What Defines a Serious Business Buyer?

Individuals who desire to purchase an established small business must be well prepared before the search process begins. Well managed, profitable and successful businesses are in short supply and very high demand. Business owners and business brokers alike have little patience and interest in wasting their valuable time with buyers who have not taken the appropriate steps to demonstrate that they are fully prepared to acquire a business.

How does a buyer define themselves as being a “serious” candidate and not a casual, curious, tire kicker? The goal of this article is to outline the steps that a business buyer should take in advance so that they can stand out and be recognized as a serious and credible buyer?

Let’s start with a few examples demonstrating who is NOT a serious candidate.

  • I want to buy a small business in the area but am not sure what type yet. Can you send me information on three of the businesses you have listed for sale – the industrial manufacturing business, the durable medical equipment company, and the online retailer?
  • I am still working at my current job but am contemplating leaving the firm and purchase a business within the next couple of years.
  • My background is entirely in the printing industry but I want to make a change and thought about buying a wholesale chemical products company.
  • I have a little money saved up but need to get a loan to purchase a business. I am not sure how much I would qualify for or how large a business I could afford.
  • I want to buy a business but will need the seller to finance the purchase. I will pay them back entirely out of the future cash flow of the company.

Preparing a business for sale takes considerable work on behalf of the business broker and seller. Just a few of the steps include valuing the business, preparing the Confidential Business Review (executive summary), and organizing all of the corporate, financial, and tax documents. For a buyer to be recognized as a serious candidate, they too have work that needs to be accomplished prior to being in a position to venture in the marketplace and begin assessing business opportunities.

So, what makes a buyer a serious candidate?

  1. Personal profile and resume

Construct a detailed personal profile and biography. Not only will the seller need to see this document but any bank requires this as well. A resume is just a starting place. The document should cover the following questions:

  • What is your education and work experience?
  • Who will be buying the business? Just you, you and your spouse, a partner, an investor?
  • Why you are interested in buying a business?
  • What is your investment criteria?
  • What transferrable skills do you possess that qualify you for managing the business?
  • How will you be financing the acquisition? If bank funding will be utilized, a prequalification letter should be included. How much money do you have for a down payment?
  • What is your timetable to complete the acquisition?
  • Who is your advisory team? Which attorney will be drafting the Asset Purchase Agreement and facilitating the closing? Do they have experience with business acquisitions?
  • What are the contingencies for the business acquisition? Do you have to leave a current job? Do you have to secure funding from a partner or a bank? Do you have to relocate and sell a house?

How will the buyer be funding the purchase?

Buyers should be knowledgeable about the size of business they are qualified to purchase. Will the buyer be utilizing personal funds for the transaction or will third party financing be used? Most acquisitions (without real estate) require 25% of the purchase price as a down payment. (Funds needed for closing costs and working capital are often provided as part of the loan package and can be financed.)

Buying and selling a small business requires a two way exchange of information. The buyer should be ready to disclose the amount they can invest and have a detailed plan on how they will finance the entire transaction. The idea that the seller is going to finance the sale is not a plan and this type of buyer will be quickly dismissed. Business brokers can be a great source for recommendations on which lenders are appropriate and likely to finance the business they represent.

The buyer should have a current personal financial statement prepared. If bank financing will be utilized, the buyer should be clear on their borrowing capacity and have a lender prequalification letter in hand (a banker can prepare this in a matter of hours). Don’t expect the broker or business seller to provide complete access to sensitive and confidential business documents without receiving assurances that the buyer has the appropriate resources to either purchase the business outright or obtain a business acquisition loan.

What industry experience or transferrable skills does the buyer have?

The optimal situation is when the prospective buyer has direct industry experience. This is especially pertinent when bank financing will be involved. Obviously, every business is different and each will have unique requirements for successful ownership. For some businesses, the buyer may be able to satisfy this requirement by having related practical work experience or transferrable skills. Certain businesses may require licenses, certifications, or a particular expertise to operate. If the buyer does not possess these it will be critical to confirm that there is a manager or key employee in place that has these qualifications. In other situations, the business may be very specialized and a buyer lacking a critical credential will be disqualified from obtaining bank funding. These issues should be discussed early in the process as the business broker will need to determine if you are managerially qualified to operate the business.

What is the type of business the buyer is seeking and why?

A serious buyer has developed a detailed and concise “investment criteria” for the business they seek to acquire. Several of investment criteria attributes will include the type of business, the industry, the geographic location, the size of business, and the price/value of the enterprise.

Serious buyers will focus on enterprises which are suited to their background and qualifications. A buyer who inquires about an industrial packaging distributer, a restaurant, and a custom millwork company will not be treated as a serious candidate. Having an investment criteria that relates only to “profitable businesses” or “those businesses which generate a minimum of $150,000 in cash flow” without regard to the business type, industry served, geographic location, and size is a clear red flag that the candidate has not put the proper time into honing their acquisition objective.

  1. Realistic expectations.

Successful entrepreneurs recognize that there is no such thing as a perfect company. Business ownership involves taking on some level of risk and acquiring a business is no different. Buyers who seek to purchase a business 100% free of any flaws will be searching for a very long time. There will be areas of improvement for every business and the buyer will have to make a decision as to which negative elements are acceptable and which ones are not. Buyers who are too risk adverse may just not be cut out for small business ownership and being an employee is a more suitable career objective.

Additionally, buyers often fail to realize that there is a limited supply of great businesses for sale… those that have year over year revenue growth, excellent profits, and bright prospects for continued advancement. Many of these businesses sell for the full listing price and for these types of successful businesses, buyers should be careful when submitting an offer less than 90% of what it is listed at. Most of the time there are a multiple buyers who are evaluating the business and those candidates who submit, either a low-ball offer or an offer with unrealistic terms attached, will be wasting the valuable time of all parties involved not to mention possibly burning a bridge with the business seller and eliminating themselves from consideration.

  1. Ability to react quickly

A serious buyer is well organized, has done their research, and knows what they want and what they can afford. They are decisive and capable of moving through the process in a timely and methodical fashion. If a partner, spouse, or investor will be involved in the acquisition, these individuals are consulted with in advance and are in agreement with the defined objectives. If advisors will be assisting in the evaluation, the advisors are aware of the acquisition search and are on standby for their assignment.

A serious buyer should have an understanding of how businesses are valued in addition to a comprehension of the typical steps in the acquisition process. They are prepared with a list of well thought and detailed questions designed with the objective of determining if the opportunity meets their investment criteria. A serious buyer recognizes that a quick no is far better than a slow no and they tackle those gating issues from the outset that would disqualify the business from being acquired. Once the opportunity is qualified a serious buyer is in a position to make a ‘realistic offer’ and provide a letter of intent or terms sheet. A professional support team has been identified for the drafting the Asset Purchase Agreement and facilitating the transaction closing. Lastly, a serious buyer will understand the due diligence process and already have their checklist in place. Funding for the acquisition has been planned and money for an earnest money deposit is liquid and available.

  1. Professional Communication

A serious buyer is honest, direct, and forthcoming. Now is not the time to be cagey, cute, or evasive. You want to convey at the earliest opportunity your investment criteria, time table, financial wherewithal and reasons for pursuing the acquisition. This type of communication will build a foundation of trust and honest dialog in the weeks ahead. One viable solution for a serious buyer is to retain a business broker to assist with the search and business qualification. This approach provides far better results than a haphazard approach of firing off requests for information on any business posted on-line that catches their fancy. The business-for-sale industry is not the real estate industry. There are no open houses. This is a highly confidential process where professionals are involved and retained to protect the sensitivity of the business for sale data. A buy-side broker is paid by the prospective buyer for the time, energy, and work that is generated on their behalf. They are compensated to produce results.

There is nothing worse than going through the myriad of steps in preparing a business for sale to find a buyer that is not properly prepared nor has gone through the logical thought, planning, and preparation steps for acquiring a business. We have outlined the information that a business broker and seller needs when qualifying a candidate as a serious buyer. In order to close a transaction all of this information is required so it best that the buyer come prepared with this data at the outset. Few parties in this arena, want to have their time wasted or patience tested. The bottom line is that when you find the right business you are in a position to act and make a realistic offer. Successful businesses are few and far between and often receive multiple offers. Why should the business broker and seller invest time in you?

The Top 5 Key Benefits of Purchasing and Owning Investment Real Estate

So… You may ask yourself, why should you buy or invest in real estate in the First Place? Because it’s the IDEAL investment! Let’s take a moment to address the reasons why people should have investment real estate in the first place. The easiest answer is a well-known acronym that addresses the key benefits for all investment real estate. Put simply, Investment Real Estate is an IDEAL investment. The IDEAL stands for:

• I – Income
• D – Depreciation
• E – Expenses
• A – Appreciation
• L – Leverage

Real estate is the IDEAL investment compared to all others. I’ll explain each benefit in depth.

The “I” in IDEAL stands for Income. (a.k.a. positive cash flow) Does it even generate income? Your investment property should be generating income from rents received each month. Of course, there will be months where you may experience a vacancy, but for the most part your investment will be producing an income. Be careful because many times beginning investors exaggerate their assumptions and don’t take into account all potential costs. The investor should know going into the purchase that the property will COST money each month (otherwise known as negative cash flow). This scenario, although not ideal, may be OK, only in specific instances that we will discuss later. It boils down to the risk tolerance and ability for the owner to fund and pay for a negative producing asset. In the boom years of real estate, prices were sky high and the rents didn’t increase proportionately with many residential real estate investment properties. Many naïve investors purchased properties with the assumption that the appreciation in prices would more than compensate for the fact that the high balance mortgage would be a significant negative impact on the funds each month. Be aware of this and do your best to forecast a positive cash flow scenario, so that you can actually realize the INCOME part of the IDEAL equation.

Often times, it may require a higher down payment (therefore lesser amount being mortgaged) so that your cash flow is acceptable each month. Ideally, you eventually pay off the mortgage so there is no question that cash flow will be coming in each month, and substantially so. This ought to be a vital component to one’s retirement plan. Do this a few times and you won’t have to worry about money later on down the road, which is the main goal as well as the reward for taking the risk in purchasing investment property in the first place.

The “D” in IDEAL Stands for Depreciation. With investment real estate, you are able to utilize its depreciation for your own tax benefit. What is depreciation anyway? It’s a non-cost accounting method to take into account the overall financial burden incurred through real estate investment. Look at this another way, when you buy a brand new car, the minute you drive off the lot, that car has depreciated in value. When it comes to your investment real estate property, the IRS allows you to deduct this amount yearly against your taxes. Please note: I am not a tax professional, so this is not meant to be a lesson in taxation policy or to be construed as tax advice.

With that said, the depreciation of a real estate investment property is determined by the overall value of the structure of the property and the length of time (recovery period based on the property type-either residential or commercial). If you have ever gotten a property tax bill, they usually break your property’s assessed value into two categories: one for the value of the land, and the other for the value of the structure. Both of these values added up equals your total “basis” for property taxation. When it comes to depreciation, you can deduct against your taxes on the original base value of the structure only; the IRS doesn’t allow you to depreciate land value (because land is typically only APPRECIATING). Just like your new car driving off the lot, it’s the structure on the property that is getting less and less valuable every year as its effective age gets older and older. And you can use this to your tax advantage. The best example of the benefit regarding this concept is through depreciation, you can actually turn a property that creates a positive cash flow into one that shows a loss (on paper) when dealing with taxes and the IRS. And by doing so, that (paper) loss is deductible against your income for tax purposes. Therefore, it’s a great benefit for people that are specifically looking for a “tax-shelter” of sorts for their real estate investments.

For example, and without getting too technical, assume that you are able to depreciate $15,000 a year from a $500,000 residential investment property that you own. Let’s say that you are cash-flowing $1,000 a month (meaning that after all expenses, you are net-positive $1000 each month), so you have $12,000 total annual income for the year from this property’s rental income. Although you took in $12,000, you can show through your accountancy with the depreciation of the investment real estate that you actually lost $3,000 on paper, which is used against any income taxes that you may owe. From the standpoint of IRS, this property realized a loss of $3,000 after the “expense” of the $15,000 depreciation amount was taken into account. Not only are there no taxes due on that rental income, you can utilize the paper loss of $3,000 against your other regular taxable income from your day-job. Investment property at higher price points will have proportionally higher tax-shelter qualities. Investors use this to their benefit in being able to deduct as much against their taxable amount owed each year through the benefit of depreciation with their underlying real estate investment.

Although this is a vastly important benefit to owning investment real estate, the subject is not well understood. Because depreciation is a somewhat complicated tax subject, the above explanation was meant to be cursory in nature. When it comes to issues involving taxes and depreciation, make sure you have a tax professional that can advise you appropriately so you know where you stand.

The “E” in IDEAL is for Expenses – Generally, all expenses incurred relating to the property are deductible when it comes to your investment property. The cost for utilities, the cost for insurance, the mortgage, and the interest and property taxes you pay. If you use a property manager or if you’re repairing or improving the property itself, all of this is deductible. Real estate investment comes with a lot of expenses, duties, and responsibilities to ensure the investment property itself performs to its highest capability. Because of this, contemporary tax law generally allows that all of these related expenses are deductible to the benefit of the investment real estate landowner. If you were to ever take a loss, or purposefully took a loss on a business investment or investment property, that loss (expense) can carry over for multiple years against your income taxes. For some people, this is an aggressive and technical strategy. Yet it’s another potential benefit of investment real estate.

The “A” in IDEAL is for Appreciation – Appreciation means the growth of value of the underlying investment. It’s one of the main reasons that we invest in the first place, and it’s a powerful way to grow your net worth. Many homes in the city of San Francisco are several million dollars in today’s market, but back in the 1960s, the same property was worth about the cost of the car you are currently driving (probably even less!). Throughout the years, the area became more popular and the demand that ensued caused the real estate prices in the city to grow exponentially compared to where they were a few decades ago. People that were lucky enough to recognize this, or who were just in the right place at the right time and continued to live in their home have realized an investment return in the 1000’s of percent. Now that’s what appreciation is all about. What other investment can make you this kind of return without drastically increased risk? The best part about investment real estate is that someone is paying you to live in your property, paying off your mortgage, and creating an income (positive cash flow) to you each month along the way throughout your course of ownership.

The “L” in IDEAL stands for Leverage – A lot of people refer to this as “OPM” (other people’s money). This is when you are using a small amount of your money to control a much more expensive asset. You are essentially leveraging your down payment and gaining control of an asset that you would normally not be able to purchase without the loan itself. Leverage is much more acceptable in the real estate world and inherently less risky than leverage in the stock world (where this is done through means of options or buying “on Margin”). Leverage is common in real estate. Otherwise, people would only buy property when they had 100% of the cash to do so. Over a third of all purchase transactions are all-cash transactions as our recovery continues. Still, about 2/3 of all purchases are done with some level of financing, so the majority of buyers in the market enjoy the power that leverage can offer when it comes to investment real estate.

For example, if a real estate investor was to buy a house that costs $100,000 with 10% down payment, they are leveraging the remaining 90% through the use of the associated mortgage. Let’s say the local market improves by 20% over the next year, and therefore the actual property is now worth $120,000. When it comes to leverage, from the standpoint of this property, its value increased by 20%. But compared to the investor’s actual down payment (the “skin in the game”) of $10,000- this increase in property value of 20% really means the investor doubled their return on the investment actually made-also known as the “cash on cash” return. In this case, that is 200%-because the $10,000 is now responsible and entitled to a $20,000 increase in overall value and the overall potential profit.

Although leverage is considered a benefit, like everything else, there can always be too much of a good thing. In 2007, when the real estate market took a turn for the worst, many investors were over-leveraged and fared the worst. They could not weather the storm of a correcting economy. Exercising caution with every investment made will help to ensure that you can purchase, retain, pay-off debt, and grow your wealth from the investment decisions made as opposed to being at the mercy and whim of the overall market fluctuations. Surely there will be future booms and busts as the past would dictate as we continue to move forward. More planning and preparing while building net worth will help prevent getting bruised and battered by the side effects of whatever market we find ourselves in. Many people think that investment real estate is only about cash flow and appreciation, but it’s so much more than that. As mentioned above, you can realize several benefits through each real estate investment property you purchase. The challenge is to maximize the benefits through every investment.

Furthermore, the IDEAL acronym is not just a reminder of the benefits of investment real estate; it’s also here to serve as a guide for every investment property you will consider purchasing in the future. Any property you purchase should conform to all of the letters that represent the IDEAL acronym. The underlying property should have a good reason for not fitting all the guidelines. And in almost every case, if there is an investment you are considering that doesn’t hit all the guidelines, by most accounts you should probably PASS on it!

Take for example a story of my own, regarding a property that I purchased early on in my real estate career. To this day, it’s the biggest investment mistake that I’ve made, and it’s precisely because I didn’t follow the IDEAL guidelines that you are reading and learning about now. I was naïve and my experience was not yet fully developed. The property I purchased was a vacant lot in a gated community development. The property already had an HOA (a monthly maintenance fee) because of the nice amenity facilities that were built for it, and in anticipation of would-be-built homes. There were high expectations for the future appreciation potential-but then the market turned for the worse as we headed into the great recession that lasted from 2007-2012. Can you see what parts of the IDEAL guidelines I missed on completely?

Let’s start with “I”. The vacant lot made no income! Sometimes this can be acceptable, if the deal is something that cannot be missed. But for the most part this deal was nothing special. In all honesty, I’ve considered selling the trees that are currently on the vacant lot to the local wood mill for some actual income, or putting up a camping spot ad on the local Craigslist; but unfortunately the lumber isn’t worth enough and there are better spots to camp! My expectations and desire for price appreciation blocked the rational and logical questions that needed to be asked. So, when it came to the income aspect of the IDEAL guidelines for a real estate investment, I paid no attention to it. And I paid the price for my hubris. Furthermore, this investment failed to realize the benefit of depreciation as you cannot depreciate land! So, we are zero for two so far, with the IDEAL guideline to real estate investing. All I can do is hope the land appreciates to a point where it can be sold one day. Let’s call it an expensive learning lesson. You too will have these “learning lessons”; just try to have as few of them as possible and you will be better off.

When it comes to making the most of your real estate investments, ALWAYS keep the IDEAL guideline in mind to make certain you are making a good decision and a solid investment.

5 Reasons Why People Fail in Business

Do you ever worry that your business will fail? It’s hard to contemplate failure, especially when you’re working so hard and want so much to be successful.

Considering failure is valuable, though, because the very ingredients that make for business failure can be transformed into business success.

Here are 5 ingredients that go into the mix of business failure, and how you can transform them for your own business success:

1. Unclear purpose

Here’s the thing: the more clarity you have about what you want, the more likely you are to get it. In your business, having little or no focus on anything but making a profit results in scattered effort and less effectiveness. Ironically, it leads to less money too.

Transformation: Clear Purpose

Have you ever been part of something greater than just you and your self-interest? Feels great, right? The reason it does is that we are actually built that way. We are motivated, and can accomplish great things in service of something bigger than ourselves. It’s no different for your business. Define your greater purpose. Define the impact you want to have in your business, your community, and the larger world. Then you’ll have clarity and energy to do more with your business. You’ll have the motivation to pull through tough times, for even greater success.

Communicate that impact purpose to your prospects and customers. People are drawn to businesses with a higher purpose.

2. Destructive thinking

A day at work filled with thoughts about imminent failure and negative perceptions of people’s motives will drain you and your motivation, and ultimately, kill your business. Not only that, destructive thinking also negatively affects your health and even your life span. Transformation: Constructive Thinking

Your thinking affects your actions in your business and everywhere else in your life. Optimistic thinking followed by persistent action leads to better results. If you’re not naturally inclined that way, the good news is that you can learn optimism. Problems become less personal, the size of the problem more realistic, and the fleeting nature of problems more clear.

You can support your constructive thinking with a daily ritual that includes mindfulness (e.g., meditation, breathing exercises), visualization (mentally rehearsing your desired outcomes), and affirmations, including gratitude. Schedule your daily ritual in. You can do this in 15 minutes, and it will make a great difference, especially as a start to your day.

3. Unproductive action

Low productivity means you can be working all day for days on end without moving closer to business success. We’re in a culture of busy-ness, and it’s tempting to fill our hours without thinking too much about whether the actions are in themselves valuable.

Transformation: Productive Action

Productivity begins with focusing your actions on your impact. Will this help me to be more impactful? Is it aligned with my impact purpose?

A quick overview of powerfully effective strategies for productive action:

· Plan before you begin each day. Plan the night before if you can.

· Do the most impactful thing first, so you always have some progress each day.

· Rush unimportant tasks. Set a time limit on each job to help move you through it more quickly.

· Delegate. Allowing others the opportunity to offer what they do well in areas that are not your strengths is a great service to them, and a great time-creator for you.

· Segment your time, then rest. I work in 50 minute blocks, followed by 10 minutes doing something completely different to rejuvenate. Find the time frame that works for you.

No doubt about it, choosing productive actions requires discipline. And in the best way! Discipline serves you by helping you to choose the things that will help you reach your business goals and be successful.

4. Constricted connection

It can feel comforting to stick with your close circle and not expand further. It takes work to reach out and maintain new connections. Staying with your same small comfortable group, though, will hold you back in your business.

The quality of your connections matter too. Are you surrounding yourself with negative people? People who aren’t as interested in success as you are? Who you spend time with matters.

Transformation: Expanding Circle of Connection

Expanding your circle of connection is one of the most powerful things you can do for your business success. The more people you know, the more likely you are to learn new things. They also become a source of inspiration, and more connections that can help you in your business. People love to be helpful. Give them that gift of asking for and receiving their help.Find and welcome the support you need to be successful. Learn from an experienced business person as a mentor or coach. Reach out to people you admire and ask them questions. Make this a regular practice.

5. Money obsession

It can be tempting to become too focused on money. First, our culture encourages it. It’s considered a good thing to accumulate stuff. And you need money for that. The thing is, money and stuff don’t bring you happiness or vitality.

Second, if business isn’t going well, you can become hyperfocused on money and leave your values behind in order to make a profit.

Transformation: Money Health

Instead of focusing on money, focus on connections with people and with your purpose instead. Helping others in your business is what will bring you business success that is both healthy and sustainable.

Find balance and harmony around money. Yes, it’s important to know where you stand with money. But money is only a tool. Instead of loving money, love yourself and others. That is key to business success.

These 5 reasons why people fail in business don’t have to be a recipe for failure. Instead, you can transform them into success.

Gadgets and Gizmos

Buying the latest gadgets and gizmos is one of those major highs for the techno savvy that has few parallels. In particular if they are high tech gadgets or computer gadgets. The mere announcement of the tablet display, sized at 7″, by Apple has all computer aficionados in a whirl. The screen of this new device is practically the size of the gizmo itself. All in all as far as high tech gadgets go, this one promises to be a delectable blend of design and ingenuity.

Those hooked on acquiring the latest gadgets and gizmos, and who feel that Nook, Kindle and the like are old hat, now can revel in the world’s first dual screen device – the enTourage eDGe. It combines a notepad, notebook, e-reader, and video/audio recorder and player in one Linux with Google Android OS device. What does it do? Much of what you might want to at any given time – web surf, read an e-book, get email, watch movies or listen to music from anywhere. Essentially this is a student-friendly device aimed at freeing them from carrying books and notebooks. Since it is first and foremost an e-reader, the glare-free screen, zooming features, and the ability for a person to read in sunlight make it a particularly desirable gizmo. There is a journal page that can be opened and used by hand or with the help of a virtual keyboard – very useful for taking notes. This feature is enabled by e-ink technology, which further allows people to make notes on the book they are reading.

If latest computer gadgets are what you are hooked on, there are quite a few in the market just now. The Lenovo Multimedia Remote with 2.4GHz Wireless Keyboard comes in a compact style. Once connected, this multimedia remote can be used for using multimedia controls on the PC like with Windows Media Center. There is also the Bear Extender n3 which Rokland Technologies has recently rolled out. It is a long-range 802.11n high-powered wireless adapter for Macs that offers up to four times the range of standard Apple-branded Airport wireless cards. The Wi-Fi adapter combines 802.11n compatibility with a powerful 700mW Wi-Fi radio that enables the device to pick up 802.11g and 802.11b signals from long distances.