10 Sep 11 Essential Points to Consider When Buying a Business for Sale in 2020
You’ve started to explore the option of buying an existing business, but you have a lot of questions and aren’t sure where to start looking for information or answers!
Let us help you get started.
On the following pages are 11 essential points that you should pay attention to whenever you look at a business for sale in Florida or anywhere in the country. These 11 points are just the beginning, though; there are often many other factors beyond the ones highlighted below that you must consider along the way.
As we explore these key points, it’s important to highlight that each business advertiser organizes their information in different ways on their respective websites. On the last page of this document, we’ve included an example of how the Business Brokers of Florida – Multiple Listing Service (BBF-MLS) provides their information.
We’ve highlighted these key points right on this sample listing! If you want to test yourself and see if you can locate the key points we’ve highlighted below on a live listing, visit Legacy Business Broker’s MLS site at BuyBizFL.com (or any other Florida MLS landing pages) to search for many businesses for sale that interests you.
Get the facts. At first, Owners selling their business may share only limited financial information. However, before you commit to purchase, make sure you request to see this information. In an ideal world, you might want to see every tax return, sales report, and employer record.
Often many of the detailed descriptions are only shared with a prospective Business Buyer as part of Due Diligence once an Asset Purchase Agreement (APA) or Letter of Intent (LOI) has been agreed to by both parties. Presenting an LOI will at least get you to a point where you can decide to look more closely at the business. (We have used a fictional listing for an example listed by a Tampa business broker.)
We always remind everyone to seek professional help where needed when considering a business for sale. Always work with an experienced attorney and experienced accountant.
Below are some terms that you will see mentioned in the points below:
- SDE – Seller’s Discretionary Earning or Owner’s Benefit. Basically, this is how much one working owner (and only one) could take home if they were not deducting optional expenses like meals out or paying family members who don’t work.
- EBITDA – Earnings Before Interest, Tax, Depreciation, and Amortization. This is basically the earnings you would look at if you were paying a manager to run the business.
Is Price to SDE reasonable?
There is no single way to determine the price of every business for sale, but there are guidelines that we use within the industry. Many businesses sell for between 2 to 3 times SDE or 3.5 to 4.5 times EBITDA, but the actual multiples vary. Get the facts. Avoid using Rules of Thumb for an actual valuation.
Always bring in professional, experienced help to look over the earnings. It’s okay to pay on the high end of a reasonable price range for a business that is performing well, and that is right for you but look at what others have paid for similar businesses before you make your final offer.
For calculation and more significant explanation of SDE, visit: http://buybizusa.com/for-owners/selling-tutorial/much-business-owner-earning-calculating-sde/
Does the ratio of SDE to Gross make sense?
Owners have lots of ways of calculating SDE, but we offer a particular guideline used by many in the industry. Since Owners want you to buy their business for sale, they may do their best to make this look as attractive as possible. You must do your best to verify figures and determine if the SDE is reasonable.
We have seen, as an example, a restaurant that claimed to have Gross Sales of $500K, and the Owner claiming he is taking home $250K when Rent was $150K. Since most restaurants have an SDE seldom have much more than 10% to 15% of Gross Sales, the claim seems overly optimistic. Always verify and trust your instincts when the money seems too good to be true!
Does the stated reason for selling make sense?
People sell for all sorts of reasons, and many sell their businesses because they want to retire. Some owners worry that would make you uncomfortable if you knew the truth. Maybe they are burned out or maybe they are losing money. Get the facts and make sure it makes sense.
Does the Owner work reasonable hours?
Will you be replacing the Owner?
- Can you work on the same schedule?
- Does the Owner have a spouse or other family working there?
- Will they stay after you buy the business?
- Are they on payroll, or is part of the owner benefit (SDE) calculated to show you will be replacing more than one person?
NOTE: SDE is a calculation to account for only one person. If a spouse is also working, you should reduce the owner benefit for all workers except for ONE WORKING OWNER, and only one. Again, seek professional help when you buy a business.
How long has the business Owner been around?
When an owner is selling his or her business after owning it for only a short while, be cautious. Short term ownership should be a red flag. It may be a great business, and the Owner may have a very acceptable reason for selling so quickly but do your research.
Thoroughly investigate any business for sale that has been OWNED by the Seller for under three years. There are legitimate reasons for quick turnaround sales, but often this is a sign that something is challenging about the business. It could be something you can live with that the current Owner cannot. Just be sure to verify why.
One additional tip is to have the Owner/Seller complete and sign a Seller’s Disclosure Document. Need a copy of one? Just email our office at info@BuyBizUSA.com.
Are training and on-compete reasonable?
The right amount of time for training, as well as the distance and time for non-compete, vary from business to business and Buyer to Buyer. Get advice to discover what works best for you. If customers are closely tied to the Owner / Seller, it might take months, a year, or more to transfer business for sale successfully.
Regarding the non-compete time requirements, always understand why an Owner / Seller might ask for a short period and why asking for too long of a period might be difficult to defend.
In terms of distance for a non-compete, a convenience store might need only a few miles for non-compete, but an online business might need to be global.
Will you need a special license?
Make sure you know the legal requirements. Do not rely on the Owner / Seller to be up to date. We recently worked with a Dental Lab, and the Owner was shocked to learn that the number of years of experience needed to obtain a license had more than doubled! Get the facts and verify at the government offices regulating the relevant license. Assume the Seller and even the Business Broker might not be up to date.
Even if you don’t know the much about the industry, you can often, over time and with support, get licensed in many fields. Find a business for sale that you can be passionate about and for which you are willing to work hard to excel. Check with the state and county. Join an industry association. Speak with someone who owns a business in the same industry and state or region. Get the facts and make sure you can live with them.
Is the source of Financial Records good?
Some business records match what the Owner / Seller claims. Others have multiple documents or have hardly any records at all.
Unless you know the industry well and can get a good idea of how the business is financially performing, be very cautious. Sometimes a business losing money will be reported as profitable when offered for sale.
It can be hard to tell the difference between someone who is hiding profits and someone who is hiding losses.
If the sources are Tax Returns, or even Profit & Loss Statements, that can be encouraging. People will also report Projection, Owner Estimate, pure guesses, and worse.
NOTE: Sometimes, the taxes that are presented are not the same as the ones sent to the IRS, so trust but verify by having the Owner / Seller sign and submit IRS form 4506T.
Reasonable expenses and adjustments.
Read the details on calculating SDE. Only accept reasonable, verifiable adjustments. It might be right to add the expense for the Owner’s expensive car written off to the business. However, the Owner / Seller cannot add back money given to employees that are provided as a bonus each year. If that has been the tradition, employees work hard for and will likely expect it to continue, so you need to be prepared for that situation.
Is Rent reasonable, compare to Revenues?
Rents that are too high compared to the Gross Revenues destroy business profitability. Learn the industry norm and determine if price the Rent for the business you are considering is in line with the norm. Landlords are very often unlikely to sympathize with someone who bought a business and now hopes that Rent will decline so that the new Owner can make some, or any, money.
Does the business has lender financing?
Few businesses qualify for SBA lending. Less than 10% of the businesses advertised on the internet today are lender prequalified. Pay close attention to these. I recommend you start with these. If you would like a list of some in your area of Florida, we can send you a list. Just email Info@BuyBizUSA.com.
Hopefully, you are now ready to examine business listings a little more closely, and you can find these 11 essential points on any business for sale that interests you! Take a few minutes and look at the last page where we’ve provided a sample listing from the BBF-MLS. We’ve highlighted in RED the 11essential points we’ve talked about today and how to find them on this listing source. As mentioned before, each unique advertising website will list this information in different ways. Still, these are the final critical pieces of information you should look at for any listing you are interested in.
One thing to keep in mind, though, every business and business owner is unique. While these 11 essential points are critical in the initial evaluation process, you will likely find that there are many other factors that you must consider along the way along with these 11 essential points.
Happy hunting, and if we can assist you in any way, please give us a call at 1-833-BuyBiz1 (1-833-289-2491).