So do your homework!

Never forget what is at stake when you are buying a business. If there has ever been a time to have laser-like focus, this is that time. There can be many skeletons hiding in a business, and you want to be sure that you protect yourself from any unwanted surprises. Not performing your due diligence can lead to a shockingly large array of problems. One exceptional way to protect yourself is to work with a business broker. A business broker knows what to look for when buying a business and what kinds of documents should be examined. There is no replacement for the expertise and experience that a business broker brings to the table.

Copyright: Business Brokerage Press, Inc.

fizkes/BigStock.com

Key Elements for Every Partnership Agreement

You should never forget that your partnership agreement is, in fact, one of the most important business documents you will ever sign. Many people go into business with loved ones, relatives or lifelong friends only to discover (once it’s too late) that they should have had a partnership agreement. A partnership agreement protects everyone involved and can help reduce problems that may arise. Outlining what will happen during different potential situations and events in a legal framework can help your business keep running smoothly.

What Should Be in a Partnership Agreement?

Every business is, of course, different; however, with that stated, any partnership should outline, with as much clarity as possible, the rights and responsibilities of all involved. A well written and carefully considered partnership agreement will keep small problems and disagreements from evolving into more elaborate and serious concerns.

There are times to take a DIY approach and then there are times when you should always opt for a professional. When it comes to partnership agreements, it is best to opt for working with a lawyer. Finding competent legal help for drafting your partnership agreement is simply a must.

What is Typically Addressed in a Partnership Agreement?

In theory, a partnership agreement can cover a wide-array of factors. Here are a few points typically addressed in partnership agreements.

What Questions Will a Good Partnership Agreement Address?

  1. Which partner(s) are to receive a draw?
  2. How is money to be distributed?
  3. Who is contributing funds to get the business operational?
  4. What percentage will each partner receive?
  5. Who will be in charge of managerial work?
  6. What must be done in order to bring in new partners?
  7. What happens in the event of the death of a partner?
  8. How are business decisions made? Are decisions made by a unanimous vote or a majority vote?
  9. If a conflict cannot be resolved when must the conflict be resolved in court?

Thanks to partnership agreements, all partners involved can proceed and start a new business with fewer areas of concern. The simple fact is that without a partnership agreement, your business can face a range of disruptions; these would be disruptions that could ultimately spell doom for your business.

Copyright: Business Brokerage Press, Inc.

Freedom TumZ/BigStock.com

Is It Time to Become a Business Owner? 3 Questions to Ask Yourself.

Many people know that owning a business isn’t for them. But for others, the appeal and lure of owning their own business can be powerful indeed. If you are uncertain as to whether or not this path is for you, there are a few simple questions you can ask to gain almost instant clarity. In this article, we will explore those key questions and help you determine if owning a business is in your future.

1. Are You Dedicated to Growing Your Income?

Quite often people like the idea of making more money, at least in the abstract. But when presented with what it takes, many people realize that they don’t want to do what is involved. Owning and operating a business can be a lot of work and it’s not for everyone. Yet, those who embrace it can find it rewarding in a variety of ways.

Being a business owner is radically different than being an employee. As an employee, you simply don’t exercise much control. Summed up another way, your financial fate is clearly in the hands of someone else: your employer.

However, owning a business means that you can take steps to control your own financial destiny. You can make decisions that will, ultimately, boost the success of your business and in turn increase your own income.

As an important note, statistics from 2010 show that the longer you own your business the more money you, as the business owner, will make. It is typical for those who have owned a business for ten years or more to earn upwards of six figures per year. If you have had more than one year of experience in running an organization, the yearly salary will likely range from $34,392 to $75,076. However, if you’ve owned your business for more than a decade, you will likely earn more than $105,757 per year.

While there are no guarantees, owning a business can be a path to growing one’s income and wealth.

2. Would You Like Greater Control Over Your Life?

Many opt to start their own business because they want more control. Business owners realize that unless they own their own business their financial fates rest in the hands of someone else. Some people are comforted with this feeling or don’t see a way around it and others are not so comfortable with the realization. If you want greater control over your life, then owning a business might be for you.

Owning a business increases the amount of control a business owner has over his or her life in many ways, not just financial. For example, business owners have more control over how they spend their time, where they work, when they work and who they work with on a daily basis. Instead of being part of a business, you help create, mold and shape it. Clearly, this is a lot of work and it isn’t for everyone, but again the rewards can be diverse and great.

3. What is Your Personality Like?

Owning a business translates to great control, but that control comes with a degree of risk. In the end, you’ll have to determine how comfortable you are in dealing with risk. As a business owner the “buck” stops with you. You’re risking your time, effort and, of course, money. You also don’t get a paid vacation, sick days or any of the other benefits so often associated with being an employee.

Other traits identified during a study by the Guardian Life Small Business Research Institute showed there are other ideal personality traits for business owners. These traits include collaboration, curiosity, focus on the future, and being self-fulfilled, tech savvy and action oriented.

Thinking about these three key questions is the perfect place to start when contemplating opening a business. Additionally, working with a business broker can help you gain clarity and determine if owning a business is right for you.

Copyright: Business Brokerage Press, Inc.

monkeybusinessimages/BigStock.com

The Importance of the Term Sheet

The value of the term sheet shouldn’t be overlooked. From buyers and sellers to advisors and intermediaries, the term sheet is often used before the creation of an actual purchase or sale agreement. That stated, it is important that the term sheet is actually explained in detail. Let’s take a closer look at its importance.

What is a Term Sheet?

Even though term sheets are quite important, they are rarely mentioned in books about the M&A process. In the book, Streetwise Selling Your Business by Russ Robb, a term sheet is defined as, “Stating a price range with a basic structure of the deal and whether or not it includes real estate.”

Another way of looking at a term sheet, according to attorney and author Jean Sifleet, is that a term sheet serves to answer to four key questions: Who? What? Where? And How Much?

Creating the Right Environment

A good term sheet can help keep negotiations on target and everyone focused on what is important. Sifleet warns against advisors, accountants and lawyers who rely heavily on boilerplate documents as well as those who adopt extreme positions or employ adversarial tactics. The main goal should be to maintain a “win-win” environment.

At the end of the day, if a buyer and a seller have a verbal agreement on price and terms, then it is important to put that agreement down on payment. Using the information can lead to a more formalized letter of intent. The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.

Make Sure Your Term Sheet Has the Right Components

In the end, a term sheet is basically a preliminary proposal containing a variety of key information. The term sheet outlines the price, as well as the terms and any major considerations. Major considerations can include everything from consulting and employment agreements to covenants not to compete.

Term sheets are a valuable tool and when used in a judicious fashion, they can yield impressive results and help to streamline the buying and selling process. Through the proper use of term sheets, an array of misunderstandings can be avoided and this, in turn, can help increase the chances of successfully finalizing a deal.

Copyright: Business Brokerage Press, Inc.

jat306/BigStock.com

The Top 3 Key Factors to Consider about Earnings

Two businesses could report the same numeric value for earnings but that doesn’t always tell the whole story. As it turns out, there is far more to earnings than may initially meet the eye. While two businesses might have a similar sale price, that certainly doesn’t mean that they are of equal value.

In order to truly understand the value of a business, we must dig deeper and look at the three key factors of earnings. In this article, we’ll explore each of these three key earning factors and explore quality of earnings, sustainability of earnings after acquisition and what is involved in the verification of information.

Key Factor # 1 – Quality of Earnings

Determining the quality of earnings is essential. In determining the quality of earnings, you’ll want to figure out if earnings are, in fact, padded. Padded earnings come in the form of a large amount of “add backs” and one-time events. These factors can greatly change earnings. For example, a one-time event, such as a real estate sale, can completely alter figures, producing earnings that are simply not accurate and fail to represent the actual earning potential of the company.

Another important factor to consider is that it is not unusual for all kinds of companies to have some level of non-recurring expenses on an annual basis. These expenses can range from the expenditure for a new roof to the write-down of inventory to a lawsuit. It is your job to stay on guard against a business appraiser that restructures earnings without any allowances for extraordinary items.

Key Factor # 2 – Sustainability of Earnings After the Acquisition

Buyers are rightfully concerned about whether or not the business they are considering is at the apex of its business cycle or if the company will continue to grow at the previous rate. Just as professional sports teams must carefully weigh the signing of expensive free-agents, attempting to determine if an athlete is past his or her prime, the same holds true for those looking to buy a new business.

Key Factor # 3 – Verification of Information

Buyers can carefully weigh quality and earnings and the sustainability of earnings after acquisition and still run into serious problems. A failure to verify information can spell disaster. In short, buyers must verify that all information is accurate, timely and as unbiased as is reasonably possible. There are many questions that must be asked and answered in this regard, such as has the company allowed for possible product returns or noncollectable receivables and has the seller been honest. The last thing any buyer wants is to discover skeletons hiding in the closet only when it is too late.

By addressing these three key factors buyers can dramatically reduce their chances of being unpleasantly surprised. On paper, two businesses with very similar values may look essentially the same. However, by digging deeper and exercising caution, it is possible to reach very different conclusions as to the value of the businesses in question.

 

Are You Sure Your Deal is Completed?

When it comes to your deal being completed, having a signed Letter of Intent is great. While everything may seem as though it is moving along just fine, it is vital to remember that the deal isn’t done until many boxes have been checked.

The due diligence process should never be overlooked. It is during due diligence that a buyer truly decides whether or not to move forward with a given deal. Depending on what is discovered, a buyer may want to renegotiate the price or even withdraw from the deal altogether.

In short, it is key that both sides in the transaction understand the importance of the due diligence process. Stanley Foster Reed in his book, The Art of M&A, wrote, “The basic function of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased.”

Before the due diligence process begins, there are several steps buyers must take. First of all, buyers need to assemble experts to help them. These experts include everyone from the more obvious experts such as appraisers, accountants and lawyers to often less obvious picks including environmental experts, marketing personnel and more. All too often, buyers fail to add an operational person, one familiar with the type of business they are considering buying.

Due diligence involves both the buyer and the seller. Listed below is an easy to use checklist of some of the main items that both buyers and sellers should consider during the due diligence process.

Industry Structure

Understanding industry structure is vital to the success of a deal. Take the time to determine the percentage of sales by product lines. Review pricing policies and consider discount structure and product warranties. Additionally, when possible, it is prudent to check against industry guidelines.

Balance Sheet

Accountants’ receivables should be checked closely. In particular, you’ll want to look for issues such as bad debt. Discover who’s paying and who isn’t. Also be sure to analyze inventory.

Marketing

There is no replacement for knowing your key customers, so you’ll want to get a list as soon as possible.

Operations

Just as there is no replacement for knowing who a business’s key customers are, the same can be stated for understanding the current financial situation of a business. You’ll want to review the current financial statements and compare it to the budget. Checking incoming sales and evaluating the prospects for future sales is a must.

Human Resources

The human resources aspect of due diligence should never be overlooked. You’ll want to review key management staff and their responsibilities.

Other Considerations

Other issues that should be taken into consideration range from environmental and manufacturing issues (such as determining how old machinery and equipment are) to issues relating to trademarks, patents and copyrights. For example, are these tangible assets transferable?

Ultimately, buying a business involves a range of key considerations including the following:

  • What is for sale
  • Barriers to entry
  • Your company’s competitive advantage
  • Assets that can be sold
  • Potential growth for the business
  • Whether or not a business is owner dependent

Proper due diligence takes effort and time, but in the end it is time and effort well-spent.

Copyright: Business Brokerage Press, Inc.

Rawpixel.com/BigStock.com

What Should Be in Your Partnership Agreement

Partnership agreements are essential business documents, the importance of which is difficult to overstate. No matter whether your business partner is essentially a stranger or a lifelong friend, it is prudent to have a written partnership agreement.

A good partnership agreement clearly outlines all rights and responsibilities and serves as an essential tool for dealing with fights, disagreements and unforeseen problems. With the right documentation, you can identify and eliminate a wide range of potential headaches and problems before your business even starts.

Determining the Share of Profits, Regular Draw, Contributing Cash and More

Partnership agreements will also outline the share of profits that each partner takes. Other important issues that a partnership agreement should address is determining whether or not each partner gets a regular draw. Invest considerable time to the part of the partnership agreement that outlines how money is to be distributed, as this is an area where a lot of conflict occurs.

The issue of who is contributing cash and services in order to get the business operational should also be addressed in the partnership agreement. Likewise, the percentage that each partner receives should be clearly indicated.

Partnership Agreements Outline and Prevent Potential Problem Areas

Another area of frequent problems is in the realm of who makes business decisions. Here are just a few of the types of questions that must be answered:

  • Are business decisions made by a unanimous vote or a majority vote?
  • What must take place in order to consider new partners?
  • Who will be handling managerial work?
  • How will the business continue and what changes will occur in the event of a death?
  • At what stage would you have to go to court if a conflict cannot be resolved within the framework of your partnership agreement?

You might just want to get your business running as soon as possible, but not addressing these issues in the beginning could spell disaster down the road.

The Uniform Partnership Act

One option to consider, which is offered in all states except Louisiana, is the Uniform Partnership Act or UPA. The UPA covers all the legal regulations that specifically apply to partnerships.

Reduce Conflict Via a Partnership Agreement

Forming a partnership can be great way to launch a new business, but it is also important to keep in mind that no matter how exciting the process may be it is still a business. New businesses face an array of challenges, and the last thing any new business needs is internal disruption. Mapping out via a partnership agreement the duties and expectations of all partners is an easy and logical way to reduce internal conflict within the business so that you can stay focused on building the business and making money!

 

Can I Buy a Business With No Collateral

At first glance the idea of buying a business with no collateral may seem impossible, but in reality it can be done. Let’s examine your options. When it comes to achieving this goal, your greatest assets are an open mind and a commitment to hanging in there despite the odds.

The Small Business Association’s 7 (a) Program is Your Friend

One possible avenue for buying a business with zero collateral is to opt for the SBA’s 7 (a) program, which works to incentivize the bank to make a loan to a prospective buyer. Under this program, the SBA guarantees 75%. The buyer still has to put in 25%; however, this money doesn’t necessarily have to be his or her money. This is where things really get interesting. The cash that the buyer uses can come from investors or even be a gift from parents in the case of young buyers. These possibilities all fall within the SBA’s guidelines.

Look into Seller Financing, You Might Be Surprised

There is a second way to buy a business with no collateral, and that comes in the form of finding a seller who is willing to finance. Again, this might seem counter intuitive at first glance. But the facts are that a large percentage of sellers do agree to offer some level of financing. So in other words, seller financing is not unheard of and stands as a viable way for a prospective buyer to buy without collateral.

Combining Seller Financing and the SBA’s 7 (a) Program

Combining the SBA’s 7 (a) program with seller financing can prove to be a powerful combination. It is important to note, however, that if you do use the SBA’s 7 (a) program the seller cannot receive his or her repayment for two years.

Persistence Pays

Ultimately, you will likely need to be rather persistent when trying to find a bank. Rejection is likely. But if you are persistent, it is possible to make the SBA’s 7 (a) program work for you.

One key way to keep yourself motivated is to constantly remember that jumping through some hurdles is all part of the process since you’re trying to circumvent the traditional route of using collateral. But working relentlessly may be worth it because if you are successful, you have acquired a tangible asset without any collateral of your own. That is no small accomplishment.

Don’t be afraid to ask for advice from S.C.O.R.E., the Small Business Administration (SBA), or an experienced business broker. While it might sound very unlikely that you’ll be able to buy a business without collateral, plenty of people have successfully done so.