Things to Know Before Buying A Business – A Buyer’s Perspective

GETTING READY

FROM THE BUYER’S PERSPECTIVE

In the previous chapters, we talked about sellers who are in the process of considering a sale. The focus in this chapter starts instead with the BUYER, and then moves on to look at the big picture aspects of the PRICE.

A critical question worth repeating as we move on to rules for buyers is: Do you really have a willing seller? Or, is the seller so emotionally tied to the business that no buyer will ever actually be good enough to pass muster? Is the seller reluctantly willing to sell — but only if the price/terms are unrealistically high?

Potential sellers should think these things through very carefully before spending a lot of everyone’s time and money on a seemingly desirable deal that is unlikely to actually take place.

Once it becomes apparent to you as a potential buyer that the seller is not really ready to sell, then it’s time to politely walk away. Don’t burn your bridges though; the seller may very well be more ready at some point in the future and you can resurrect the deal at that point. Just don’t waste time and money before the overall timing is right.

Buyers

The following rules are presented from the buyer’s standpoint, but sellers should be acutely aware of these things too:

First:

The first rule for buyers is: Know what YOU are looking for. Buying a business is risky, expensive, and a LOT of work for the buyer. Do your homework first.

*Not every business is worth the same to you as it is to other potential buyers.

  • What business would fit the best with what you already own?
  • What can YOU bring to the table to enhance its value after the purchase?

In other words, what business can you buy that will result in a 1+1 = 3 scenario? (or even 4?)

  • This is so important, that if the resulting effect of 1+1 is not more than 2, then perhaps you should not buy it at all.

Second:

Another rule for buyers is: YOU are for all practical purposes “selling” yourself personally and/or your existing company to the seller at this point as well. That’s because if you really want to buy that target business, someone else probably does also. It’s about a lot more than just price and terms.

So, why should this seller sell to YOU?

*Be ready to sell yourself and/or your company as the most appropriate buyer for that particular business.

  • The seller is almost always looking for a buyer he or she feels comfortable with personally and believes will take proper care of the business, its employees and its customers post-sale.
  • If you fail this unspoken test, you can lose the opportunity before you ever get to issues such as price and terms.

Third:

The third rule for buyers: Be ready.

Be ready financially — a strong balance sheet, good banking relationships, and enough uncommitted cash flow with which to do the transaction are essential. Be ready with your own time — if your time is already fully committed, how are you going to handle the additional management burdens?

Fourth:

Another rule for buyers: Consider the basic steps in a business sale.

  • Is there a business broker involved, and if so, on which side does their allegiance lie? Which party pays the commission? If I as the seller sign a listing agreement, can I get out of it, and how long does it last? What if I bring the buyer to the table myself, do I still owe a commission to my broker under an “exclusive right to sell” agreement?
  • Can or should both sides use the same attorney or C.P.A. in order to save professional fees?
  • Should you sign a confidentiality agreement up-front? At what point?
  • Will this deal be seller-financed in whole or in part, or do I need to get a banker on-board early and see if financing is available beyond what cash I have for the down payment?
  • Am I willing to personally guarantee all or part of my company’s promissory Note to the seller for the balance of the purchase price, or to pledge additional collateral?
  • How much cash will I need for working capital until the cash flow situation in the new business settles down following closing?
  • Do I need a business valuation, and if so should it be a full-blown appraisal or just an opinion letter? Will my banker require an appraisal in order to loan me the down payment or all of the purchase price as the case may be?
  • What role does a letter of intent (an “LOI” or “terms sheet”) play? What kind of LOI should you create? Should it be binding on both parties or non-binding, or should only portions of it be binding?
  • Will the seller request a good-faith cash deposit up-front, perhaps paid into escrow? Refundable or non-refundable?
  • What due diligence is needed, and when, and should the other party pay part of the cost if they back out prematurely for no good reason?
  • What contracts are likely to be needed, and which side should have the subtle advantage of drafting first and controlling the documents (customarily the buyer, since it has the most risk in how the transaction is structured and written up)?
  • What should you expect at closing?
  • Will an independent third-party professional escrow be necessary for the eventual closing?

Fifth:

The fifth rule for buyers: Know the legal basics.

  • What are the crucial legal distinctions between an “asset sale” and a “stock sale” that will determine the overall structure of the entire deal?
  • What additional risks do I effectively assume if I buy the stock of the seller’s corporation, as opposed to buying the assets out of that corporation and thereby shedding most of those risks?
  • What to do with the employees?
  • What about a non-compete agreement with the seller entity as well as the individual owner(s) thereof, or with key employees of the target business who might leave following closing and go right into competition with the very business you just paid a lot of money for; or
  • Does the target company already have those crucial non-competes in place with key employees, and if so are they enforceable and transferable?
  • You need to know the basics, but you will definitely need professional help to get this right.

Sixth:

Another critical rule: Know the tax basics!

  • If I personally buy the company’s stock from the seller, I’ll have no tax deductibility on the purchase price. Does that matter to me, or would I rather have that higher tax basis and thereby pay less tax when I re-sell the company sometime in the future?
  • Or, should I have my own company buy that same stock instead? Can my corporation or LLC buy stock in another without causing serious tax consequences?
  • Am I comfortable with the hidden or unknown risks in this industry or this particular company that come along with a stock purchase format, including the risk of prior taxes unpaid or under-paid by the target corporation; or do I want to insist on an asset purchase format instead and thereby try to “shed” most of those potential liabilities? Can I mitigate that risk by having the selling stockholder indemnify me for all or part of those taxes, interest and penalties, or even other unknown and/or unexpected exposures?

Never forget, there are three parties to every business sale — the seller, the buyer and the IRS. A sale can be a lose/lose/win (guess who the losers are… ); or, the same sale can be re-structured to constitute a win/win/lose. If there is a “loser” in this deal, you want it to be the IRS.

  • The taxes on sale of a business can exceed 50% of the total sale proceeds if the sale is structured wrong!
  • The seller can even end up owing more to the IRS at the front end than he receives as the down payment from the buyer… a particularly unfortunate (and generally avoidable) result of poor tax planning.
  • You don’t need to be a tax expert; but you do need to know there are ways to mitigate this kind of tax disaster and also be able to point the seller in the right direction for professional help.
  • You need to be willing to work with the seller to resolve what may be critical issues to the success of the sale.
  • You need to know the basics, but you will need professional help to get this right.

Seventh:

The seventh rule for buyers: Know how to use your own professional advisors, and when to bring them into the picture (earlier is better, even up to a year or more under some circumstances).

  • CONTROL your professionals in order to keep expenses down and prevent them from killing your deal. It’s YOUR transaction, not theirs. Get advice from them, but do not let them renegotiate the sale.
  • Keep relationships cordial. You will almost certainly need help of some kind from the seller after the sale closes, so don’t let your professional advisors poison that well.

MOST IMPORTANTLY: The most important rule for buyers (and for sellers too for that matter): The sale must be perceived as a “win” on both sides. In most cases, neither side is compelled to do the transaction. If either side concludes that the sale is a “lose” for them, then the deal is likely off at that point.

Special Situations

Some special situations will be covered in more detail in later chapters but deserve a brief mention now:

Internal Sales

Many business owners would love to sell their company to their key employees, but they don’t think it’s possible. The most frequently cited reason is “but they don’t have any money.”

You work with these key employees every day. You probably already know they have the basic talent to run the business, or you would not even consider selling to them. They may already have been running it for many years already from a practical standpoint. Only money seemingly stands in the way.

The fact is, the money issue can almost always be handled to everyone’s satisfaction. The REAL key issue is instead, “Do they have the fire in the belly, and the risk tolerance, to be an entrepreneur?”

The heart of an entrepreneur is an intangible that can’t really be measured or pinned down; but if your key employees have what it takes to be one, then you can probably arrange win/win terms that work financially for them and give you a better long-term after-tax price than you could receive from an outside third-party sale.

As always, YOUR expectations need to be reasonable. Just as with a third-party sale, the price and terms must “pencil-out” for the buyers in any internal succession. The down payment is likely to be less, and the seller financing will probably run for more years. Terms are likely to include a way to split the fruits of future success.

We’ll discuss this more in subsequent chapters, but suffice it to say that if your key employees have what it takes to succeed after you are out of there, then internal succession can be your best exit strategy financially. It can also be an excellent way to attract and retain top-notch employees with an expectation of participating in the buying group and a way to ensure a satisfactory sale of your business when the time is just right in the future.

Family Sales

Family sales are a particularly difficult kind of internal sale. All the usual considerations of internal succession apply, plus uniquely complex tax considerations.

The IRS is deathly afraid parents will do something nice for their children. So an entire chapter of the tax code is devoted to making sure the IRS gets its “fair” share (they consider about half the total value of the business to be “fair”). Needless to say, this adds to complexity.

Intra-family dynamics can be even more complex. Just because a child has the talent, does not mean that he or she has the experience to run the business. And talent + experience still do not mean the child has the intangible heart of an entrepreneur. Even establishing the price can be more difficult than in an arms-length sale since a child can find negotiating with a parent over price and terms to be essentially impossible.

Price

What about “Price”?

Ultimately, the “Price” must be justified by (i) the future cash flow the buyer can reasonably expect from the acquired business, and (ii) the risk the buyer must take in order to receive that cash flow.

But “Price” is much more than just money to a seller. It can even be seen by him or her as a reflection of their individual worth as a person. A buyer overlooks this only at their great peril.

Starting the conversation with comments designed to push down the price can be fatal to an emotional negotiation like this. You are not haggling over the price of a car here. “It will have to pencil-out, of course, but it’s probably worth quite a bit…” is often a good starting point comment for you as a buyer.

Emphasize creating a “win/win” transaction overall. Remember, the seller most likely does not HAVE to sell, and likewise you do not HAVE to buy. As soon as either party perceives the transaction to be a “lose” for them, the sale will die.

An emphasis on AFTER-TAX cash to the seller is also extremely helpful. Thanks to our overly-complex tax laws, it is often possible to restructure a sale with a lower stated “price”, but more actual after-tax cash for both the seller and the buyer.

An “all-cash” deal is low risk for the seller, but much riskier for the buyer. Therefore, the price is almost always significantly lower in an all-cash transaction in order to compensate for this mismatch in the risk area.

What about payment terms?

Terms are not as emotional, but in a practical sense can be even more important than price. In fact, your authors are fond of saying “The price is not the price… terms are everything!” Terms determine how the sale will “pencil-out” for the buyer. For example, seller financing over a period of 10 years is much easier for the buyer to pay for out of ongoing cash flow from the business, and thus justifies a higher price.

Terms can also dramatically affect taxes for both sides. Since it only counts if you get to keep it, this consideration alone can be more important than price.

Terms affect the risk for both sides. Terms so stiff that the sale cannot possibly pencil-out will obviously raise the risk for the buyer. Less obvious, the seller may incur more risk from draconian terms like this as well. An upside down buyer is much more likely to look for an excuse to rescind a sale or some way to sue the seller for misrepresentation or a breach of the seller’s representations and warranties in the purchase and sale agreement.

Terms can be massaged to share the risk, thus lowering the effective risk for the buyer. Lower risk translates to a higher price. It is fairly common for part of the price to be dependent on future results and retention of business (called a partial “earn-out”), which is a great way to share risk and reward.

Other factors will affect the price as well. For example, do key employees have, or can you create at closing, enforceable non-competes (see our later chapter entitled NON-COMPETES)? What about major customer accounts? Will key vendors terminate their contracts when the “founder” of the business is no longer around?

What about the building occupied by the company? Does the target company’s owner also own that building? Is the Lease transferable, and/or how much longer will it run? Are there any options to extend or to buy the building and not have to incur major expenses in moving the entire business later on? Is the business owner a personal guarantor on that existing Lease, and will the landlord release him or her from that guarantee at closing or simply execute a brand new Lease with the new owner? Is rent likely to be raised post sale?

Finally, it’s not all about “Price” anyway. Price certainly matters; but is rarely the key to a sale.

A seller is likely to have other “hot buttons” that can make or break the deal. Some are obvious, such as how key employees will be treated post-sale in all respects. The seller may want to see to it that a couple of his “pet” long-term employees are retained for a number of years at the buyer’s expense.

Other hot buttons can be quite unusual. Your authors well remember a sale that hinged on providing a parking space on company property for the retiring seller’s yet to be purchased RV. The buyer initially balked, which would have killed the sale. It has been many years now since the closing, and the seller never did quite get around to parking his RV in that spot that seemed so crucial to him at the time.

Forex Education Tips – 5 Steps to Successful Forex Trading

Close to 95% of all Forex traders will lose money. We’re not just talking about novices, either. Whether you trade Forex for a living, as a hobby or just for fun, odds are against your success. That’s a simply astonishing fact. However, the remaining 5% of Forex traders somehow manage to break even and there are those lucky few that actually make money in the currency market – consistently!Like the TV show says … “How’d they do that, anyway?”That’s the million dollar questions, isn’t it? Countless books, seminars and expos have been hosted to answer this very question. That sad fact is that thousands of books have been written and countless seminars and interviews have been conducted in an attempt to answer the magic questions. The reality of the situation is that there is no magic formula; no one single Holy Grail of Forex trading.So what do the successful traders do that the rest of us have simple not comprehended. They have mastered a process of winning where they combine and customize several factor to produce consistent results. They have mastered the Process of Trading.The Process of Trading is:Strategy > Money Management > Self-MasteryHere are some simple Forex Education tips to help you master the process of forex trading:Success Tip #1 – You’ve Got To Have a PlanYou must have a written business plan that will detail all aspects of your trading. When are you going to trade, how much to risk, strategies for entries and exits are just o name a few. To become a consistent (profitable) Forex trader you have to plan your trade sand trade your plan.

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Simplicity rules! Don’t make this plan too complicated. One sheet of paper for you mission statement and another for your trading plan should suffice. Anything more is probably too complicated.Success Tip #2 – Focus on Your Personal PsychologyKnowing yourself will allow you to master the discipline necessary to execute high quality trades with solid money management techniques. Lack of discipline is fatal in Forex trading. Go on a personal journey to identify you attitudes towards risk and money. Get intimate with your strengths and weaknesses as a trader and build in to your trading plan strategies to minimize those weaknesses and maximize your strengths.Different personalities lend to different trading styles. Get familiar with all the different styles and over time you will begin to gravitate towards one particular style. Don’t fight the urge like I did. I insisted I was a day trader, but had only limited results. I found my winning percentages were much higher when I entered swing trades. Guess what’s my bread and butter strategy now!Success Tip #3 – Be Realistic About Your ExpectationsThis is a hard one, I know! I am on the internet every day and the amount of advertising is staggering. Brokers are offering free education (fox in the hen house if you ask me), forums of all different trading styles and points of view. Gurus pushing their system as “the one” that will make you the big bucks. How do you get through all that noise?Let me tell you loud and clear right now – everyone is right and everyone is wrong. You have to make a personal commitment to become a successful trader, find a trading style that works for you and expect a slow and steady approach to wealth building through Forex.What works for me may not work for you. Expect to go through an exploratory period where you are learning and at the same time exploring yourself as a trader. Keep an open mind and don’t pay attention to all the noise out there.Success Tip #4 – Exercise PatienceRome was not built in a day and neither will your trading account. In fact, I tell all of my students that while they are studying to become successful Forex traders they should not look solely at their account balance as an indication of success or failure.By tracking and increasing your percentage of high quality trades you execute is a far better barometer of your progress than your account balance. Cause and effect rule here. Over time when you increase your probabilities through the execution of high quality trades your account balance will respond accordingly.Keep the focus on the process and with time your results will blow your mind.Success Tip #5 – Money Management Is Top PriorityI would rather have a shaky strategy and excellent money management techniques than the other way around. This topic warrants its own blog post to do it justice. Limited your exposure (read “risk”) allows for you to stay in the game and allow the laws of probability to work.

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Let’s take a casino for example. They need gamblers to frequent their slot machines to make money. Why? They have a game that has a greater than 50% chance of making money for the house. The more people that play the slots, the greater the casino’s profits.The casino controls risk by payout tables (always favoring the house!) and increases their probabilities by keeping gamblers at the slot machines (read “free drinks”). As a trader you must limit your risk by committing only 1% – 3% of available capital to a single trade. When you execute enough trades with a high probability strategy you too can clean up like the casinos – but only by staying in the game long term.In conclusion, Forex trading is not easy. It’s hard work and will test the limits of your patience and perseverance. If anyone tells you otherwise .., buyers beware! It can be a very rewarding and profitable venture if done correctly. In the end it is a profession that requires a learning curve and practical experience, no different than an airline pilot or engineer. Understanding how to approach and learn this game will allow you to reap all the benefits advertised. It is your Forex Education that you will master the Process of Forex Trading.

The Energy Healing Power of Natural Medicine

Natural medicine is a system that uses a variety of therapeutic or preventive health care practices such as homeopathy, naturopathy, chiropractic, and herbal medicine. Alternative medicine is also known as traditional, naturopathic, natural or holistic medicine. Proponents of alternative medicine are not refuting the validity of discoveries in and the practical uses of conventional medicine, but are merely trying to put some things into perspective. Due to the widespread interest in natural medicine along with the disappointment and disenchantment with Western medicine, many people, especially in the United States and Europe, where conventional medicine has taken a dominant foothold, are seeking the advice and treatment from naturopathic physicians. These practitioners include herbalists, acupuncturists, naturopaths, chiropractors, and others, who advocate preventative health measures as well as recommend wholesome foods and nutritional supplements for their patients and clients. Considering the growing popularity and effectiveness of alternative health treatments and products, certified and licensed professional practitioners of such medical practices should be given their rightful and respectful place in medical society. Natural medicine has been proven not only to be safe, but more effective than Western medicine in treating many chronic illnesses such as diabetes, hypertension, asthma and many other diseases as well

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The history of Natural Medicine and its roots can be traced back thousands of years to ancient cultures such as India and China. Ayurvedic (E. Indian) and Chinese medicine, along with their diagnostic and herbal systems, are still used in these countries extensively, as well as in the United States, especially in Europe, where alternative medicine is well respected. Chinese herbal medicine has a documented history of over 2500 years in China, and is now widely used by practitioners all over the world. It has been legally practiced in the United States. since the mid seventies by licensed acupuncturists. Homeopathy is also a well-known form of alternative medicine discovered in the 18th century by German physician Samuel Hahnemann, but was practically stamped out in the U.S. in the late nineteenth century by the American Medical Association. In 1938, though, the U.S. Food, Drug, and Cosmetic Act finally recognized homeopathic pharmacopoeia as the legal equivalent of allopathic medicine.Another more contemporary and popular form of herbal medicine, called Western herbalism, can be traced back about two hundred years in America. Samuel Thomson, born in 1769, is considered the father of Western herbalism. He discovered over sixty different medically effective native plants by clinical testing, and on the basis of these findings, devised a theory of disease and botanical drug action. Randy Kidu, D.V.M., Ph.D., writes in his articled entitled A Brief History of Alternative Medicine: “The history of herbal medicine is interesting because herbs have been a part of our diet and pharmacy since man began roaming the earth. Coprophytic evidence (seeds and other plant part(found in preserved fecal pellets) points to herbal use by cavemen. Early herbalists practiced their trade since before recorded history in all parts of the world including China, Egypt, Greece, Rome, Africa, England, the Americas, and Europe. Many herbs are also mentioned in the Bible. Today, based on sheer numbers of folks who use one form of herbal medicine or another, it remains the most-used medicine worldwide.”Twenty-five hundred years after the advent of allopathic medicine, modern medicine is still grappling with the idea that herbal medicine could be an effective treatment, and not just quackery, although thousands of years of recorded history has proved its efficacy. A new model of understanding in medicine needs to be incorporated into the existing allopathic model. Because of the growing popularity and effectiveness of natural medicine, practitioners may eventually be given their deserved place in medical society. The incorporation of natural medical practices into the existing model of conventional Western medicine, including the training of new medical doctors, is now called Complimentary Medicine. In order to solve our health problems, this modern paradigm for treatment in medicine must be promoted. This can only truly emerge when bias, self-interest, greed and discrimination is discarded and diverse medical knowledge is promoted and shared, not only between university trained scientists and medical doctors, but among Alternative Medicine practitioners, philosophers, metaphysicians, and other intelligentsia of society as well.

Skip The Lines – Bring The Amusement Park Right To Your Own Back Yard

There’s no shortage of things to do in Atlanta. From professional sports to amusement parks, there’s something for everyone. In fact, Atlanta is proud to house some of the nations largest amusement attractions, including the ever popular Six Flags Over Georgia. Children (and adults) love the thrill and adrenaline rush of the large roller coasters. However, one thing most people don’t like about amusement parks is the long lines. By the time it’s all said and done, you can spend several hundred dollars for your family to have an afternoon of fun, and only get a few rides in. This year, instead of spending the day waiting in long lines for short rides, why not bring the fun right to your back yard? With today’s technology, you can literally do just that! One of the advantages of living in a large city like Atlanta is that we have large rental companies that can make your special event feel just like a trip to Six Flags… complete with a train and an ice cream cart!

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If you’re trying to replicate the amusement park feel, there are definitely specific items that you’ll want to be on the lookout for. As mentioned previously, ice cream carts and trackless trains help make the special event feel more like a day at Six Flags.In order to make your next special event more special, try some of the following tips:

Head online to do some research on the party rental company that has the selection your looking for. If you want an ice cream cart to complete your theme park adventure, look around until you find what you’re looking for.

Don’t settle for the first website you see. There are literally hundreds of inflatable party rental companies in Atlanta. Keep looking for a website that offers a wide variety of rental items that you’re looking for.

It’s better to rent everything from one company. Renting in bulk can help you save money. Larger companies will offer discounts for larger purchases of multiple units and rental items.

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Having a day of amusement park fun is cheaper and easier than ever before. By bringing the amusement park to your front door by using a party rental industry, you can include more people at a lower price. So next time you’re planning a special day, instead of spending tons of money for just a few people and braving the long lines of amusement parks, invite the whole neighborhood and bring the amusement park right to your own back yard!