Performing Due Diligence When Buying a Business

Performing due diligence on a business being considered for purchase should be conducted much like a surgical procedure. The operation should be an organized examination of the vitals of the company.

This stage of buying a business begins once you have made your offer and the seller has accepted. A contractual agreement has been entered into between the buyer and seller outlining the price and terms of the sale. The contract is contingent upon the business passing "inspection," which is the due diligence period allotted to the buyer.

Since it is the buyer's responsibility to uncover any potential problem areas of the business, it is important to be prepared. This is the time to cut to the chase with checklist in hand to confirm all material facts of the business and validate what the seller has represented. The buyer, being the lead surgeon of the procedure, may call in specialists, such as an attorney to examine the legal aspects of the business and an accountant to scope the numbers. Depending on the size of the business, a buyer will typically have about two to four weeks to complete the process.

The following checklist represents vital aspects of a business that a buyer may wish to examine during the due diligence period. This checklist is not meant to fit all scenarios or to be all-inclusive, but to serve as a guideline.

•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, Agreements, Leases
•Product or Service Lines
•Customer Information
•Litigation
•Insurance Coverage
•Vendors, Suppliers, & Professional Service Providers
•Market, Marketing and PR Campaigns

Houston Small Business Acquisitions Outpace Nation

More small businesses in Houston were sold in 2009 than in any other city in the U.S. Why? Because buyers are positioning themselves for the future.

We have been bragging about Houston's economy and the engine behind it for a long time. Pick your industry, we've touted it.

Houston Business Journal last week reported, "Houston-area small business sales outpace nation," which is the message we've been delivering and the trend we've been experiencing for years.

Here's the HBJ article:

Small business owners in the Houston area who wanted to sell their companies in 2009 were more successful in finding buyers than entrepreneurs elsewhere in the United States.

Local owners also got more money for their businesses than sellers nationwide, according to statistics from BizBuySell.com, a large online marketplace for selling businesses.

A total of 107 companies in the Houston area were reported sold by business brokers in 2009, down by 7 percent from 115 sales reported to BizBuySell in 2008. In comparison, BizBuySell reports sales were down 28 percent year-over-year for the country as a whole.

The median sales price for a local business in 2009 was $155,000, up 19.2 percent from the previous year’s median price of $130,000. The median sales price nationwide was down 16 percent.

"Prices didn’t fall," says Mike Handelsman, general manager of BizBuySell. "That’s the most surprising thing to me."

Houston companies also outperformed those in other parts of the nation in revenue and cash flow, he says.

Local businesses sold in 2009 had median revenue of $366,954, as compared to $287,000 in 2008. And the companies' cash flow increased to $101,949 from $85,668.

"That’s a really unusual result," Handelsman says. "That’s different from what we’ve seen in the total United States."

Here's a partial list of our economic posts over the last few years:

Why Should You Consider Selling Your Business in 2011 (Dec. 2009)
Texas Restaurant Industry - Biggest in the Nation in 2009 (May 2009)
Why Does Houston Have the Second Most Fortune 500 Companies in the Nation? (May 2008)
Texas No. 1 Economy In The Nation, Houston Leads The Way (Feb 2009)
Houston, Keep Your Seatbelts Buckled As Our Economy Takes Off (Jun 2008)
Inc. Magazine - "It's a Seller's Market for Buying Businesses." (Apr 2008)
Got Business? Houston Does -- Here's Why!(Apr. 2008)
Selling A Business In Houston - It's Still Hot! (Feb. 2008)
Houston Logistics Industry Is Top Rated In The Nation (Oct 2007)
Houston Leads Future of Alternative Energy (Dec 2007)
Houston Economy - Manufacturing and Transportation Sectors (Dec 2007)
Houston - A World-Class City and Economic Powerhouse (Dec. 2007)
Texas Ranks In Top 10 Richest Economic States In The U.S. (Dec. 2007)
Rocketing Houston Economy -- Small Business 101 (Jul. 2007)
Houston Economy Surpasses Expectations -- Stirs Small Business Activity (Mar. 2007)
Houston is Booming -- It's Not Only the Weather That's Hot Down Here (Mar. 2007)

SBA Update - What's Happening in Congress

On Thursday December 10th, Sens. Landrieu and Snowe introduced S. 2869, the Small Business Job Creation and Access to Capital Act. This new bill contains a series of measures that were separately introduced by Sens. Landrieu and Snowe earlier this year. The Senate Small Business Committee will mark up S. 2869 Thursday, December 17th. Highlights of the legislation include:

• Increase the loan limit on 7(a) loans from $2 million to $5 million.
• Increase the loan limit on 504 loans from $1.5 million to $5.5 million.
• Increase the loan limit on microloans from $35,000 to $50,000.
• Allow the 504 loan program to refinance short-term commercial real estate debt into, long-term, fixed rate loans.
• Extend the authorization to provide 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) and 504 loans through December 31, 2010.
• Direct the SBA to create a website where small businesses can identify lenders in their communities.
• Increases the maximum guarantee on 7-A loans to $4.5 million.
• Changes the eligibility criteria to (a) a tangible net worth not to exceed $15 million and (b) the average net income after Federal Taxes over the past two full fiscal years is not more than $5,000,000.

The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

The Initial Buyer Seller Meeting in the Business Sale Process

Most people will purchase or sell only one business in a lifetime. Therefore, as business brokers, a large part of what we do is educate buyers and sellers about the intricacies of the process. People rely on us to help them understand the steps involved in buying or selling a business. They understand that the better informed and prepared they are the more likely they are to achieve their goal. Therefore, in the beginning stages, we're the ones doing most of the talking.

When it comes time for the buyer seller meeting, however, our role is to make the introductions, be an observer, and be quiet for the most part. We may interject questions or comments when appropriate to guide the flow of information. This meeting is an important event for the buyer and seller. It is their time to understand each other's objectives, establish a rapport, and size each other up.

An appointment for a buyer and seller to meet is usually made when a buyer is considering making an offer to purchase the business. The buyer would have already reviewed the business profile and financials, and asked preliminary questions that had been answered by the broker. It is common for business owners to require that all such meetings be during non operating hours to avoid premature disclosure to employees and customers.

This is the chance for the buyer to tour the facilities, to learn about the operations of the business, the employees, the growth opportunities, the financial aspects of running the business, and to get a feel for what it would be like to walk in the owner's shoes. However, this meeting is not the time to discuss the price and terms of the sale. The business broker is the intermediary and will be the liaison for the two parties on that subject.

From a buyer's perspective, purchasing a business is a huge financial risk – most likely the largest in their life. While they know they will have the right to perform all the due diligence they deem necessary, a healthy amount of trust is involved. The buyer must gain a sufficient comfort level about the seller, the business, and its sustainability under their ownership in order to take the proverbial leap of faith.

The seller, on the other hand, usually has their net worth tied up in the business. Typically, the seller has invested many years building and nurturing the business. Retirement may depend on successfully selling the business at a just price. In today's market, a seller note is usually required. Even if a buyer is well funded, a lender will often want a seller to carry a note in order to reduce their own liability and exposure. It is a huge financial risk for the seller – most likely the largest in their life – just as it is for the buyer. In order to realize full payment, the seller has to trust in the buyer's ability to manage and successfully run the business.

In our experience, the first meeting usually takes about two to three hours. First impressions will be made during this short period. Each will be making their respective judgement of the other and pondering the possibility of a deal being formulated. This is usually the time when the buyer decides if this is the business they wish to pursue. If all went well, an offer to purchase is tendered. If the seller accepts, the due diligence process begins.

Understanding Seller Financing in a Business Sale

It has traditionally been a common practice for the sale of a privately-held small business to include some seller financing as part of the deal structure. Because of the tight credit market and lender efforts to reduce their own risks, that practice has become even more common and may be the key to getting the deal done.

Seller financing can accomplish several goals beneficial to both parties. From a buyer's perspective, most buyers feel there is a risk that the success of a small business is tied to the involvement of the owners. By having the seller finance a part of the purchase price, it can give the buyer confidence in the fact that the sellers believe that the business can thrive without them. From the seller's perspective, seller financing can help a buyer pay more for the business than if the deal were financed only through traditional financing sources.

With that in mind, it is important to remember that the purchase/sale of a business is a two-way street. Just as a buyer will conduct due diligence to determine the viability of the business, become comfortable with its financial and legal matters, and assess the opportunities for growth, a seller should be comfortable with the buyer as well, particularly if the offer includes a loan by the seller. The seller should understand the buyer's business background and qualifications, motivation for buying the business, and financial capacity to purchase and sustain the business.

Business owners who extend financing to a buyer for the purchase of their business often ask, "What happens if the purchaser defaults on the loan?" Should that happen, the seller would be able to exercise whatever rights are defined in the security agreement that is associated with the promissory note. The seller would usually have the right to get the business back, which may not always the best scenario if the business has declined and is not performing well. In addition, if the buyer is using the business' assets to get a bank loan, the seller will have to take a second position behind the bank. A seller should try to negotiate a personal guarantee by the buyer as part of the terms of the promissory note. The seller can also require the new owner to provide periodic reports on the performance of the business as part of the terms of the promissory note.

While it is important for a seller to protect themselves should a default occur, keep in mind that seller financing is often required for a reason, such as lack of bank financing, risks in the business, or to bridge a value gap. In other words, seller financing may be required in order to get the deal done.

Regarding the interest rate to be paid for the seller note, if the seller note is in conjuction with a bank note, it is hard to substantiate a rate much higher than the bank since a buyer is generally utilizing seller financing as a "bridge" mechanism to help the seller attain a higher price.

In the course of due diligence on the buyer, it is acceptable to ask for their credit record, particularly if the buyer is an individual. Personal credit records are available through several outside services, as long as written authorization is given by the individual. There are standardized forms that can be used whereby the buyer grants permission for the seller to obtain credit reports from specific consumer reporting agencies. Many of these credit companies can be queried via the Internet, such as Equifax, Experian, and TransUnion. If a fee is charged to obtain the reports, the buyer can be asked to cover it. The seller may also ask the buyer for a list of financial and business references.

Seller financing can accomplish the goals of, and be beneficial to, both parties as long as each feels confidence in the other.

Control Your Own Destiny and Buy a Business

Working for someone else, whether it be in a small business or in a large corporation, doesn't give people that secure, warm fuzzy feeling it did in years past. With the current unemployment rate at almost ten percent and an economy that is not yet stabilized, many find themselves in transition.

If you are one of those individuals, in considering your options be sure to consider putting your fate in your own hands instead of someone else's by working for yourself. Buy your own business.

Being in charge of your own destiny through business ownership can be both frightening and rewarding. It may be frightening as everything rests on you, yet it can be rewarding for the very same reason. There is an element of risk in every new venture and diving into business ownership is no exception. But the fact remains that being an employee these days, is hardly risk free.

There are those who are born to be business owners and for some it is a learned discipline. The most successful owners are those with a persevering spirit, believe in themselves, are committed and driven, are quick to react to change, and those who can inspire others to follow.

So, how should you begin to explore the business-for-sale opportunities that are available?

• You should educate yourself on the process of buying a business.
• Assess your finances to ascertain how much you actually have as a down payment on a business and to get you through the initial transition.
• In order to significantly reduce risk, it would be smart to target businesses that suit your background, lifestyle, knowledge base, and natural talents.

Business ownership is a worthy goal because not only do you get to invest in your own destiny, you help others, through employment, at the same time. However, in order to be successful, you need adequate funding and significant knowledge about your business. Lack of capital and lack of knowledge are two of the top reasons why businesses fail. Both of these risks can be mitigated by approaching the task of buying a business with a deep understanding of your own capacity to buy and what you would be able to do with the business once you bought it.

Here are articles that will help you on your way to business ownership:

A Road Map Is Key To Buying A Business
Six Steps in the Buying Process
14 Common Business Buyer Mistakes
Build a Business Plan When You Buy A Business
How Do Brokers Screen Buyers?
Looking For A Business to Buy in Houston? Who Do You Call?
Do You Need An Attorney When Buying A Business?
Buying A Small Business - Does The Purchase Price Make Sense?
Make Your Acquisition A Good Investment

The Five C's of Credit Analysis for Getting a Loan for Buying a Business

If you are buying a business and plan to obtain financing from a lending institution, these five tips provided by Adeline Rem, Regional Vice President of Celtic Bank, will be helpful in getting your loan approved.

1. Capacity

The capacity of the borrower to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships -- personal or commercial -- is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

2. Capital

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

3. Collateral

Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can't repay the loan. A guarantee, on the other hand, is just that -- someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

4. Conditions

Establish the focus and intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

5. Character

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration.

This article was authored by Adeline Rem, Regional Vice President of Celtic Bank, and published here with permission from the author. She can be reached at 512-215-2727.

Sooner Than Expected - A Buyer's Market for Buying Businesses

While the economy is expected to remain weak throughout 2009, there will continue to be plenty of opportunities for individuals and businesses in a position to buy, according to a recently released survey.

The report, published by the International Business Brokers Association, found that 61 percent of the survey participants, professionals involved in selling businesses, believe that more businesses will go up for sale in 2009, while 66 percent say they will sell more businesses this year compared to 2008.

This is no surprise. In April 2008, just nine months ago, Inc Magazine published "The Most Valuable Businesses in America" issue, which spelled out the Seller's market that has historically existed but would change as baby boomers started retiring. So, we have, indeed, been anticipating the change of the business-for-sale marketplace. But it was predicted to occur steadily over the next decade. Economic turbulence has accelerated the natural process.

“While the economy has put a damper on business, the continuing trend of baby boomers looking to sell and retire will provide opportunities for potential buyers,” said IBBA Chair Andrew Cagnetta. “The survey of our members indicates that money will continue to be tight and the number of sellers will outpace the number of qualified buyers.”

The survey also found that in a buyer’s market, purchasers are more selective, so it’s important for sellers to make their business more attractive to buyers. Improving cash flow, updating documents and records and determining the company’s actual worth to make the business more attractive to a potential buyer is key to getting the business sold, it said.

Not only is this important for those owners of small businesses who are considering their exit, now more than ever, it is essential to the economic vitality of our country that these firms successfully transfer to new ownership. The estimated 25.8 million small businesses in the United States have a huge impact on our economy. Outlined below are powerful statistics that speak to the importance of the continuity of these enterprises. Small businesses --

• Have generated 60 to 80 percent of net new jobs annually over the last decade
• Employ 50.6 percent of the country’s private sector workforce
• Represent 97 percent of all the exporters of goods
• Represent 99.7 percent of all employer firms
• Generate a majority of the innovations that come from United States companies

Source: U.S. Small Business Administration

The survey of more than 1,750 International Business Brokers Association members showed that more than 37 percent believe the economy will be down significantly this year and another 29 percent believe the economy will be down slightly.


The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of business brokerage and mergers and acquisitions.

Buying or Selling a Business During Tough Times

With negative economic news grabbing the headlines in the United States, business owners may think it is not a good time to sell their company. But fortunately for owners looking to sell, that is not necessarily true.
Business sales are still taking place with sellers capturing attractive prices and favorable terms, when the deal is structured properly.

One of the the most important foundations of constructing a successful deal has always been a solid buyer, one that is creditworthy. Whether it is an individual, another company, or a Private Equity Group, qualifying criteria are demonstrated business acumen, significant assets to pledge as collateral, or a committed fund behind them.

With a proven, credible buyer at the negotiating table, lenders are more likely to support the transaction.

In today's environment, some seller financing should be expected to get the deal done. It is not uncommon during a tight economy that sellers must share the risks with the buyer and the lender in order to achieve the highest value.

Therefore, now, more than ever, it is in the seller's best interest to find the right buyer. This has resulted in the advantage going to buyers with a strong balance sheet

In today’s tight lending environment, a seller can still get a strong value for the business, but the seller may need to finance more of the purchase price than before. Regardless of the capital structure or finance considerations, a professionally-crafted and creative deal structure is the key.

Typically, seller financing has been somewhere between five percent and 15 percent. With the current lending climate, seller financing may approach 15 percent to 40 percent amortized over 10 years.

After the buyer has proven themselves in the business and shown that the debt payments will be made, the lender may allow restructuring of the seller’s note. As a result, the seller could receive full payment within three years to five years.

While the economy has put a crunch on available financing, it has not had a dramatic impact on the number of potential buyers. We continue to have strong buyer interest in acquisition opportunities and equity capital is still available. With the right buyer, the right portion of owner financing, and the right structure, deals are still getting done across the U.S.

What are the silver linings in today's market? First, the government has a strong focus on freeing up the credit market and the new administration will continue that effort. And, second, although there have been many high-powered, high-paying jobs eliminated over the past several weeks, we are starting to see an influx of contacts by highly-educated individuals who have money and want to acquire their own business as a result.

The American entrepreneurial spirit is still alive.

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The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

©2008 International Business Brokers Association® (IBBA®) all rights reserved. Permission to reuse any or all of this material should be directed to the IBBA at 888-686-4442 and is restricted to IBBA members.

Credit Crunch and SBA Lending for Small Business Acquisitions

Despite the current credit crunch, well capitalized community banks still have money to lend for business acquisitions. The SBA 7(a) loan program is an excellent way for both bank and borrower to tread through this troubled business environment.

While many large financial institutions are licking their wounds from the mortgage mess and the credit market contraction, community banks who are well capitalized and who traditionally don’t participate in these arenas are still a viable source of funds for small business acquisitions.

Because SBA loans have features that reduce risk for banks, they are a valued tool for banks in this environment. And because they offer lower down payments and longer terms, the resulting lower monthly payments are attractive to borrowers.

The US Small Business Administration (SBA) enables private lenders to make loans that they ordinarily would not be able to make by guaranteeing that a portion of the loan proceeds will be repaid to the lender in the event of a default by the borrower. Among many other uses, the SBA 7(a) lending program is the primary vehicle through which small business acquisitions are financed.

Experienced and well-reputed business brokers / intermediaries will have a list of lending institutions with whom they have worked in the past and who are well-versed in getting deals done.

Buying a business can certainly be an emotional ride. It’s a time to work with deal makers and specialists who will help to minimize the stress and help everyone move forward toward the timely completion of the business sale.

Visit our full SBA Financing Article that outlines the process from start to finish. The SBA requires a "Personal Financial Statement" that is used to determine if applicants meet the criteria to receive an SBA Loan. You can review and download a copy here.

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Some content in this article was provided by, Wendy Horak of Bank of Houston SBA Lending Department. Contact her at 713-600-6626 for more information.

Build a Business Plan When You Buy A Business

An essential part of any business is its plan for success. Your business plan lays the foundation and groundwork for your new venture.

Business Plans are a standard requirement by lending institutions, including SBA lenders, when pursuing financing for a business acquisition. However, business plans should be looked at as part of the bigger picture, as an architectural blueprint, the guide that will elevate your enterprise to the level you envision.

The discipline of constructing a business plan gives you the opportunity to examine and understand the challenges ahead and generate realistic expectations for your new business. This involves cohesively organizing your business ideas and financial needs and aligning them with detailed marketing and management plans that conform to your budgetary constrictions.

How far ahead should business plans look? A three year prospectus is standard since circumstances can change over long periods of time. Business plans should also include contingency plans since investors or lenders will want to know how the company will continue operations should something happen to the owner.

Your business plan should have a cover sheet and a table of contents. The cover sheet includes the name, address, and telephone number of the business along with the names of all principals. The table of contents lists the headings and subheadings in your plan as shown in the sample outlined below.

A business plan has four segments:

1) Description of the Business / An executive summary

This section is a statement of purpose and summarizes what is contained in the plan, such as the company's mission, objectives and key elements. The summary allows investors or lenders to learn about the company without having to wade through the entire business plan. Also included is the location of your business in terms of desirability and accessibility.

2) Marketing Plan

Marketing usually involves determining who your customers are, identifying their needs, and fulfilling those needs. Questions you need to answer include: Who is likely to buy your goods and services? What is your potential market share? How can you hold and expand your customer base? What is your pricing strategy? Who are your competitors in the market and how can you differentiate yourself from them?

3) Financial Management Plan

Financial management is one of the keys to keeping your business profitable. Plan a realistic budget that covers initial working capital and operating costs. Consider how much cash you have for a down payment. How much money will you need to purchase the business? How much will you need for initial working capital? How much will you need to pay debt service, earn a livable wage, and make a reasonable return on your investment?

Your operating budget should show the expenses you will incur and how they will be paid. You should cover the first three to six months of operation. This section should also address your accounting system and inventory control. You should also include any financial data and supporting documents listed in the sample table of contents outlined below.

4) Management Plan

The existing business owner may already have operating procedures, manuals, and materials. You can describe any training and assistance that you will be receiving from the previous owner. Who will be your prospective management team and what are their credentials? What are your plans for hiring and training personnel?

Sample Table of Contents

I. The Business

• Business Description / Executive Summary
• The companies products and services
• Legal entity of the firm (ie, LLC, Corp)
• Marketing Strategy & Implementation
• Target Market & Competition
• Operating procedures
• Management Team & Personnel
• Business insurance

II. Financial Data

• Loan applications
• Capital equipment and supply list
• Balance sheet
• Breakeven analysis
• Pro-forma income projections
• Pro-forma cash flow

III. Supporting Documents

• Tax returns of principals for last three years
• Personal financial statements (all banks have these forms available)
• Copy of contracts
• All supporting documents
• Proposed lease or purchase agreement for building space
• Licenses and other legal documents
• Resumes of all principals
• Copies of letters of intent from suppliers, etc.

A good business plan is a solid structure, the specifications that will help you achieve your goal. Make the plan an active participant in your company, it is a tool to measure your progress and keep the vision on track.

For more info on this subject refer to these helpful websites:
http://www.sba.org/
http://www.score.org/

A Road Map Is Key To Buying A Business

Buying a business takes time and planning. Just as it would be sensible to pre-map a road trip through unfamiliar territory, it would be practical for a first-time buyer to develop a plan to navigate the path to business ownership. Charting the route is key to buying a business and becoming your own boss.

If you try to look at every business opportunity out there, you would be spinning your wheels and getting nowhere. You need to establish your own weeding-out process in order to streamline the course towards business ownership, rather than taking a circuitous route with too many detours.

Here are six (6) milestones to achieve before embarking on your trip to the business-for-sale marketplace.

1) Begin with a self-assessment: Critique the reasons why you want to buy a business. Summarize the types of work activities you enjoy and what type of lifestyle you want to pursue. For example,

• Do you want to be an Absentee Owner or run the business yourself? Do you intend to operate the business with a manager? This may be important to you if you have a limited amount of time available to personally operate the business. Not all businesses lend themselves to absentee-ownership conditions.
• Do you want to manage a staff or prefer non-labor intensive? Do you consider yourself a people person? Some people shun or fear taking management responsibilities. Are you comfortable with, and enjoy, supervising and motivating others?
• How important is perceived status of the business? Is it important that you own a business that has a name, product, service or asset base which will project a certain image? Or, would you be happy with an unpretentious business as long as it was profitable and met all of your other requirements?
• Do you require time freedom or have issues about the kinds of hours involved in the business you choose? Is it important that you own a business which allows you to come and go as you please? Or, would you be satisfied with a business that required fixed hours?
• Will your family be involved? Is it important that you own a business where you can employ other family members? Are you wanting to create a certain number of jobs for your family members or close friends? Do your family members really have the needed skills and qualifications to help you succeed with the business? Are they willing to make the same sacrifices you are making
• Does it matter if the business has travel requirements?
• Do you want a business in which you would need some or a substantial amount of training? Are you willing to learn new skills, new business buzz words, new techniques and procedures? Or, do you prefer a business be one in which you are already quite knowledgeable and experienced?
• Is it important that your business not require your personal involvement on weekends? If so, does the business have dependable employees capable of handling weekend operations without your supervision?
• Are you a morning or night person? Do you like to retire early in the evening and wake up early in the morning? How important is it to you that the demands of the business not disrupt your present life style?

2) Draft a personal financial statement - Outline your assets and liabilities. Take an inventory of your financial resources. You should identify the actual availability of all financial resources in the following categories:

• Actual liquid funds (cash) available for a down payment.
• Actual liquid funds (cash) on reserve for transition expenses, start up costs, working capital, business charges, learning curve.
• Current sources of income that are expected to continue into the future
• Anticipated funds to be received in the future
• Unencumbered assets available as collateral, notes receivable which could be factored, real estate
• Other sources of financing including business partners, relatives, friends
• Retirement funds such as 401K and pension funds that qualify for tax free benefits

3) Establish monetary expectations - Determine your minimum income requirements and your goal for future earnings. Your financial criteria will help narrow the field of businesses that can meet your expectations. Here are a few points to consider:

• Do you need a fixed amount of earnings every month from the business?
• Do you need to pull money out immediately or can you wait six months or a year before making any withdrawals?
• How much importance do you place on high growth or expansion? Do you want a business that has full potential to grow and continue expanding into the future? Or, would you be satisfied to maintain a business at its current level of operation?

4) Update your resume - Accurately highlight your skills, work experience and extent of business knowledge. It can be extremely useful in enabling a business broker to suggest acquisition candidates that may be suitable to your background. Sellers and lenders want buyers with qualifications that will help insure the continued success of the business. You're actually selling yourself to the current owner, the lender and the professionals that represent them.

5) Define the parameters of your search - what industries, geographic area and transaction size will you consider. Past work experience, education, hobbies, interests, talents, and skills are a good source of inspiration for the types of businesses you might enjoy and in which you may have some knowledge. Once you understand your financial capacity for a down payment, you will have a better understanding of the transaction size you should consider. Business Brokers can explain the possible price ranges that would work for you.

6) Assemble a team of advisors - Let your professional advisors, such as your attorney, accountant, and financial planner, know you are looking for a business. Contact a business broker / intermediary who represents businesses within your targeted market.

Making a business acquisition is a team effort, and your business broker is the quarterback. If you are interested in buying an existing business, representing yourself as serious, qualified, and motivated is sure to drive your effort to successful business ownership......the whole reason for the trip!

Do You Need An Attorney When Buying A Business?

Many buyers do not know if or when an attorney may be needed in the process of buying a business. That question always comes up when chatting with people beginning the process of searching for a business to buy.

As a rule, it is recommended that buyers should consult their attorney for the review of any legal documents. Some of the types of documents involved in closing a business purchase that may be candidates for attorney review are:

• Covenant not to compete
• Employment contract(s) (for existing employees or the current owner)
• Review of the escrow instruction
• Review of promissory note
• Review of new or assumed lease
• Review of any agreement produced by the other party
• Checking for any pending lawsuits against the business, or any other liability problems

Attorney's can draw up non-compete agreement for the seller to sign, as well as employment contracts for key employees who are critical to the operation of the business. You don’t want the seller or manager setting up shop down the street while you are getting your new business up to speed. It is wise to interview key employees to make sure there is a good fit.

Your legal counsel can make or break the deal. Therefore, if you choose to engage an attorney to assist you in the purchase process, it is important that they be deal friendly and transaction experienced. You must articulate your objectives and seriousness in getting the transaction completed. And that, unless something completely unanticipated is discovered, the attorney's job is to pull the documents together to get the deal done.

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 onerous that the other party walks away from the deal.

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.

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 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 process will be timely and smooth.

Indo-American Chamber of Commerce Presents Small Business Success Series

The Indo-American Chamber of Commerce of Greater Houston (IACCGH), as part of their Small Business Success Series, will be hosting a moderated dinner event at Bombay Brasserie Restaurant in Houston, Texas, on June 24, 2008. Tara Energy, headquartered in Houston and one of the largest independent retail electricity providers in Texas, is sponsoring the event.

Frank Stabler, CEO of Certified Business Brokers (CBB), has been invited to serve as a distinguished panelist for the event to answer questions on the following topics:

• How To Sell Your Business
• How To Buy An Existing Business
• How To Finance Your Business
• and other related questions from guests and attendees

Since 1999 the IACCGH has been a powerful advocate and important resource for businesses looking to capitalize on the tremendous opportunities presented through international trade. This organization has made a significant impact on the rich, diverse and prosperous Houston economy.

For more information about this event, call IACCGH at 713-624-7131. RSVP Required.

Buying A Small Business - Does The Purchase Price Make Sense?

When considering the purchase of a business, how do you determine if the price is sound? The following formulas can help quantify that answer.

While this is not meant to be a foolproof analysis, it can help validate the purchase price based on real-life criteria. It takes into account that you:

• need a livable salary
• will have debt payments
• will need working capital at time of purchase
• will need cash for a down payment
• should expect to receive a reasonable return on your cash investment (ROI)
• will want a safety cushion to fall back on

For a simple assessment of a business opportunity, let's assume the following scenario:

• Asking Price for a janitorial company is $500K.
• The janitorial company and the buyer are both qualified for SBA financing.
• Current Federal Prime Rate is 5.25%.
• A SBA loan can be obtained at 7.25% for 10 years.
• Working Capital needed is $25K.
• Seller's Discretionary Earnings is $178K.
• Expected Return on Cash Investment (ROI) is 25%.
• The owner is paying his nephew $20K more than a regular employee could expect to earn.
• The current owner is taking a salary of $60K.

A 20% cash injection as a down payment is a typical SBA requirement, which means $100K in liquid funds is required. Based on a $425K loan ($500K purchase price - $100K down payment + $25K working capital) at the assumed terms and by using an amortization calculator, you would find that the annual loan payment would be $59,880.


Working capital consists of operating expenses such as inventory costs, rent and utility deposits, escrow fees, loan costs, and short-term liabilities. A quick estimate of working capital can be achieved by using the Current Assets less Current Liabilities garnered from the company's balance sheet.

The Table for Seller's Discretionary Earnings delineates the owner's total bottom line benefit as a result of owning the company. This is the total non-business related benefits going to the owner and family members on an annual basis. One-time, non-recurring or unusual expenses are typically things such as a new phone system, website development, outdoor signage or moving expenses. See the Table for other items that are used to arrive at SDE.

Fair market wage is an amount that the owner would pay a hired employee for a particular job. For instance, if the owner has been paying his nephew $40K for a job a new hire could do for $20K, the excess wages of $20K would be added to the benefit column in the SDE Table. As for paying yourself a salary, you can determine what you consider fair wage for what your role would be in the company -- or you can put all of the other numbers into the equation and see what is left for salary. If it adds up to your satisfaction, then so far....so good.

ROI for the purposes of this exercise is calculated by multiplying the cash investment by a reasonable interest rate that should be expected on the investment. This is a subjective percentage and a change in this number can substantially change the result of the analysis.

Investment options, such as putting your money in U.S. Treasury bonds has little risk, therefore only 4.5% interest is received. The stock market option, on the other hand, has a higher risk with a higher average ROI of 11% (source: Ibbotson Associates). Venture Capitalists investing in risky internet start-up companies might look for 45%+ ROI. None of these options, however, puts the investor in the driver's seat -- there is absolutely no control over the performance of the funds in which they invest.

Historical data indicates that a 25% ROI is reasonable for a medium to low risk small business acquisition. The greater the risk of the business, the higher the rate of return should be.

As evidenced by the 25.8 million small business owners across this country (source: US Small Business Administration), there are many people who choose to have complete control over the ultimate success and performance of the money they invest through business ownership.

Let's plug all the numbers into the Final Analysis Table to determine the soundness of the purchase price of the business opportunity at hand. The return on the cash investment was calculated by multiplying $100K (cash down payment) by 25%.

After deducting wages, debt service, and a return on your cash investment from the earnings, the business still generates $33,100 in additional funds to take vacation with the family, or increase marketing efforts for the business. You almost have enough to hire a manager to run the business for you. Now would you buy this business under these circumstances? One might suspect the answer would be, yes!

Of course this is a simplified assessment and not all factors are considered, such as growth potential, equipment condition, and other issues that should be considered when determining risk and working capital that might be needed to keep the company viable and growing.

Inc. Magazine - "It's a Seller's Market for Buying Businesses."

It's all about supply and demand.

Potential buyers and sources of capital for the acquisition of profitable privately-held companies is plentiful while the supply of businesses on the market is not. This makes a profitable, established business a hot commodity and in demand. Inc. Magazine spells it out in this month's issue, "The Most Valuable Businesses in America."

During my first conversation with Darren Dahl in February, in preparation for his writing the article for Inc. Magazine, he wanted to understand what drives the value of a business and why some businesses are more desirable than others.

I first described the Houston marketplace, which enjoys one of the top economies in the nation. Location, location, location is always a value driver, and a business location is no exception. I've been writing about Houston's hot economic climate for over a year now and told Mr. Dahl that Houston is a "bulls eye" target for business acquisitions because of it. We cannot satiate the marketplace of buyers because there are not enough businesses currently for sale.

Good businesses are in short supply. The number of buyers looking to buy a business far exceeds the number of businesses available. So when a new business hits the market it will usually sell very quickly if the owner's expectations are realistic, if their financial history and data are upward trending and in good order, and is marketed properly.

We have buyers waiting for businesses such as these and are ready to act quickly when one comes along. They know that if they don't pull the trigger, they will miss out to someone else who will.

One of our "Serial Entrepreneurs," as described in Inc.'s article, agreed to a conference call with myself and Mr. Dahl, and pretty much described what makes him tick and what he looks for and why. Entrepreneur Gary has been working with Don Piercy, one of our staff of professional brokers, for several years and has four businesses in his collection and is currently in the process of acquiring his fifth. We thank Gary for taking time out from his very busy schedule to share his viewpoints.

In continuing the issues surrounding value, while a price tag can certainly be put on any item for sale, including a business, price doesn't mean value. Value is in the eye of the consumer. It is the perceived benefits that the business represents to the market of buyers that makes it valuable. Perceived benefit, or value, looks different depending on who's looking. And, ultimately, the price that will actually be paid will be determined depending on how MANY are looking. Which means if lookers are plentiful, demand is high. The price will reflect that demand.

I further explained that while the reasons that business owners of small privately-held enterprises sell do not vary significantly, the reasons for buying do. I described the various categories of buyers and their respective acquisition criteria and told Mr. Dahl that the price each type of buyer is willing to pay directly correlates to their motive for the acquisition. This is why it is important for business owners to know who the most likely buyer would be for their company prior to going to market.

It was then that Mr. Dahl decided to focus part of his article on the buyers rather than just the attributes of the business. Inc. Magazine's article covers the U.S. market as a whole and does not describe all buyer types. But it definitely describes the current Seller's Market that exists for profitable businesses for sale today.

In closing and of particular relevance, is that 8,000 Americans are turning 60 every day, which means about 20% of businesses owned by boomers will be on the market within the next couple of years. About 65% to 75% will be exiting within a decade, which means we will experience what is expected to be the greatest wave of business transfer activity in U.S. history. The future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

Not only is this important for those owners of small businesses who are considering their exit, it is essential to the economic vitality of our country that these firms successfully transfer to new ownership. The estimated 25.8 million small businesses in the United States have a huge impact on our economy. Outlined below are powerful statistics that speak to the importance of the continuity of these enterprises. Small businesses --

• Have generated 60 to 80 percent of net new jobs annually over the last decade
• Employ 50.6 percent of the country’s private sector workforce
• Represent 97 percent of all the exporters of goods
• Represent 99.7 percent of all employer firms
• Generate a majority of the innovations that come from United States companies

Source: U.S. Small Business Administration

Read Inc. Magazine's Full Article

Huddle with the Experts when Buying or Selling a Business

Acquiring a business is a team effort and finding the right business broker (intermediary) is just the start of building your squad.

Oftentimes, buyers do not know how to go about tackling the whole process of investigating the business they like or how to evaluate the financial data. This questions represents a common real- buyer inquiry:

"I'm ready to purchase the freight company I've been looking at that's currently listed for $1.2 million. I've never bought a business before and I need someone who can help me through the various phases so I don't overpay and don't miss key legal issues that might be involved. Where can I find such a person?"

The answer is: You need more than one person.

Making a business acquisition is a team effort, and your business broker, also known as a business intermediary, is the quarterback. The broker drives the deal by acting as the buffer and go-to guy with the buyer, the seller, the attorney and the accountant. We do everything to move the deal along, including coaching and some tactical rationale therapy.

It's an extremely emotional process. Sometimes, the reason deals don't get done is that emotions get in the way. A good intermediary will take the emotion out of the transaction. Feeling an emotional connection to the business you intend to purchase is important since it will be a large part of your life. However, during the due diligence process common sense must be injected into the game plan.

As the coach, the broker sees the big picture. S/he keeps the ball spiraling towards the goal and creates the synergy needed to prevent false starts, fumbles and needless setbacks.

Your broker can help you find your other team members, including an attorney to act as your blocker to protect you in the legal aspects of the transaction and an accountant to tackle the numbers and tax issues.

As a general rule, small business owners sell a business only one time -- and buyers purchase a business only once in their lives. A business owner's professional advisors who have counseled them on the operations of their business consists of their attorney who does general business law and their accountant who does their books and tax filings. New buyers, too, have probably called on attorneys for various reasons such as preparing a will, for example, and have used accountants to file their income taxes. It is important to note that these types of professional advisors may have little or no experience in a business sale transaction.

Another general rule is that a deal structure that favors a buyer from the tax perspective normally is detrimental to the seller's tax situation and vice versa. Negotiations are opposing in nature and require creative solutions by experienced business brokers....the negotiators.

Good brokers will have a list of professionals with whom they have worked with in the past - deal makers versus deal breakers. You need an accountant and attorney that specialize in business transfer transactions.

You wouldn't call an eye doctor to perform foot surgery, so why call a patent attorney or a general accountant to help you perform due diligence on an acquisition candidate. You need specialists.

Professional advisors can make or break a deal. You must articulate your wishes to your team in order to have them working together towards the common goal. Each advisor, such as a business broker (intermediary), an attorney or an accountant, has a specific role in the transaction and should be working on behalf of their client to achieve the objective for which they were engaged.

Your advisors should provide the information you need in the time period required -- so you can make the decision on the purchase. You are the ultimate decision maker in the deal.

Communication between all of the parties involved is a priority to prevent the deal from dying. Each advisor should clearly understand the wishes of their client.

The accountant 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 provide, review, and verify the financial records of the business in order to get the deal done.

If there is no one monitoring and leading the progress of the transaction, the ball can be dropped somewhere along the way before the final yard...before breaking the plane of the goal line.

The use of a professional business broker to captain the effort can alleviate communication problems, avoid needless delay, and keep the momentum rolling.

The experienced business broker has been through the due diligence and closing process many times, much more often than any of the attorneys or other advisors involved. 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 in the huddle understand the game plan and are all getting the same signals from their respective clients -- the buyer and the seller -- the odds are good that the effort will have the desired result -- a win.

Selling A Business In Houston - It's Still Hot!

Back in March 2007 I wrote an article touting Houston's booming economy. In revisiting that article, while there is certainly economic turmoil on today's national scene, Houston is still hot!

The reason for this blog post is to share some of our current hands-on observations and experiences that keep us aware of the climate in Houston. And, I'm not talking about green house gases or other global warming theories. These are facts straight from the microeconomic level.

Our firm is like a barometer for the Houston business marketplace. We know what business owners are feeling and thinking -- they talk to us. Everyday, we visit with these entrepreneurial people who are keeping Houston's economy as one of the best in the nation. And, we also serve as the information source for those who want to become business owners. Yes, they talk to us too. They are calling from New York, California, Ohio, Canada, England, well -- in other words, we are seeing international interest in Houston for business acquisitions.

What we are finding is that many business owners in Houston who are ready to sell their businesses or are beginning to prepare for their exit, are hesitant. They don't know what's going to happen in the upcoming election and they are worried about the economy they tell us. Not only are these valid concerns, they are the realities facing the nation today. Who isn't worried about these issues?

But let's talk facts -- Let's focus on the facts about the Houston marketplace:

1) The number of businesses in Houston is growing and our population is growing. Corporate firms are either relocating their headquarters to Houston or are making strategic acquisitions of smaller businesses here to expand into our market. From corporate, private equity, to the individual entrepreneur, they have their eyes on Houston. And no wonder, Houston is the #2 best business climate in the Nation (Site Selection).

2) We have full-occupancy in our Class A office space, and we have experienced the #1 job-growth rate in the country (U.S. Bureau of Labor Statistics) due to the opportunities available in our expanding market.

3) Our housing market is #1 in America. Houston is bucking the trend of decreasing home sales, as reported by USA TODAY on 2/15/08. Houston was identified as one of only a few US metro areas showing home growth. In fact, the Houston Association of Realtors in their January 16, 2008 press release, reported 2007 as one of the best years on record for property sales in Houston, second only to 2006.

4) Texas has one of the top 10 best economic outlook rankings in the U.S. according to senior economists for the Wall Street Journal. Another senior economist with Moody's Economy.com, says in his Texas economic forecast through 2008, "Houston is probably the state's biggest economic hot spot thanks to its sheer size and broad-based growth and booming energy industry." Houston is indeed a world-class city and economic powerhouse.

5) At a panel convened by the Center for Houston's Future this month, experts concluded that one of Houston's strengths was its entrepreneurial culture and the shared feeling that growth is good. Other driving forces mentioned were the city's great port, critical mass of industry clusters, and its cultural arts districts. "We really are impressed by Houston," said one expert on the panel, "we're convinced you are on your way to becoming America's fourth global city after New York, Chicago and Los Angeles."

I can go on and on, but I'll leave it at that for now. Of mention, however, is Inc. Magazine interviewed me last week for their upcoming April 2008 issue. They, too, are aware that Houston is the happening place. They wanted to know what specific types of businesses are hot in Houston and what makes some businesses more valuable than others. So there you go. If you are a business owner and have been wondering if you should test the water, jump in and ride the wave. It's not only the weather that's hot down here in Houston.

Buying A Business -- Make Your Acquisition A Good Investment

Future profit potential – and how much you can impact that future – is the most important information you can have when purchasing a business and will ultimately be the measurement of the merits of the investment.

One the most serious shortcomings when evaluating an enterprise is to focus only on historical performance without considering what the business might be capable of under new management. While its history provides some insight, it is what will happen to the company in the future that is key.

In any conventional evaluation process, the buyer will pay for what has been achieved but will buy for upside potential. Successful acquisitions are all about generating a premium on the investment. The major "determinator" in considering an acquisition should be how a new owner can improve the business. Probing for underlying growth opportunities that are ripe for exploitation will help achieve that goal.

Factors to consider in order to adequately gauge the company's future outlook include industry trends, overall market and economic conditions, regulations, societal changes, technical trends, competition -- in addition to your ability to grow the business through better sales techniques, innovative marketing programs, adding more products or services, refined operational processes, wider distribution, and an increased capital base. Each of these enhancements can dramatically expand the bottom line.

Most business pricing models have two major components: a base, usually revenue or profit, and a multiplier. To get the base you need a clear view of the revenue picture from previous years, the historical performance. The multiplier is derived from industry-specific ranges. That multiplier is actually the number of years it will take to recoup the price you just paid for the business, assuming it doesn’t grow (or shrink.) Having a clear view of the future – and how much you can impact that future – is the most powerful intelligence you can have when determining the soundness of a business investment.

For example, if you have to pay 3x earnings, and believe you can double the business in twelve months, that is a good deal. If you have to pay 10x earnings, and you expect 10% growth – it’s going to take a very long time to see a return on your investment.

Using these principles as a guide in making an acquisition decision may markedly increase the chances that your journey to profits and success will end with positive results.

Buying an Existing Business Beats Starting a Franchise

Last Friday afternoon I was a guest on KSEV Radio AM 700 with host Aubrey Thoede and had the opportunity to discuss a subject that many call-in listeners wanted to learn more about....starting their own franchise. But buying a new franchise is not the best way to go about achieving the "American Dream."

Everyone reads or hears about big corporate mergers and large company acquisitions. However, big corporations aren't the only companies being bought and sold. Profitable, privately-held small businesses are changing hands everyday. These transactions are done behind the scenes and are not reported along with the daily stock market news. These business exchanges fly under the radar of the public at large -- which may be part of the reason that it is not commonly understood that buying an existing small business is the most viable path to being a successful business owner.

If you are considering your options for going into business for yourself, buying an already established profitable business should be the first option on your list and starting a new franchise the last. Here are six slam-dunk reasons why:

(1) The Real Scoop On New Franchise Failure Rates

The failure rate of franchises is greater than most people realize - far greater. Everyone has probably heard the rumor that new franchises only have a 5% failure rate. Well, I was somewhat suspicious of that standard. So, in order to back up my suspicions, I did the research. I was surprised to find that there is very little independent study out there. Most research and reporting about success rates of franchises is sponsored by the franchise companies themselves! So, with that in mind, there is good reason that we only hear about how successful new franchise are. Well, here's the real story....statistics:

• Companies that sell franchises go under at a rate of about 15% a year, meaning in any given five-year period, 75% of franchisors disappear.
• Thirty eight percent (38%) of franchise units fail over a four-year period, vs. only 32% of independent non-franchised startups.
• Franchises make lower profits than independent businesses.
• Many franchisees never make much money. Average profitability is poor, especially after taking into account the purchase price of the franchise.

Some of the reasons for not fully understanding the chances of failure of a new franchise include the fact that many non-performing franchise units are taken back by the franchisor or resold to a fellow local franchisee at less than start-up cost. The franchisor doesn't consider them failed enterprises and they never show up as a "closed" business thereby distorting the real story.

Armed with this knowledge, don’t mistake the information provided to you by the franchisor for a balanced consumer guide. It is a carefully engineered sales pitch. Getting hold of the information you need to make a rational buying decision is difficult, to say the least. So use your common sense and a healthy dose of cynical discretion. Franchise agreements always favor the franchisor. It is very easy to be swept away in the heat of the moment and get into a binding contract that is not in your best long-term interests. And it is very hard to get out of a franchise agreement without taking a big financial loss. Remember, the main purpose of franchising is to make the franchisor wealthy.

Compare the odds of starting a new franchise with buying an already established business. Seventy percent (70%) of companies that have been purchased by new owners are still in business five years later, as reported by business brokers/intermediaries and substantiated in a 2003 SBA Office of Advocacy Study.

(2) No Guarantee Of Succes Despite The Hype

Yes, franchises are a known entity and have proven concepts. When you buy a new franchise, it comes with franchise support such as national marketing campaigns and materials for local campaigns, has established relationships with suppliers, and established methods of operation. Training is provided and is usually substantial. You can obtain SBA financing and some franchise companies provide additional loans to new franchisees...sounds good so far. Many franchise companies will even provide a demographic study to assist with choosing a location for the new business. Population, drive-by traffic, potential customer base and a whole series of factors go into the results of the study that will indicate that "theoretically" the business should do well. Ah, but they can't guarantee your success.

An existing successful enterprise has a mature infrastructure and proven systems that include suppliers, methods of operation, and a trained staff already in place. Financing options include SBA backed loans, conventional lending institutions, sellers notes, and 401K plans to name a few. There is nothing "theoretical" about the company's market presence and location that is already established and proven. The proof? Cash flow and paying customers. As for training, all sellers provide at least two weeks training and assist in the smooth transition to the new owner. They may even stay for a longer period of time with agreed upon compensation and if personal circumstances allow.

(3) High Upfront Cost - Can You Repay The Debt

New locations can take a year or more to build and initial start-up costs of a new franchise can far exceed the cost of buying an already established business. Keep in mind that initial start-up franchise costs touted by the franchisor may not include such things as real estate, staff, payroll taxes, local licenses, advertising, or inventory.

On the other hand, all the expenses incurred by an existing business are known quantities. The bottom line -- when you examine the possibility of purchasing an existing business, expenses are already factored into the non-"theoretical" profits. You do not have to go through the trials and tribulations of trying to get enough customers to make a profit because established customers provide an established cash flow, aka money. With an established cash flow it is just a matter of managing the available cash to achieve your business goals. You do not have the extra pressure of finding enough business to pay the bills or hiring and training a new staff. Security and peace of mind goes a long way! When you buy an existing business, at least you know what you are getting for your money. You will know what kind of loans you can get based on the proven cash flow, if the investment will allow you to achieve the standard of living you expect, and if you will realize a reasonable return on your cash investment.

(4) Fees, Fees, and More Fees

A percentage of monthly gross revenues (yes, before expenses!) will be levied as royalty fees (forever!) for the privilege of using the franchise trademarked name and procedures -- which cuts into your profit potential. Other fees you will have to pay include a franchise fee, training fees -- and, in some instances -- a monthly fee for marketing materials and ongoing support. If you are planning future growth and expansion, you will be paying additional fees for licensing the rights for each additional market area.

When you acquire an existing company, the only required fees you pay are taxes. There may be licenses associated with certain types of firms or other regulatory requirements based on the industry. Yes, the debt will have to be paid, but there's an end in site -- a loan has a definite pay-off date. Growth potential of an independently-owned enterprise is only as limited as the market for its product or service and the financial capacity of the owner(s). You are not tied to some radius within which you are allowed to expand.

(5) No Entrepreneurial Freedom

Do you have an innovative entrepreneurial spirit? Do you dislike being told what to do? Do you want freedom with your marketing plan? If so, owning a franchise is not for you. Franchise contracts have very explicit standards, allowing little or no alterations or additions to the brand, stifling any creativity on the part of the franchisee. You must use their system and follow their rules. Some franchise contracts dictate how much to pay your employees and stipulate that you must buy supplies only from their approved list of suppliers, possibly at higher costs than you could find from other vendors. The reputation of your franchise is only as good as that of the franchise company, so any difficulties that the franchise company encounters will have a direct impact on you.

There are enormous growth opportunities with owning a non-franchised, independent company. You can acquire additional businesses, open up new locations, try new marketing campaigns, and add new products or services just to name a few. The fact that you can raise your prices whenever you deem necessary may seem like a luxury in comparison to the opposing reality when you own a franchise.

(6) When It Comes Time To Sell

There can be very restrictive terms if and when you decide to sell a franchise. For example, the buyer will be required to pay a transfer of ownership fee, pay for training, and must be approved by the franchisor.

If you own an independent business, and grow it, you can sell it for vastly more than you paid for it...which makes good investment sense. This is not the case for most franchises because of poor profitability and growth potential.

In Summary

There are some great franchises out there with solid business models but may have frigid rules and ongoing fees that can bog you down. Franchising has been around for a long time and will continue as a viable choice. But don't start a new one, buy an existing franchise, a resale - one that is already up and running successfully. Even though the disadvantages noted above will still apply, at least you will be able to review its sales history so you have some idea of whether it is a money-maker or a lemon.

Buying an existing independent business with all the ingredients for success already in place is a safe investment and a platform from which to grow and launch new ideas. By far a much more flexible and less risky avenue to successful business ownership. No matter which road you take, however, there are no guarantees. You still need to be a sharp businessperson to make it work.

You Decide

The articles below and our own experience for the past 32 years of selling businesses are the sources from which I derived my conclusions.

Hidden Risks of Franchises
Safer to Buy A Franchise? - Think Again
Franchise This

Secrets and Snags to Franchising Success
2003 SBA Office of Advocacy Study

Houston Business Brokers Predict Buying, Selling of Companies to Grow in 2008

If you are looking to buy or sell a business in Houston, 2008 will see a wave of activity and be a year of great opportunities.

We have already kicked off the New Year with a bang, closing four businesses between New Year's Eve and the day after the Holiday. And, we currently have a record number of businesses scheduled to go to the closing table over the next two months.

The celebrating, enthusiastic freshly-crowned business owners are bullish on the Houston economy and have grand plans for growing their new acquisitions. As for the former proprietors, now retired former baby boomer business owners, are to be congratulated for their successful achievement and having been in the driver's seat that has helped steer our city's economy to its top status as one of the best in the nation. The diversity of our small business community is the backbone of the city's robust commercial health.

We fully expect business transfer activity to continue its uptrend here. We have seen accelerated momentum over the last few years. A good deal of the activity is linked to the baby boomer generation. Just as many boomers are looking to sell their businesses and retire, younger people, young retirees, private equity firms, and strategic corporate buyers are looking to acquire privately-held companies in Houston. It's a great combination, a perfect storm.

Nationally, more than 65 percent of small and medium-sized businesses are expected to change hands over the next decade. This number will certainly hold true for Houston enterprises. They are already targets for those looking to get a toe-hold in our world-class city's economic powerhouse that is predicted to flourish for the foreseeable future, according the Houston Business Journal's November forecast.

A variety of industry sectors are popular as acquisition candidates. Many of those in the individual buyer category with whom we are currently working are looking for commercial service companies such as freight/delivery, janitorial, landscaping/lawncare, and vending firms, to name a few. Service companies such as these are always in demand because they have recurring revenue streams, potential for growth, and relatively short learning curves -- thereby bringing the largest pool of interested acquirers. Of particular interest in Houston are medical and energy related firms due to Houston's position as a major player in these sectors of the economy.

Restaurants are of particular interest to individual buyers as well. Texas has the second highest restaurant revenues and the second largest number of restaurant-industry employees in the nation according to the National Restaurant Association's December news release. A good restaurant, just like any other solid business, will sell quickly in Houston -- especially in the current market with so many people looking to buy a restaurant. On the other hand, the failure rate amongst restaurants is rather high. Therefore, someone not experienced in the industry should educate themselves about critical issues to help insure their success as a new restaurant owner.

The strategic buyer and private equity buyer groups are asking for wholesale, distribution, logistics, storage & warehousing, manufacturing, and medical & health-care related firms. As the hub of the energy sector, Houston-area oil service companies are strategic targets of corporate buyers. Each buyer category has distinctive characteristics that correlate to the motivation behind their purchases. In addition, the price each is willing to pay for a company is directly proportional to the motive.

First-time buyers need to be cautious when evaluating buying opportunities. You just have to sift through, do your homework and figure out what the pros and cons are. A self-assesment will help you figure out what types of businesses would work for you and how much money you have as a down payment.

Company owners need to work hard to make their businesses attractive to potential buyers. This includes increasing your cash flow, keeping good records, getting a business valuation, and understanding who your potential buyers would be.

Buyers and sellers of businesses should consult with professionals, such as business brokers/intermediaries, attorneys, and accountants who have experience in the marketplace and structuring deals.

The more you educate yourself on the process, the better the outcome will be.

Buying A Small Business - Get Prequalified For Financing

Get Reviewed and Prequalified For Financing So You Can Leverage Your Business Purchase.

Getting prequalified for financing by lenders is very important for two specific reasons.

1) 90% of all small businesses sold have some form of financing involved.

2) One of the biggest reasons that deals falls through is because the buyer could not obtain financing.

While some sellers are willing to provide partial financing to a qualified buyer, they would much rather the buyer be able to get third party financing so they can receive their cash up front at closing. Wouldn't you? The seller takes a considerable risk on a buyer he doesn't know too well and can only hope that the buyer will be successful in running the operation.

The usual cash injection (down payment) required by SBA and other lenders in the purchase of a small business is generally around 20% to 30% and the rest is financed. This, of course, is based on your personal financial standing and background. You will need to submit personal financial information and a work resume.

By having a lender review your financeability and background upfront, the lender can then give you valuable Intel on the types of businesses they would take into consideration for financing based on your skill sets and what they would deem to be transferable to different types of businesses or industries. Not only can you narrow the scope of the types of business you research, you would also know exactly what price range to target.

All of this adds up to the serious, prepared, perfect buyer! A rare species in the land of business brokerage. You'd get the red carpet treatment for sure by business brokers and sellers alike.

Keep in mind that the business you choose must also be financeable. The business must pass the lenders test. For instance, the company's financials must be reviewed by the lender so they can determine if the business can produce the income required for you to make a living after making payments on the loan that they will be providing.

The point to be made here is that you, as a person looking for the "perfect" business to buy, will be ready to pull the trigger when it appears. There are more buyers than sellers in today's business transfer marketplace. You will have an advantage, you will be a step ahead of the rest of the crowd.