June 17, 2019
Want to Buy a Business? One of our SCORE Mentors recently sent me the May 24, 2019 Kiplinger Letter, Forecasts for Executives and Investors. The letter begins, “As America’s population gets older … many businesses will change hands in the coming years. Just as the workforce is aging, the ranks of business owners are grayer on average.
“A lot of owners are mulling how and when to sell. A quarter of business owners are over 60, a figure that will grow once all of the members of the baby boom generation reach retirement age. Lots of them intend to sell relatively soon … as many as half aim to do so in the next five years, according to one recent survey of business owners. I agree that this may be the best time to Buy a Business.
Since there are two sides to this coin, let’s look at taking advantage of opportunities to buy a business from the anticipated barrage of companies that will be on-the-market soon. What happens when there are a plethora of businesses for sale? Do prices go up or down?
Think about the housing market. Prices generally go down. According to BizBuySell.com, about one in five businesses listed actually sells.
As a prospective buyer — and assuming the information in The Kiplinger Letter is on target — there will be a bonanza of business acquisitions taking place in the next five years. I am beginning to see this activity pick up.
In anticipation of increased selling activity, SCORE’s Exit Strategy team was created to help business owners explore various exit options and maximize retirement equity. It takes two to tango, and we are receiving requests from prospective buyers who want to be on the other side of this transaction. SCORE does not function as a business broker, per se, but serves as a mentor in the process of buying or selling.
In lieu of this potential selling frenzy, business prices will have downward pressure. There will be more competition seeking to attract scarce buyers. As a seller, forget about receiving an all-cash offer. If you want to sell, you will have to be open to holding paper. You may have a lot of competition and, all else being equal, selling multiples will invariably be less than they are now.
1. Scout out potential opportunities online at sites such as bizbuysell.com.
2. Visit the business as an anonymous customer to see how it serves its clients.
3. Focus on top-line sales. The bottom line may show losses for tax reasons.
4. Figure on putting down 10% to 20% of the sale price. Conserve as much cash as possible. Consider asking for some seller financing to gauge the owner’s confidence. Loans backed by the Small Business Administration carry lower rates. To get one, you’ll need to put 10% down. Repayment runs seven to 10 years. Loans up to $5 million qualify. (Note: SCORE is a resource partner of the SBA).
1. Product mix: Look for product diversity and not a one-trick pony.
2. Customer mix: Look for more revenue streams, many customers.
3. Business and industry trends: Look for upward trends for both.
4. Size: Look for above average size when comparing to the industry, because size lessens risk.
5. Geographic penetration: Look at nearby competition and number of locations.
6. Management: Look to see if there is a strong management team in place.
7. Management information systems: Look for state-of-the-art computer software that provides information to run the business successfully.
8. Profitability: Look for profits increasing annually. Add back owner benefits.
9. Receivables and collections: Look at aging of accounts receivable, DSO (Days Sales Outstanding), and billing and collection processes.
10. Quality of financials: Look for audited statements, or, at least, orderly books and well-maintained records. Review tax returns.
When you Buy a Business the process is complicated, and you shouldn’t go it alone. We haven’t even mentioned Non-Disclosure Agreements (NDA’s), Letter of Intent (LOI), Purchase and Sale Agreement (P&S), Due Diligence (DD), etc.
If you want to Buy a Business in the next five years, I encourage you to contact the SCORE Exit Strategy team at score.org and request an exit strategist as a mentor. The door swings both ways, and your successful entrance is dependent on someone else exiting their business. If I may be of service to you in buying or selling then please reach out to me at [email protected]it.com