Business Buyer - Frequently Asked Questions

1. What is a fair price for a business?

Supply and demand determine the price of a business much as it does with other products. If a business is especially desirable and there are few on the market, the price will be higher, so it depends on how badly the buyer wants that particular business. A good rule of thumb is 1 to 3 times the owner's benefit, with a 30% to 40% down payment and a note to the seller using the assets of the business as collateral.

A business is usually priced right if the cash flow is sufficient to do three things: pay the buyer a reasonable salary to run it; cover the debt service; and give a acceptable return on the down payment.  If the cash flow won't do this, then the deal needs to be restructured so that it will.

2. What is Cash Flow?

We calculate cash flow or owner's benefit, (sometimes called seller's discretionary cash) as profit before income tax, one-time expenses, depreciation, interest and owner's compensation & benefits. This is the amount of money the buyer  has available to pay himself, buy additional equipment, make note payments on the business and pay taxes.

3. What is Goodwill and what should I pay for it?

Goodwill is calculated by subtracting the total hard asset price of the business (inventory, equipment, furniture, fixtures, patents, franchises, real estate etc.) from the total value of the business. The amount of goodwill you pay depends on what the cash flow is and how desirable the business is. It is the intangible value for the good business name, proven product and location that has increased in value over time.

4. Are there tax benefits in buying a business?

We are not tax experts and you should ask your accountant, however it is our understanding that generally speaking tax deductions may be taken for depreciation on the fair market value of all the furniture, fixtures and equipment. The Covenant Not to Compete and the Training Agreement.

 5. What are the advantages of buying an existing business vs. a start-up?

It makes a great deal of sense to let someone else take the risk and high cost of starting a business from scratch.

It's true that your initial investment in a start up can be substantially less than an established, proven business. However, more often than not, a new business has to have additional infusions of cash for several months or years before any income is realized, while an established business will give you an income from the first day you take over.

According to government surveys, over 80% of new businesses fail in the first three years. The reasons for failure are many, including but not limited to POOR LOCATION, WRONG PRODUCT, UNDER CAPITALIZED, POOR MANAGEMENT SKILLS and simply too much for the owner to handle.

On the flip side of this, most established businesses continue to be successful because they have a PROVEN LOCATION, THE RIGHT PRODUCT, and PROVEN CASH FLOW AND GOOD MANAGEMENT SKILLS THAT ARE PASSED ON TO THE NEW OWNER. Training and a Non Compete Agreements are nearly always a part of what you buy with an existing business.

6.What do Sellers want from Buyers?

As you go about the process of buying a business you will find that it is not easy and you will have questions and concerns. If the seller is financing the largest part of the sale he wants to be as sure as he can that he will in fact be paid the balance of his note.

Every seller's worst nightmare is that the buyer will come in and destroy his business and he will be left with nothing, so you can see that selling a business creates just as many questions and concerns for the seller. You can often get significantly better price and terms by being aware of the seller's needs and removing some of his or her uncertainties.

7. Why do I have to provide a resume' and financial statement?

The more information the seller has on your past experience, qualifications and financial situation, the more likely she will accept an offer you make. By extending financing to you, the seller is acting as your banker, and he needs to feel comfortable with you (lending institutions always have this requirement. Remember, once the seller accepts your offer he is committed but you still have contingencies to remove before moving ahead.

8. What is a fair offer?

A fair offer is one that realistically satisfies the needs of both buyer and seller. Frequently a fair offer will vary drastically from the listed price and terms. A knowledgeable broker will help you write an offer that is fair to both parties. A word of caution about "low ball" offers, they are rarely accepted and sometimes permanently damage your relationship with the seller. This could result in reducing your chances of getting the business for a fair price.

9. What is a reasonable down payment?

We've all heard the fairy tale of no or ridiculously low down payments. In the real world, this rarely happens and if it did, you probably wouldn't want it. Every buyer wants to conserve cash but a very low down payment can indicate a buyer's lack of commitment to the business.

The number one concern of sellers is the safety of taking a note from the buyer and if the down payment is too low the seller feels it would be easier for the buyer to walk away if a problem arose in the business. If the seller questions a buyer's commitment or seriousness about the business, the seller may not negotiate seriously with that buyer. 

10. How is the removal of contingencies handled?

It's wise to remove each contingency as quickly as possible. Be thorough but don't procrastinate, it's to everyone's advantage to show progress in the deal moving forward 

11.How is business ownership transferred?

When you go to the closing the ownership of the business is actually transferred to the buyer. Each state has its own methods to assist & protect the buyer, seller & broker when transferring the business. You can use your own attorney and pay him yourself or you can use some type of trust officer like the Escrow Attorney and split the price with the seller.

This trust officer is known by different names in different states. For this purpose we will use the name Escrow Attorney to describe this trust officer. If you decide on an Escrow Attorney, we recommend the use of experienced Escrow Attorneys to assist the seller and buyer in transferring ownership of the business.

Escrow Attorneys are specialists in the field of business transfers and perform their services at very competitive rates. Some buyers and sellers choose to have their own attorneys review the details of the transaction. We encourage you to consult your attorney if you feel more secure by doing so.