Buying or Selling a Business? What is the Attorney's Role?

Whether you are buying or selling a business, your legal counsel can make or break the deal.

If you choose to engage advisors, such as an attorney, to assist you in the sale or purchase of a business, it is important that they be deal friendly and transaction experienced. You must articulate your objectives and seriousness in getting the transaction completed. In many instances, the sale of a business fails to close because the attorney for one side makes too many demands of the other side. Certainly, you want your attorney to protect your interests, but not to the point where the demands are so strenuous that the other party walks away from the deal.

The buyer, seller, and their advisors involved in the transaction must have a mutual understanding of the price and terms of the deal.......who is getting what and for how much......or the sale may be doomed before it starts. Business brokers can refer you to legal professionals if you don't already have one that is experienced in legal issues related to business transfer transactions.

To help prevent wrecked deals, good communication between all of the parties involved is a priority. Unless they are told, outside advisors may not realize how much the buyer and the seller want to consummate the sale. The attorney needs to know from the client that this is an earnestly desired transaction and that, unless something completely unanticipated is discovered, his or her job is to pull the deal together.

If there is no one monitoring the details and leading the progress of the transaction, the ball can be dropped somewhere along the way. The use of a professional business broker can alleviate communication problems and keep the ball rolling. The broker's role at this point in a business transfer transaction is to act as the intermediary. The business broker--having been through the process many times, much more often than any of the attorneys or other advisors involved--knows the pitfalls. They keep the deal on track and act as the captain that keeps the team working together towards the common goal.......the successful consummation of the sale. As long as all advisors involved are operating on the same wave length as their respective clients -- the buyer and the seller -- the odds are good that the deal will happen.

Selling Your Business? Don't Let Anyone Know!

Family and private businesses are sold in an environment that is unlike the selling environment of anything else you can imagine!

Sound surprising? After you review the following ten reasons that make selling a business different, perhaps you will agree.


(1) Confidentiality

Making the decision to sell one's business is a difficult enough task in itself. However, once the decision is made how do you sell it without anyone knowing it's for sale? Adverse things can and do occur when people know, or think they know, a business is for sale. Confidentiality must be maintained. Here's why.

a) Employees get nervous and may leave for more stable employment. They believe that the "new broom will sweep clean." That may be true in public company acquisitions but is generally not true in private company sales. Your staff represents a significant portion of your company's value. Should your key employees leave, most buyers of private companies will not buy.

b) Competitors may take advantage by using the information as a way to gain an advantage and pirate customers. After a recent seminar on buying, selling and pricing businesses, a businessman said to me, "I wish you had given this seminar last year. Your information would have saved me $150,000." He had decided to sell and had sent information to his competitors and others within his industry offering his company for sale.

Shortly thereafter many customers stopped coming in. Apparently his competition was using the information to undermine customer confidence by saying, "I know you have done business with Joe for years but - he's selling out you know and . . ." Twelve months later business is almost back to normal. Many companies have not survived this mistake.

c) Suppliers extend credit to your business because of your good payment record over the years. Now they hear you are "on the block". Might they put you on COD? What impact might that have on your business?

d) Bankers have a healthy skepticism of small business. They want your business but they have been burned in the past by others. They know that a very high percentage of small businesses fail. What's that? Who's trying to sell his business? Might the bank decide not to renew your line of credit? Call your note(s)?

e) Customers may lose confidence and decide to trade elsewhere. Where are you without your customers?

In summary, sell it but don't let anyone know it's for sale. What else must be sold under that condition?

(2) Business owners do not know what the business is worth

Essentially every business person we have worked for has confided that they really did not know what their business was worth. They admitted that although they didn't know what the business was worth, they knew what they wanted for it."

What seller of any other item being sold doesn't know the item's worth?

(3) Buyers don't know what they want to buy

An overwhelming majority of buyers come to us and profess to be in search of either a light manufacturing opportunity or perhaps a distribution company. This is code for "I really don't know what I want to buy but I'd feel silly telling you that." Later, virtually all admit they really didn't know what they wanted. The odds of a person buying the business that attracted them to our offices are 1 in 500! The odds of buying a company within the industry for which they initially stated a preference, 1 in 50!

We reviewed thirty five Dry Cleaning Plant sales to determine how many were sold to persons who had responded to an advertisement for a dry cleaner. We were not surprised to find only one. The other thirty four had come to us in search of something else.

What else has to be sold to someone who doesn't know they want to buy it?

(4) The major selling point is intentionally concealed

A business owner's desire to minimize taxes overrides the desire to show bottom line profits. You have to look between the lines in order to determine the real earnings of a private company.

Can you think of any other situation where a seller intentionally conceals a major reason to purchase?

(5) Everyone, yet no one, knows the value

Ask twelve buyers what a business is worth and you will get at least twelve answers. One of the twelve will offer more than the rest. Why? More on this later. Buyers, as with sellers, don't really know what a business is worth. Unlike virtually every other commodity sold, there is no public record of sale prices for private business. As a result, we have seen more than three hundred different valuation methods used by buyers, sellers and advisors to estimate a business's value.

What else has to be sold under conditions where nobody knows the real value but everyone has an opinion?

(6) Future value of the purchase is dependent upon who buys it

You own a business and a home. So do I. We both have profitable businesses and nice homes. Let's swap homes and businesses just for the change and variety.

It's now a year later. The value of our homes is basically the same. What about our businesses? Might one of us be in trouble, perhaps both of us? What do I know about your business? What do you know of mine?

A business is a vehicle. How fast and far it has been driven is of interest but does not predict how a new driver might fare. Will a new operator drive the business to new heights, or drive it into the ground?

What else is sold where the future value of the purchase is so dependent upon who buys it?

(7) Third parties refuse to ratify the wisdom of the purchase

We can buy virtually anything and a third party will participate in the purchase by providing the financing. This participation essentially ratifies the wisdom of our purchase. An excellent example is the purchase of real estate. The bank appraises the property, ratifies we are not paying too much and gives us a mortgage.

Business equipment and inventories are not favorite collateral with bankers. What percentage of the asset value would they lend anyway? Which asset value would they use? Liquidation Value, Book Value, Replacement Value, Value in Place, Net Book Value - and what equity or loan to value percentage would they apply - 60%, 50%, 40%? What part of a business' value is attributable to the value of assets? Usually less than half. How much will your banker lend you on your business' assets today?

What other major purchase can you make where a third party will refuse to participate in the financing to any degree of significance?

(8) Conflict between personal desires and financial considerations

Financial considerations are important but do not drive the decision to sell. Business owners sell their businesses to gain a life-style change. They want to sell in order that they and their business can each move on to different levels. The decision is a combination of personal and financial considerations. Nothing a business owner will ever sell will have the personal attachment the business represents. Only you, the business owner, are capable of making the decision.

Buying a business is a personal and life-style decision also, not purely a financial one. Buyers are seeking independence, freedom to express themselves and their ideas, the ability to take control and not have to put up with "corporate group think" any longer. Obviously, the financial aspects of a purchase are important but financial considerations do not drive the decision to purchase. Nothing will have as great an impact on a buyer's way of life than buying a business. Only the buyer is capable of making the decision.

Both buyer and seller have to balance the imagined personal gain against uncertain financial prospects. A business opportunity, not a business guarantee, is involved.

What other purchase or sale can you imagine that involves such a high degree of personal involvement and financial uncertainty?

(9) Too many customers

Those who sell businesses are inundated with buyers. It seems everyone is either professing to be a buyer or knows one. Buyers are everywhere. Finding the right buyer is another story. It's always a seller's market for viable businesses. A down economy intensifies this as usually layoffs from down-sizing bring more than the usual number of buyers into the market.

Can you think of any other business where people complain of too many customers?

(10) Extremely emotional atmosphere

A business is to its owner as a child is to its parents. Your business is an extension and a reflection of you. It's your baby and you do not have to sell. You have sacrificed yourself, your family life. There have been times when you didn't take anything out, rather you put everything back into the business. All those long hours, your hopes, your dreams. . . now you are thinking of selling? Put the business up for adoption?

What else is bought and sold in such an emotionally charged atmosphere?

Summary

The environment in which a business must be sold is unique. Therefore the methods used to sell a business should be unique also. Although the sale of a business is different than the sale of essentially anything else, what occurs is straightforward. It all makes perfectly good sense and is quite logical once you understand the uniqueness of what is occurring.

For an understanding of the process, assume your business is a public company. Before attempting to attract a suitor your board of directors would first engage an investment banker to identify appropriate acquisition candidates (buyers) and determine the company's worth. The investment bankers would provide the board with information as to the best acquirers and what values or strategic advantage might be achieved through a sale or merger of the firm. The board of directors would then decide if sale or merger of the company was in the best interest of the stockholders.

Assuming the decision to sell was ratified, the investment bankers would then package your company so as to be most attractive to the appropriate acquiror(s).

Essentially the same process should be used by family and private companies considering sale. Identify the characteristics of your ideal acquiror. Determine what makes your company of value, to whom and how much. Then decide to sell the company or take other actions that might be deemed more appropriate, such as make the company more attractive and valuable or perhaps consider some alternative to selling.

This article is excerpted from "In & Out of Business . . . Happily," by Theodore P. Burbank.
-------------------------------------------------------------------------------

When the decision is made to sell and the sale is properly conducted, your business can be sold for the best price and terms without anyone knowing it was for sale.

The Seller Remorse Stage of Selling a Business

Getting Cold Feet?

Closing the deal can be the most challenging part of buying or selling an operating business. Valuations, investigations, and negotiations are complete and now it's a matter of getting everything into writing in a form that satisfies everyone so that the transfer of ownership of the business can take place. However, you can definitely count on someone getting cold feet just before the closing. Be prepared for this! Anticipate it happening and then work through it logically, reasonably and unemotionally.

"Seller’s Remorse" doesn't happen at any specific stage of the process. It can occur at any time and the usual symptomatic thoughts start going through the seller's mind. “Do I really want to sell my business?” “At this price, am I just giving my business away?” “What if the new owner mistreats my long-time customers and loyal employees?” "What if I’m bored as soon as I retire?” “Who is this new potential owner? "Will he maintain the policies, the standards and the conditions that have enabled the business to survive the hard times and continue to prosper?” And ultimately, “How will I fill my days when the business is gone? Am I really ready for such a lifestyle change?”

With these concerns, it’s no wonder many Sellers agonize for months, or even years, before they reach the point of seriously considering a sale of the business. Ordinary human emotions occur whenever a new stage of life or change from the status quo is about to occur. It is a normal fear of the unknown and uncertainty about the future. If there is even a hint of doubt about selling the business, don't begin the process. Wait until there is not one shred of doubt.

The Seller, at this point, should remember all of the circumstances that initially provided the impetus to consider selling the business. Having a plan and solid reason for selling the business in the first place will help smooth over these second thoughts. A sincere motivation to sell is not only important to facilitate a successful process, it is also important from the buyer's perspective as well. Whatever the reason, there should be something other than dollars that motivates the sale. After all, if it isn't valuable to own the business, no one would ever buy it.

“Seller’s Remorse” will usually pass as emotional preparedness evolves and a comfort level with the buyer is developed, enabling the seller to separate himself from the business and begin to focus on the new future.

The 1031 Exchange -- Sell Business Property Now, Pay Tax Later

A growing number of investors are selling properties and paying taxes later through a deal structure called a 1031 exchange.

Section 1031 of the U.S. Tax Code permits a seller of commercial properties to defer the capital gains obligation if it identifies a replacement property within 45 days of closing the sale. The seller must then close on its new purchase within 180 days of the first closing.

In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date. Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a business owner who has outgrown a company-owned building, for example, can defer the tax liability as long as the proceeds are used to buy another building of equal or greater value within a specified period of time.

The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed. Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain.

The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

Key factors to consider for a 1031 Exchange.

1. Investment Intent

Both the Relinquished Property and the Replacement Property must be held for investment or productive use in a trade or business. Personal residences do not qualify. Although there is no specific holding period to establish investment intent, taxpayers who hold their Relinquished Property for two years generally satisfy the requisite intent for a 1031 Exchange. A holding period of over a year has commonly been accepted but may be subject to review by the IRS.

2. Deadlines

Replacement Property(ies) must be identified within 45 days of the sale of the Relinquished Property and must be purchased within 180 days of the sale of the Relinquished Property.

3. Rules of Identification

The Three Property Rule. The taxpayer may identify up to three properties without regard to their value; or The 200% Rule. The taxpayer may identify more then three properties, provided their combined fair market value does not exceed 200% of value of the property sold; or The 95% Rule. The taxpayer may identify any number of properties, without regard to their value, provided the Exchanger acquires 95% of the fair market value of those properties.

4. Equal or Greater

The taxpayer must buy Replacement Property(ies) of equal or greater value to the property sold in order to defer the applicable capital gains tax, or pay tax on the difference. The taxpayer must use all the cash proceeds from the sale of the purchase in order to completely defer the applicable capital gains tax, or be taxed on the funds withheld.

5. Common Ownership

The party selling the Relinquished Property must be the same party purchasing the Replacement Property or a disregarded entity with respect to the party (such as an LLC or a trust, where a single taxpayer holds 100% of the beneficial interests in that entity). Spouses can be added or removed in community property states.

6. Like Kind

The Replacement Property must be "Like Kind" to the Relinquished Property. Any type of real property is like kind to other real property. Personal Residence. Taxpayers can exchange business or investment property, but not their personal residence(s). Vacation Homes. Vacation Homes treated as a personal residence are generally not eligible for 1031 treatment. Investment property listed on Schedule E is generally eligible for 1031 treatment. Condo Conversion. Recent rulings point to the acceptance of exchanging units on a condo conversion, provided the property was held for investments for a sufficient period of time before the taxpayer even contemplated the conversion. Contract Exchanges. Recent rulings point to the acceptance of exchanging contracts, provided all other 1031 requirements, such as holding period and investment intent, are met. Contracts to purchase Real Estate may be exchange for another contract or other existing real property.

7. Qualified Intermediary

To qualify for sale harbor tax deferral, sale proceeds must be held by a Qualified Intermediary between the sale of the Relinquished Property and the purchase of the Replacement Property. A Qualified Intermediary must remain completely independent and cannot have been the taxpayer’s agent in the past 2 years. A CPA, attorney, or other agent cannot act as a Qualified Intermediary for their clients. More information can be found on the FEA website.

Buying a Business - Questions to Ask the Seller

The following serves as an excellent checklist for a Buyer in compiling questions to ask the
Seller about his business during the Due Diligence period.

Potential Problem Areas to be Addressed

• Changes in law, New competition, Change in technology
• Foreign imports, Drop in demand, Equipment obsolescence
• Facility obsolescence, Market shifts, Down trends
• Employee theft, Interest rate flux, Labor problems
• Tax liens, Increased repair costs, Low margins
• Capital improvements needed, Single supplier position, Single customer position
• Bad receivables, Low backlog, Shipping problems
• Political instability, Restricted credit, Lavish facilities
• Closed business, Customer problems, Supplier problems
• Regulatory violations, Utility rate changes, Insurance cost changes
• Obsolete inventory, Slow moving inventory, Obsolete advertising
• Key talent leaving, Lease about to expire, Employee promised equity
• High lease escalation, Product liability claims, Patent expiration
• Sales agreement expires, Cash flow problems

Specific Questions For The Seller

1. How did you get started in this business? What first attracted you to this product (or service)?
2. Why do you now want to sell the business? Have you been thinking about selling for a long time?
3. What are your plans after you sell the business?
4. When would you like to have the business sold?
5. What kind of ownership-transition period do you foresee?
6. What were your plans for the business before you decided to sell?
7. What would be the greatest obstacles to face in achieving those plans?
8. What have been the most significant factors in the past success of the business?
9. If I, as the new owner, wanted to invest additional working capital into the business, what would I want to use it for?

Houston -- #3 Business-Friendly City in the Nation

Business is thriving in Houston........and No Wonder!

Houston is the fourth-largest city in the United States, located in a culturally diverse metropolitan region of 4.8 million residents – and growing at more than twice the national pace. It has a low cost of living, a well trained and educated workforce, has one of the largest ports in the nation for the expansion into the international marketplace, has no state income tax, and is one of the top business-friendly states in the nation.

Houston is booming and is ranked #3 best Metro Area for doing business by Forbes.com. Texas has the #6 best Business Tax Climate in the nation according to the Tax Foundation's 2007 State Business Tax Climate Index. The Tax Foundation, established in 1937 in Washington, D.C., provides unbiased tax information and presents facts and figures to educate the public about America's tax burdens and its impact on our economy.

As reported by the Texas Workforce Commission (3/8/07), Houston's job growth rate was double the growth rate of the rest of the State of Texas.

The April 2007 Census Bureau reports Houston as having had the third-largest Metropolitan area increase in population in the nation for the period 2000 to 2006. The report predicts the continuing growth of the city. The rising numbers are a good barometer of the city's economic health. There are jobs in Houston and people tend to follow jobs. City officials in Houston say the population growth is a boon to the metro area because new residents bring needed job skills and other contributions that is across-the-board beneficial to the city and to the local economy.

Yes, this population growth is driven by career and job opportunities. But the precursor to this growth is the steady and diverse expansion of business and industry. It is business, small and large, sitting in the driver's seat of the machine that is spurring the economic opportunities in Houston. Businesses are moving and expanding into the city because of its business-friendly environment and projected future economic growth.

"Houston is hitting on all cylinders," said Joel Kotkin, contributing editor for Inc. magazine (April 2007). "Not only are manufacturing and energy hot growth areas, there is also a cost advantage on housing, which is a big factor as housing growth in the suburbs, as well as inside Loop 610, is pulsing." The magazine also reported that Houston has escaped the difficulties of many other large cities, including weak job growth attributed to high taxes, business overheads and housing costs. The report said strong growth in Texas was attributed to low business costs, a rebounding technology sector and a thriving energy sector which is attracting a new cadre of highly paid professionals to increasingly sophisticated high-tech businesses.

Take a look at these national rankings of Houston:

Houston Ranks # 1

• Lowest Cost of Living and Least-Expensive Housing Among 24 Metropolitan Areas with Populations of More Than 2 Million by: ACCRA Cost of Living Index - Second Quarter 2006
• Port of Houston –– Top-Ranked Coffee Exchange Port in the World by: New York Board of Trade - March 2006
• Fastest Growing Companies by: Fortune - September 18, 2006
• Job Growth by: U.S. Bureau of Labor Statistics - March 21, 2007
• Number of Overall Building Permits by: Demographia - March 2007
• Number of Single Unit Building Permits by: Demographia - March 2007
• Best Cities for Software Developer Pay by: U.S. Department of Labor - 2005
• Largest Immigrant Communities in the United States by: Center for an Urban Future: A World of Opportunity - April 10, 2007

Houston Ranks #2

• Campus Diversity: National Universities –– University of Houston by: U.S. News & World Report - America's Best Colleges 2006
• Best Hospitals for Cancer Care: M. D. Anderson by: U.S. News and World Report - July 2005
• Top Logistics Metro for Waterborne Commerce by: Expansion Management - September 2005
• Most Popular City with Movers for 2005 by: U-Haul National Migration Trend Report - 2006
• Most Logistics-Friendly Metros in the U.S. by: Expansion Management & Logistics Today - Logistics Quotient, September 2005

Houston Ranks # 3

• Metro area for New and Expanded Facilities by: Site Selection - March 2006
• U.S. Metros for Business and Careers by: Forbes - May 2006
• Fortune 500 Headquarters (ranked by Consolidated Metropolitan Statistical Area) by: Fortune - April 5, 2006
• Number of Foreign Consulates (83) by: Houston International Protocol Alliance - February 2006
• Total County Population by: U.S. Bureau of the Census - March 22, 2007
• Overall Financial Performance of Local Charities by: Charity Navigator - June 2006
• Total Number of “Insourced” Jobs by: Organization for International Investment, - September 2006
• Retail Investment by: Weaver Davis & Jacob Realty Group as reported in Business Wire - August 29, 2006
• Best Metros for Business by: Forbes - May 4, 2006
• Top Ten Underrated U.S. Cities by: MSNBC.Com - April 10, 2007
• Most Hispanic-Owned Businesses in the United States by: Center for an Urban Future: A World of Opportunity - April 10, 2007

Houston Ranks # 4

• Total City Population by: U.S. Bureau of the Census - October 20, 2006
• Houston’s trade has more than doubled since 2003. As reported by the U.S. Census Department, Houston the nation's fourth most important Customs District in the nation. The 2006 results marked the second year in a row that Houston has bettered its national standing in import export activity.

Houston Ranks # 5

• Best Business Opportunity Metro by: Expansion Management - August 2006
• Top 10 Best Value Private Colleges –– Rice University by: The Princeton Review - America's Best Value Colleges 2007 Edition

Houston Ranks # 6

• Best Values: National Universities –– Rice University by: U.S. News & World Report - America's Best Colleges 2006
• Total Metropolitan Area Population by: U.S. Bureau of the Census - March 22, 2007
• Most Asian-Owned Businesses in the United States by: Center for an Urban Future: A World of Opportunity - April 10, 2007
• Houston's George Bush Intercontinental Airport is the nation's sixth busiest airport

Houston Ranks # 7

• Most Diverse U.S. Cities by: Brookings Institute - March 2006

Houston Ranks # 8

• Fastest Growing Metro Area for Women-Owned Businesses by: Center for Women's Business Research - 2004
• Best Places to Live by: Places Rated Almanac 2000 - Current Edition
• Largest Central Business Districts by: Demographia - June 2006

The Landlord and Lease Contingency in Selling a Business

Clear A New Lease With The Landlord Before You Sell Your Business

A lease is a contract that represents the right to operate a business from rented premises. It is a legally binding contract between the landlord and the tenant. It sets out the terms, conditions and rights as well as the obligations of both parties in relation to the occupancy.

Before selling a business make sure the lease can be transferred or renegotiated. You want to get this part of the sale process done relatively early. Landlords don't like surprises. A deal can fall apart quickly if a Landlord is informed at the last minute that a new owner is about to take over the current business. It is better to work with the Landlord to iron out the details before you get too far into the deal. Determine the Landlord's willingness of renewing or transferring the lease to a new owner and what qualifications of such new owner are expected.

Also of importance is how much time is remaining on the lease and whether there are any extension periods. The purchaser would want to evaluate the lease to determine what impact it might have on the future viability of the business.

The Buyer Remorse Stage of Buying a Business

Getting Cold Feet?

Closing the deal can be the most challenging part of buying or selling an operating business. Valuations, investigations, and negotiations are complete and now it's a matter of getting everything into writing in a form that satisfies everyone so that the transfer of ownership of the business can take place. However, you can definitely count on someone getting cold feet just before the closing. Be prepared for this! Anticipate it happening and then work through it logically, reasonably and unemotionally.

Many Buyers, particularly first-time Buyers, experience a pre-closing nervousness known as “Buyer’s Remorse.” It generally occurs during the Due Diligence phase. During this period the Buyer may begin to have second thoughts about the wisdom of buying the business. The train of thought may go something like, “Am I doing the right thing?” “Do I really want to get into this venture?” “Is this the right time?” “What if the current customers decide to change to another company?” “What if all of the employees quit?” “Am I paying too much for the business?” “Will I lose my life savings?”

These are not unreasonable questions. They are the emotions we all have when facing a lifestyle change or new stage in life, making a large investment, moving, buying a house, and not to be left out -- getting married. Yes, operating a business certainly does have an element of risk. However, if the Buyer has followed the correct Sequence of Events, properly investigated and researched the business, negotiated a fair agreement and performed due diligence, the risk has been reduced to an acceptable level and “Buyer’s Remorse” will pass. The Buyer must remember, at this point, why the business was attractive in the first place and how well it matched personal goals and future expectations.

Planning some wiggle room is a strategic way to minimize risk and to strike a satisfactory level of comfort. Whether it's financial wiggle room - a little bit of capital set aside for unexpected expenses like a new computer - or managerial wiggle room - the chance to meet with key employees privately before closing the deal - it heightens the Buyer's confidence that obstacles can be overcome and goals achieved. A Buyer just can't know all there is to know until after the sale. Because difficulties and delays are possible, planning for them should be automatic.

Ultimately, however, the proverbial "Leap of Faith" must be taken if business ownership is to ever be achieved. It is the leap that every successful business owner has survived.

Buying A Business - The Sequence of Events

6 Steps in the Buying Process

Step 1: Self Assessment

When you meet with a Business Broker, be prepared to discuss your background, work experience and financial ability to purchase a business. A Business Broker cannot adequately help you find a company that meets your needs without this knowledge. A personal resume and financial statement will also be required by lenders, landlords and others who will be a party to your business acquisition. The following are examples of the questions you may be asked by a Business Broker:

1. Why do you want to buy a business?
2. What are your special skills and educational background?
3. What is your work and/or business ownership experience?
4. What are your hobbies and areas of special interests?
5. Assuming suitable sources of financing are available, what is the maximum amount of your personal funds you can invest as a down payment to purchase a business?
6. If you plan on including an equity partner/investor, how much do you expect them to invest of their personal funds?

Step 2: Define Your Acquisition Criteria

• Which business categories are of most interest to you? (Service, Retail, Wholesale/Distribution, Manufacturing, Restaurant/Fast Food)
• Is there a specific type of business that you are interested in purchasing?
• If you are not sure of the type of business you want, are there any businesses you do not want to purchase?
• What is the minimum income you require from a business to meet your living expenses?
• What is your preference for the location of a business?
• How far are you willing to commute for a good business?

Step 3: Review Businesses For Sale

Prior to receiving information on specific businesses for sale, you will be asked to sign a Brokerage Representation Disclosure Notice, a standard form required by the Texas Real Estate Commission. This notice describes the various ways that a Broker can represent Sellers and/or Buyers. Furthermore, you will need to sign a Nondisclosure / Confidentiality Agreement wherein you agree to keep all non public information confidential, and you agree to not do anything that would be disruptive to the business.

Based on your qualifications and acquisition criteria, a Business Broker will review with you several businesses that potentially meet your needs. In the event you indicate an interest in one or more of these businesses, you will be given a copy of the Business Profile that describes the business and a Financial Profile that summarizes the income and operating expenses for specified periods of time.

Step 4: Meeting The Business Owner and Touring The Facilities

After reviewing the information on the Business and Financial Profiles, the Broker will answer any questions you may have about the businesses or will obtain the answers from persons deemed reliable. The next step is to meet with the business owner and visit the facilities. The Broker will schedule all appointments with the business owners. It is common for business owners to require that all such meetings be during nonoperating hours to avoid premature disclosure to employees and customers. The Broker will attend these meetings with you to introduce the business owner, and facilitate the flow of information.

When meeting with a business owner, you may tour the facilities and ask questions regarding the operations of the business. It is best not to discuss the price and terms of sale with the business owner. Your Broker can explain the basis on which the business was valued and the terms of sale required by the owner.

Please remember to keep all proprietary information you obtain about the business confidential. Only discuss this information with your professional advisors and spouse, and remind them that the information is confidential and not to be disclosed to other parties. In most cases, the employees, customers, suppliers, landlords and lenders are not aware that these businesses are for sale. Premature disclosure could have a negative impact on the business being sold.

Step 5: Due Diligence and Offering Process

At this point you have reviewed operating information and financial summaries of the businesses that meet your acquisition criteria, and you have met with the business owners and toured their business facilities. You should now be ready to select the business that you feel best meets your needs and begin your due diligence process. Checking out the business can be very time consuming for both you and the business owner. Furthermore, costs may be incurred for such things as professional advisors, copies of documents, lien searches and closing documentation. The business owner does not want to go through a detailed due diligence process without knowing the buyer is serious and willing to make an acceptable offer to purchase the business. Therefore, before copies of tax returns and other business documents can be obtained, and before any contact with landlords, bankers, suppliers, employees, or customers, an Earnest Money Agreement or Letter of Intent must be presented and accepted by the business owner. The basic steps involved in making an offer are:

• The Business Broker will help you complete the Earnest Money Agreement. This Agreement provides the terms and conditions under which you are willing to buy the business and the seller is willing to sell the business. Final closing documents, such as a bill of sale, note and security agreement, closing statements, noncompetition agreements, leases and approvals from various parties will be handled by the Escrow Attorney prior to closing. If real estate is included, a separate Earnest Money Agreement will be completed.
  
• The amount of earnest money required to be submitted along with the Earnest Money Agreement will depend upon the size of the business transaction. The amount needs to be sufficient to show your serious intent to buy the business and to encourage the seller to take the business off the market while you complete your due diligence. For most small to midsize businesses, earnest money of $5,000 to $10,000 is typical.
  
• A Broker will assist in the negotiations between you and the business owner to secure an Earnest Money Agreement that is acceptable to all parties. The Standard Earnest Money Agreement gives you up to 15 days to complete your review of the business financial documents, operating agreements, property leases and other aspects of the business after the agreement has been approved by you and the business owner.
  
• During the due diligence period, the Broker will coordinate your request for documents and assist in arranging meetings with related parties to the transaction including the business owner’s professional advisors, your professional advisors, the landlord, lenders, the escrow attorney and others as needed.
  
• If institutional financing is required, a Business Broker can recommend various lending sources depending upon the type of financing needed.

Step 6: The Closing Process

When you have completed your due diligence and are satisfied with all aspects of the business, you will authorize an escrow attorney to conduct lien searches and prepare the bill of sale and other closing documents for all parties to review. After the closing documents have been approved by the principals, a closing date will be scheduled. A cashiers check will be required at closing for the amount due. The Broker will coordinate with the principals and their advisors, landlord, lender, and others, to insure that all the necessary paperwork is completed by the closing date.

This information provides an overview of the business buying process. It should not be considered a substitute for obtaining competent legal and financial advice.

Buying or Selling a Business -- Closing the Deal Checklist

A Simplified Checklist When Selling A Business & Closing A Deal

aAdjust purchase price
This would take care of prorated items such as rent, utilities and inventory up to the time of closing.

aReview documents required to be provided by the seller
This would be a corporate resolution approving the sale, evidence that a corporation is in good standing, any tax releases that may be been promised by the seller. Check with your local department of corporations or secretary of state.

aSign promissory Note
In some cases the seller will financing part of the sale price, so have an attorney review any Note documentation.

aSecurity Agreements
These documents may be necessary if you are going to finance your purchase. A Security Agreement lists the assets that will be used for security as a promise for payment of the loan.

aUCC Financing Statements
These documents are recorded with the Secretary of State in the State in which you have purchased your business. Again, these documents are necessary if you are going to finance your business.

aLease
If you have agreed to assume an existing lease, you will be required to execute the assumption. Make sure that you have the landlords concurrence to assumption of the lease. You may instead have negotiated a new lease with the landlord instead of assuming the existing lease.

aVehicles
If the purchase includes vehicles you may have to execute the transfer documents for the vehicles. You can check with your local department of motor vehicles to determine the correct procedure and necessary forms.

aBill of Sale
The bill of sale will be proof of the sale of the business and will transfer the ownership of the other tangible business assets not specifically transferred on their own.

aPatents, trademarks and copyrights
May need to execute the necessary forms if part of the transaction.

aFranchise
May have to execute franchise documents if the purchase of the business was a franchise.

aClosing or settlement sheet
The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing so there should be no surprises.

aCovenant Not to Compete
It is a good idea to have the seller execute this agreement. This will help add to the success of your operation of the business without any interference from the previous owner.

aConsultation/Employment Agreement
If seller has agreed to continue working in the business for a period of time, this documentation would be necessary.

aComplete IRS Form 8594, Asset Acquisition Statement
This document will indicate how the purchase was allocated amount the various assets. This is important for your tax return.

aBulk Sale Laws
Make sure that all bulk sale laws have been complied with in the transfer of the business assets.

Buying a Business? How Do Brokers Screen Buyers?

Prior to discussing confidential information about businesses for sale, business brokers require prospective buyers to complete certain forms that serve two purposes. They protect the interests of the business owners during the sale process and enables a business broker to competently assist buyers in their acquisition search. These documents are necessary to the process and are defined below.

Confidentiality Agreement

This document is also known as a Nondisclosure Agreement (NDA). It registers the buyer's receipt of confidential information regarding a business for sale. It is also the buyer's pledge that the confidential information is not to be shared or used for competitive purposes. It also protects the broker's position as the intermediary in the introduction of the buyer to the seller's business.

Personal Financial Profile

This is NOT a credit report or an official document that requires confidential information such as a social security number or your bank statement. This form requires the buyer to assess his/her financial capabilities. It outlines the buyer's financial condition in terms of assets, liabilities and liquidity to which the buyer attests to its truth and accuracy. It provides insight to the buyer's availability of funds for a down payment, the purchase price range, and net earnings requirements for an acquisition. It will help narrow the focus of the businesses to research as possible candidates for purchase consideration.

Buyer Background Profile

The Buyer Profile is more or less an Interview Form. It provides information that, coupled with financial capabilities outlined in the Personal Financial Statement, will help match businesses with the prospective buyer's background and interests.

Real Estate Services Disclosure Form HAR-214

This form is required by the Texas Real Estate Commission and provides information about brokerage services. It advises the signatory about the responsibilities of the broker depending on who the broker represents, either the buyer or the seller.

Selling a Business: Suiting Up for the Spotlight

Preparation for putting a business on the market is like rehearsing for a stage performance....as the main character....in the spotlight.

When entering the center stage spotlight, both a business owner and a star performer must know their roles, the script, the story, as well as the other major players and the rolls they will play. The goal of both are to achieve a certain response for their portrayal of the story from their own specific audience. Whether it be rave reviews for the actor or offers to buy the business for the owner, an experienced director is key to making the presentation a success.

Putting metaphoric pros aside, directing and orchestrating the behind-the-scenes activity for the successful sale of a company, is a business brokerage firm.

The Business Owner's Role in a Sale

Before dressing up the company for its debut, be ready to share its best features, as well as its blemishes. All will become visible under the due diligence spotlight. As in the classic tale, "The Emperor's New Clothes," it doesn't take a rocket scientist to see what the cloth is really made of. Buyers don't like surprises, and neither do business brokers or other members of the professional team involved in the sale process. Problems uncovered late impugn your integrity and threaten the price--and the deal. The more issues brought to the table and worked out in advance, the better chance of a smooth closing.

Your role as the business owner is to be the source of information necessary to accurately assess the firm. Addressing the following issues will help maximize the value of a company, provide transparency to prospective buyers, and minimize the amount of time consumed in the sale process. This information will be the foundation of the script that will tell the story to your audience...the markeplace of buyers.

• Why is the business on the market? This is not only important from the buyer's prospective, but an owner must have a sincere motivation to facilitate a smooth process.
• Are accounting procedures in place and easy to follow?
• Are profit and loss and balance sheets well prepared and clean?
• Are the facilities and equipment in good working condition? "Curb Appeal" makes an impression. When someone walks into a business establishment, they're looking at everything. An orderly and organized facility gives a good feel for how the business is run.
• Is intellectual property (if applicable) well documented and up to date?
• Is there an appropriate lease in place and is it transferable?
• Are customer contracts secure and transferable?
• Are their employee contracts, are they well documented?
• Are operating procedures documented and in use?
• Are there outstanding legal or financial aspects that may hinder the sale?
• How is the business positioned in relation to the competition?
• What distinguishes the business from others in the same field?
• What services or products are offered that are unique?
• What niche is served?
• Are there areas for future growth?
• What makes the company's customer service superior?

The Story

Once information gathering is complete and data is analyzed, a price range will be determined and a company profile will be formulated. This is the story about your business. It will be the marketing tool that articulates and presents the message about your company to the audience of buyers.

The Script

The script is made up of the individual pieces that tell the story. The following are individual items that will be pieced together by the prospective buyer in order to substantiate the story and justify the asking price.

• Financial statements. Accurate financial statements not only adds to a buyer's comfort level, it more likely will result in a higher sales price. A potential buyer is typically looking for a predictable cash flow from the business. Three, four or five years of professionally prepared financial statements and tax returns will show them that.
• Trends in accounts receivable and payables. When selling a business, you want to show that you have good customers who pay on time. Owners need to be on the ball and contacting slow-paying clients. This shows better credit management, follow-up and attention to detail. Seasonality of cash flow and concentration of the customer base are also underlying themes of the story.
• Make sure patents, trademarks and other property rights are properly registered. Review contracts for third-party consents needed in order to facilitate a transfer. An example would be a construction subcontracting firm that has a contract with a home builder to provide doors and windows for an additional number of houses. That contract needs to be reviewed to see if it can be transferred or if it requires the consent of the home builder.
• Well-organized and updated collateral materials such as employee handbooks, policy manuals, mission statements, or an online Internet presence add value in the eyes of the purchaser. Other collateral such as brochures, press releases, advertisements, and marketing campaigns such as mail out or email programs add credence to the story.
• A list of furniture, fixtures and equipment along with applicable service records shows the buyer that the company is well maintained. Remove excluded items prior to the sale, or list items excluded from the deal separately.
• Being prepared for the questions the buyers will ask, will facilitate a smooth process for all involved.

The Players

The team that a business owner puts together to assist in the structuring of the business sale will play key roles in the transaction. Depending on the size and complexity of the business, the usual team may consist of the firm's accountant, attorney, and business broker. In order to insure a smooth process, it is recommended that all team members be experienced in business transfer transactions.

The Successful Performance

Proper rehearsal and having the necessary props in place for presenting a business to the targeted audience is key to attaining the desired outcome.......the successful sale of the business in a timely manner........a rewarding finish to a performance well done........the whole reason for the show.

When Buying a Business -- Understand the Seller's Position

In the purchase of a business, the end result of negotiation is not winning an argument, but reaching a mutually beneficial agreement between buyer and seller.

The most common mistake people make in negotiation is thinking that their goal is to win at the expense of the other party. Adopting this win-lose approach almost always results in a failed, or less than optimal, negotiation. A win-win approach, where each party gets its needs met, is the most successful way to negotiate.

To better accomplish this end, the prudent business Buyer should understand the Seller’s position, establish a harmonious relationship with the Seller, and pave the way for negotiations which will lead to the successful purchase of a business.

Understanding the Seller's Position

The buyer should seek to understand the Seller’s position as well as those circumstances which lead to the decision to sell. This is the first step in developing a sincere respect for the Seller’s objectives, which builds a foundation for successful negotiations. A Seller's thought process toward a prospective buyer goes something like this:

“Who is this new potential owner? Does he appreciate what has gone into raising the business to its present level of development? Will he know how to treat those special customers and my employees? Will he maintain the policies, the standards and the conditions that have enabled the business to survive the hard times and continue to prosper?” And ultimately, “How will I fill my days when the business is gone, when I am no longer needed to make the day-to-day operating decisions? Am I really ready for such a lifestyle change?” With these concerns, it’s no wonder many Sellers agonize for months (or even years) before they reach the point of seriously considering a sale of the business. The Buyer who understands the Seller’s feelings and can express genuine appreciation greatly enhances the prospects of eventually reaching a successful purchase agreement.

Developing the Buyer-Seller Relationship

From the very first personal meeting with the Seller, the Buyer should begin setting the tone for a successful negotiation. This can be accomplished in several ways:

• Establish rapport with the Seller. Indulge in some small talk, be sincere and look for common background or mutual interests. Both parties will feel more comfortable if they are communicating on the same wavelength.


• Maintain a friendly but business-like posture. Remember, while you are assessing the Seller, his motivations, and his company -- he is forming an opinion of you, your ability to buy the company, your track record in actually running a business, and your level of interest in buying his company.


• Show a flexible, openminded, and reasonable approach to possible scenarios of the business sale, transfer and transition.


• A positive attitude and self confidence will go a long way in compelling the Seller to feel very comfortable with you and your ability to successfully replace him as the new owner.


• The first meeting with the Seller is to serve these purposes; establish rapport, collect factual information about the business, and to determine if there is a sufficient level of interest to warrant continued pursuit of the business.

Guidelines for the Initial Buyer-Seller Meeting

1. Be on time or a few minutes early. Remember, the Seller has a business to run and his meeting with you is a mutual courtesy. There is a big negative to overcome if the meeting is delayed or must be re-scheduled due to your tardiness.


2. Provide the Seller with a resume or brief synopsis of yourself and your associates (if others are involved as co-principals). Your willingness to fully disclose your background will help foster trust and enhance the Seller’s willingness to supply you with details about himself and the operations of the business.


3. Be complimentary. Find one or two key positive points about the business and verbally express your genuine appreciation of these attractive aspects of the business. Most Sellers are impressed with Buyers who understand what the Seller has accomplished through his business.


4. You should not raise the issue of selling price or terms of sale at the initial meeting. The purpose of this meeting is to meet the Seller, see the business, establish rapport, gain a good understanding of the product and/or service and operations of the business to determine if there is further interest. You already know the Seller’s asking price (the listing price) and it is not productive to “put the Seller on the spot” or attempt to negotiate with the Seller. You must first carefully evaluate all the facts and be prepared to make a serious offer to purchase. Your business broker will be the middle man for further questions and presenting any offer to purchase the business.


5. Respect confidentiality. Prior to gaining any confidential information about the company, business brokers will require you to sign a “confidentiality” / “non disclosure” agreement. This agreement does not require you to buy the business or obligate you to pay any commission or broker fees. It is intended to register you as an interested party (Buyer) and document your pledge that the information you receive about the Seller and the business will not be used for competitive purposes or revealed to any third parties. For obvious competitive reasons, some Sellers may be reluctant to openly discuss the details of such things as key employee salaries, mark-up percentages, names of customers or suppliers, technical patent information, unique operating procedures, formulas and other trade secrets. This information would be revealed to you during the due diligence period after a contract has been executed.

Selling a Business in Houston -- Surfs Up!

Proper planning for the sale of your business is key to an enjoyable sail into your next adventure in life.

Surfs up! A wave of business buyers has flooded the Houston marketplace looking to take part in its promising future economic growth. Houston is booming and is ranked #3 best Metro Area for business.

Texas is home to almost one million privately-held small businesses with revenues under $100 million and less than 500 employees. As the largest city in Texas, Houston is home to one quarter of those small businesses (Source: InfoUSA) and it is estimated that less than 50 percent have had a change in ownership in the last 15 years. For many of these business owners, developing and executing a timely exit strategy is key to achieving the rewarding outcome they expect.

As 80 million baby boomers around the country move toward retirement, more than 7 million business owners are expected to exit their businesses over the next 10 to 15 years. Some fortunate business owners have family members or employees who are willing and able to step in and take over the operation. For many others, the only way to realize the value of the company is to sell it.

Business owners with profitable companies and the desire to sell can always find demand, especially in today's Houston marketplace. Buyers are particularly attracted to companies with upward trending revenues, strong gross margins, loyal customers, and experienced employees. But even owners of the most attractive businesses should follow these steps in order to maximize the benefits of a sale:

Plan Ahead and Develop a Strategy

The decision to sell can have a profound impact on your financial position, career, and lifestyle. Moreover, consummating a sale requires a significant investment of time and energy. Planning the sale in advance helps ensure that the sale occurs at the right time. The goal should be to sell when the market is generally favorable, the business is growing, the employee base and/or management team is stable and — perhaps most importantly — when you are ready based on your personal and financial objectives.

Maintain Confidentiality

It is important that employees, competitors and customers not be aware of the sale until it is nearly completed, with a solid contract in place. Consequently, the sale process should be run in a manner that minimizes disruption to the company and protects your privacy.

Package the Business Properly

Time must be invested to develop a high-quality, comprehensive document that describes your business, its background and its future potential. Any negative issues about the business should also be disclosed. Disclosure will reduce litigation risks, add to your credibility with potential buyers, and save time by eliminating those who are unwilling to accept the realities of the business.

Target the Right Prospective Buyers

The goal in the marketing process is to engage multiple qualified buyers. A proactive targeted search for prospective buyers who have the skills, aspirations and resources to grow your business substantially is one method that business brokers routinely utilize. Recognize that buyers who fit this profile may be willing to pay more than others; consequently, the buyer that may have approached you directly might not be the ideal acquirer.

Assemble an Experienced Team

Your accountant and your attorney will play key roles and their expertise will be invaluable in consummating a successful transaction and reducing your risks. A successful business brokerage firm (also known as business intermediaries) directs the sale process while you remain focused on running the business. Before choosing a business brokerage firm, make certain that they have a marketing methodology customized for your specific needs and that they have a verifiable track record and clear visibility in your market area.

The successful sale of a business does not happen overnight, and it does not happen by accident. Do your homework, plan ahead and work with the right team to realize the outcome you envision.....and enjoy your sail.

Buying A Business -- A Due Diligence Checklist

Due Diligence is the last phase in the buying process. This is the time when you will have access to all of the company's books, records and files. You will have a pre-determined due diligence period in which to investigate the information that you have been given so far to ensure that it 's true and accurate.

The goal of an effective due diligence is to validate what the seller has represented and to allow you adequate time to review all of the other key issues of the business. The following is a checklist of information and documents that a buyer may wish to review during the due diligence period.

• Organization and Good Standing
• Accounting and Financial Information
• Physical Assets
• Real Estate
• Intellectual Property
• Employees and Benefits
• Licenses and Permits
• Environmental Issues
• Reports, Studies, Appraisals
• Taxes
• Contracts and Agreements
• Product or Service Lines
• Customer Information
• Litigation
• Insurance Coverage
• Vendors, Suppliers, & Professional Service Providers
• Marketing and PR Campaigns

Small Business Owners: When is it Time to Sell Your Business?

The Answer -- in a Nutshell: The best time to sell a business is when the business has upward trending revenues, when the industry is in an upturn, when the economy is strong, when there is a multitude of buyers looking for business acquisitions, and when interest rates are low.

There are many questions that need to be answered before an informed decision can be made. Is selling the business your best alternative? Will one of the kids want to take over the business? Timing is everything. Is now the right time? You figure that you don't have to sell or decide right now. You are quite busy so maybe you will look into it after.....or maybe tomorrow.....or next year......

Facing the issue of succession or continuation of one’s business is not addressed with much enthusiasm by the average small business owner. But only one of three eventual fates exist for a business:

• Transfer to family, employee, customer, or vendor
• Sell to an outsider
• Close down

Although the overwhelming majority of business owners wish for their businesses to continue, most small businesses will simply close down because of lack of planning or lack of knowledge on the subject. Based on US Small Business Administration statistics, small businesses employ more than half of the private work force and are responsible for half of our nation's gross domestic product. Since small business is the backbone our economy, it is important to increase the amount of small businesses passing to new owners once the previous owner is ready to exit.

Why Don’t Business Owners Sell?

The largest single reason that most businesses are not sold or transferred seems to be that the owners never made the active decision to do so. Selling a business is not a passive effort. It takes clear, decisive actions and preparation. Every business can be sold if the following conditions are in place.

• Owner(s) has done his/her homework and fully understands the process of selling a business.
• Owner(s) recognizes the natural cycle of business ownership and makes a timely decision and preparations to sell.
• The company is properly prepared for sale before marketing efforts begin.
• The right buyer and the optimum price are identified before going to market.

“I am considering the sale of my business,” is the initial phrase we hear most often from business owners. Very few will tell us they have decided to sell. This is understandable as information is required before an informed decision can be made. Some of those that have decided to sell, have waited too long, and have nothing left to sell. You cannot sell a business for an optimum price when you are not profitable. No one wants to buy a company that is essentially going-out-of-business. It is best to consider selling when revenues are on the upswing.

The following are the questions most commonly asked when selling is considered:

• What is my business really worth?
• How can I find the right buyer and still maintain confidentiality?
• Are there steps I can take to increase my company’s value?
• How long does it take to sell a business?
• Are there buyers out there with the money I want?
• Will I have to finance part of the sale? If so, how much?
• What will I do after I sell?
• How much money would I have after the sale?
• Would I have to stay on for long? Would they keep my employees?
• What expenses are involved in selling?
• What kind of investigation will a buyer want to perform?

What is important to remember is that the timely decision to do something with your business is the single most important factor impacting your ability to cash in on your investment in your business. You cannot wait until you are compelled to sell nor can you expect an offer you cannot refuse to come out of the blue. Decisive actions must be taken by the owner in order to sell the business. Common reasons for selling:

• Retirement
• Health considerations
• Lease expiring and you do not want to renew for another term
• Changing technology and renewed vision or expertise is required
• Not interested in investing additional long-term capital
• Children do not want to enter the family business
• Under capitalization
• Divorce or partnership dissolution
• Burned out, tired, need a rest
• Passion for the business is gone

So, You've Decided it is the Time to Consider Selling. What Does an Owner Do?

First and foremost, maintain confidentiality. Without confidentiality you risk the chance of customers going elsewhere, your employees jumping ship, your creditors tightening their terms, and competitors pouncing on what they would perceive as an opportunity to gain advantage. This is the primary reason that business owners choose to use a business broker to represent them in the sale of their business. A properly educated and licensed business broker will prepare and market your business in a confidential manner so the firm can continue while the broker screens and selects buyer candidates.

An exit strategy is all about preparing your firm for the eventual sale -- on your terms. Therefore, it is important to prepare it in such a manner that is attractive to a wider range of potential buyers. You will need a strategy that will maximize your selling price and minimize the tax impact. This is where a professional business broker brings the greatest value to the process. They are aware of what buyers are looking for and can suggest strategies to satisfy their needs making your business a more attractive proposition. A successful business brokerage firm maintains a large network of professional advisers, such as accountants, attorneys, and bankers to which they can refer you should you not already have one that is experienced in business transfers.

A prudent choice is to select a successful Business Brokerage firm in your market area to represent you in the sale of your business and guide you through the entire process.

Buying a Business: How are Payables and Receivables Handled in the Sale?

What is a common practice for dealing with accounts payable and receivable when purchasing a business?

In most small business transfer transactions the seller will retain the cash and receivables. They will pay off the bills and other outstanding payables and deliver the business "free and clear" to the buyer.

In larger purchases, the buyer should consider acquiring the receivables to provide themselves with immediate working capital. Ample working capital is of utmost importance for successfully running the business after the acquisition. As an added benefit, acquiring the receivables allows the buyer to begin dealing directly with his most important relationships - his customers.

Assuming the payables is also something to consider -- for the following reasons.

1) By assuming the responsibility for the payables, you immediately begin forming your own relationship with another key element of the company -- the suppliers, vendors, and other service providers. It puts you, the new owner, in control of dealing with these important contacts instead of the former owner.

2) The purchase price you pay the owner is reduced by the amount of accounts payable that you assume. Then you, as the new owner, pay the invoices as they become due. Not only would you keep more money in your pocket at closing -- you would essentially have 30 to 60 days of interest free financing for the payables.

3) As the receivables start coming in, you will be able to use that capital to pay the invoices as they come due.