Preaching Caution to Buyers

Let’s get one thing out of the way:  We are never wrong!!!

We thought we were wrong once; but we were mistaken.

Okay, enough for the lame jokes on a Monday morning.

In a recent public bulletin board, we were soundly taken to task for one of our comments.  The question was whether a Pepperidge  Farm Route was a good investment.  Our answer was that we did not have direct experience, because we had never represented one; and the reason we had never represented one is that none of the Route Sales opportunities we had been asked to sell were worth anything, and we declined to represent any of those Sellers.  Our comments suggested that the ones we have seen were loaded with expenses, and very little profit.  And that was before gas went to $3.50+ per gallon!  We further stated that we had heard of a number of complaints about owning such businesses, and not a single success story.

This is not to say that NO Route Sales operations are worthwhile.

Some of the later respondents were positive, most were not.

The criticism we personally received was from a writer that responded two (2) years after the original question, and our almost immediate answer.  He was obviously angry that we were so negative about his chosen line of work and we apologized, since we certainly were not attempting to be insulting, which is apparently how he took our comments.

Our response to the question originally posed did not and does not suggest that Route Sales are terrible investments.  But neither are they representative of a pot of gold, for any given Buyer.  Our Critic’s own private correspondence with us suggested that his Route was a suburban operation, with somewhat specific market characteristics.

And THAT is really the point!

There are MANY good businesses out there.  And there are MANY dogs!

One guy’s good fortune is not something you, as Buyers, can take to the bank.  Because ONE GUY did well, it does not suggest that the entire market for Route Sales is like hitting the Lottery.  Wolgang Puck has done incredibly well with Restaurants; does that mean every Restaurateur is going to hit it rich?

And maybe our experience is too limited to find the real bell ringers, among Route Sales.  But again, that is the point:  You cannot assume anything, and as we have said over and over, in various posts here and other places, YOU HAVE TO DO THE RESEARCH!  You have to know what you are buying or starting, and you cannot listen to only one guy – us, or anyone else – in making a singular decision that may mean the biggest investment, and the biggest commitment of your professional life!  And Business Plan can be the tool you use to do that kind of research.  (See our posts on Business Plans.)

Knowing any business in depth and in advance is almost always the key to avoiding disaster, and paving the way for real success.  This is why we always suggest that your first involvement in owning your own business should play on your own business experience, rather than something about which you know nothing.  And we can provide you with tons of disaster stories about otherwise intelligent people that have ignored that advice.

And there are other situations where, though the Buyer had background in the field he chose, he did not have the business background to make it work.  Like the Real Estate Agent that could not manage the cash flow needs of the Brokerage he bought, and got deeper and deeper into debt, until we finally sold it for him.

According to our Critic, there are some incredibly good Route Sales businesses out there.  According to our own experience, there are many that would be a mistake to own.

There are some great Restaurants in the market.  And there are many that should never have been open, to begin with.

There are some superior Liquor Stores, in operation.  There are others that cannot cover their own Lease payments, much less provide for Debt Service and an Owner’s Salary.

And though fewer than in more prosperous times, there are businesses that are opened and flourish, or some that increase the volume and/or profits during the most trying economic times.  But the truth is that these are invariably successful more because of the skill and knowledge of the Owners, than from pure, dumb luck.

There is no question but that we are Business Brokers, and we do not make a dime, until you buy a business from us.  But we will always council caution over our own profit, for any Buyer with which we are working.

Mr. Critic, God bless you in your success.  But we still council such caution for Buyers looking at Route Sales – just as we do with ANY business they wish to purchase.

Landlords are NOT Your Friends

There are any number of reasons for deals to fall apart.  The biggest, by far, is because of Landlords.  The bigger the Landlord, the worse they seem to be.  REITs (Real Estate Investment Trusts) are by far the worst, in our experience.  Yes, we know we are generalizing, and we should say this is in our experience, particularly inMarylandandVirginia; however, REITs are found throughout the Nation, and we cannot believe they do not follow similar strategies and methodologies.

And their methods – in OUR experience – are largely based on apathy, arrogance and greed, all at the expense of the Tenant-Buyers and Sellers, alike.

We are representing a Seller at this time that has a bona fide Buyer under contract.  But try as we may, we cannot get the Landlord’s Representative to answer phones, e-mail, regular mail or correspondence sent via overnight courier, candygrams – you name it!.  They have ignored the Tenant, they have ignored us and they have ignored the Tenant’s Attorney.  This has been going on for almost ten (10) months, long before we got involved in representing the Tenant for the sale of his business.  And we cannot go further with the Contract, until the Landlord blesses the Buyer and offers and Assignment of the Lease.

About three months ago, another Tenant in the same Shopping Center came into our Client’s establishment and asked if he – our Client, had heard from the Landlord.  It seemed that this other Tenant’s lease was to expire in about a year, and he was attempting to determine how the Landlord was going to respond, because this Tenant wanted to take out a loan, in order to improve his store.  He, too had gotten no response.  And he had spoken to five (5) other Tenants, each of whom had similar difficulties.

We have had identical problems with four (4) other Landlords and their Representatives.  When attempting to contact other people in these REITs, the Tenants (and we) are shuttled back to the original Representative, who still ignores all communications.

Unfortunately, many, many Landlords have a “take it or shove it” attitude.  They begin with an adversarial position, which gets worse once your Lease is signed.  And this is not found only with large, institutional entities.  We went to one, private Landlord, to speak about a Restaurant space.  The prior Tenant had gone bankrupt and it was our position that the Rent was too high for the area.  We attempted to negotiate a more reasonable rate.  His response was:  “This is what it is.  If your guy does not like it, screw him!  There are plenty of dumb-ass restaurant people who will take it, if he doesn’t.”

We counseled our guy to walk away, and sure enough, the Landlord got another Tenant…who is now about to fail.  We spoke to that Tenant recently, and he said:  “If I was a mile west of here, the Rent would have been about 25% less and I would have been making money!  Not getting rich, but surviving!”

Some locations may be worth the price.  In our area, Rents are going from $35 to $47 per square foot, NNN.  (More on this in another post.)  That means  your BASE Rent for a 2,000 square foot space is going to cost you $5,833 to $7,833 per month, plus the NNN charges.

If we stay with the Restaurant theme, the Rule of Thumb on Restaurant Costs suggests that Rent should be no more than about 8% to 10% of your Gross Revenue.  At $5,833 per month, or $70,000 per year, that means you have to earn Revenue of at least $700,000 to justify that amount.  At 2,000 square feet, that is $350 per square foot, or a little less than your average Ruby Tuesday’s.  Put another way, that is $1,918 per day (based on 365 days per year), or $13,425 per 7-day week, or 58,333 per month!  That is a lot of pizza and subs!

And you need to think in terms of patterns.  Landlords typically charge more Rent for Restaurants than for other businesses, because of the perceived additional wear and tear on the property.  Yet, Landlords typically NEED Restaurants, because in many locations, such as Malls and Outlet Centers, having the Restaurant there helps retain Shoppers there longer – they do not have to go out of the Shopping Center for a break or to eat, where the Landlord can risk them going to other shopping areas, afterward.

But typically, the Landlord will resist making your eatery the exclusive one, in the Center.   They might give you exclusivity for pizza or hamburgers.  But they claim they want to infuse a diverse menu, so the Shoppers will have no reason to go elsewhere.

Great!  Except that if LL Bean and Eddie Bauer are in the same Center, you might buy two sweaters from them.  But if you just ate a pizza at one end of the Mall, you are not going to eat a hamburger at the other, just for the variety.  It does not work that way!  But the Landlord does not know or care that he/she is cutting your sales in half, by bringing in a second Restaurant.  He/she is not going to discount your Rent by 50%!

YOU NEED TO THINK OF THESE THINGS!

Think about the fact that, in those shopping areas, you would be paying for Rent from 9:00AM until 9:00PM, in your Restaurant.  But people do not eat en masse except during the hours of perhaps 11:00AM until 2:00PM.  You still have the lights on during the rest of the day.  The refrigerator is still on.  So is the grill and oven.  You have to have staff, or be there, yourself.  And the Landlords frequently dictate the hours you must be open.  So, if you are relying on shoppers for your traffic, you have some severe limitations with which to deal.

Therefore, if this is your kind of operation, you need to get several items included in your Lease, IN ADVANCE – because you may never be able to speak to the Landlord or his/her representative again, until it is time for him to raise your Rent:

1. Get exclusivity, if that is a requirement of your business, like in a Restaurant.
2. Use your Business Plan (remember that?) to project the Rent you can afford, and negotiate that rate.
3. Make certain the Landlord’s marketing goals meet your needs, as well.

If you are in other types of businesses, think about the essential space issues you need to address.  What about being able to occupy a large office building after 5:00PM?  Is that important to you?  Many large buildings lock the doors after that time and, even if you have access, they frequently shut down the Heat and Air Conditioning.

How does your business intend to operate?  What do you need?  Anticipate these things, well in advance, for your own sake!

Do You Come Off Like an Amateur?

Several times this year, we have received Business Plans from people looking to Finance either a startup or a business purchase.  (We are Business Brokers, but have a division that Brokers Commercial Loans.  We handle SBA loans and up to one, $42 million resort development, which is in successful process at the time of this writing.)

Most of the Financing request we receive are turned away, almost immediately.  The issues normally revolve around RISK!  No Lender, no Investor wants to entertain anything that looks like a doomed project, going into it.  And most applicants we reject seem to go out of their way to prove themselves as unworthy of a loan, because of things they say and do.  Their verbiage, their presentation will often give the Lender the impression that the Borrower has no concept of what he/she is actually getting involved in.

There are a couple of dead giveaways:

There is no god-given right to get a loan.  We cannot tell you how many people act that there is such a right, feel they have no responsibility to demonstrate why they need the money, why they feel no need to justify their request and how it is to be repaid.  And it is not just how they act; THEY ACTUALLY SAY THESE THINGS to us!

Poorly written Business Plans.  The Business Plan – yes, we know we harp on that – is your “sales pitch” to prove your idea.  The typing should be well done; the vocabulary should be professional and clear; concepts should be easily understood by the Lender, keeping in mind that he/she may know nothing about the industry you are contemplating.  That last point is important, because the use of industry-related abbreviations, as an example, can hinder the Lender’s understanding, and if they do not understand it, they will reject it, out of hand.  YOU may know what you are talking about, but you need to read it once you are finished, to make certain the outsider will understand what you are saying.

Business Plans are frequently vague or disorganized.  Again, under the premise that the Lender may not know your particular business, all information should be like a linear equation, for you math students:  A + B = C.  One concept should lead to and build on another and so on, until you reach your result.    For example, first you identify that a need exists; second, you state your idea and how it would meet the need you identified; next, you show how that idea is developed or created; then you show how much it will cost to develop; after that, a narrative might demonstrate how it will be managed; finally, a two (2) to preferably three (3) year Pro Forma or projected P&L must be attached.  The Pro Forma P&L is your result; the “C” in the A + B = C equation.  There are tons of books on writing a good Business Plan.  The organization is vital, because again, if the Lender has difficult in reading it, you will get nowhere, fast!

Failure to sell yourself.  Keep in mind that the Lenders do no know you.  You are not even a face or a voice – you are a piece of paper.  You need to demonstrate to them that you have the education, the experience, the sophistication, the skills and the maturity to handle that kind of money and responsibility.  To do that, your communication skills will be important, but so will your resume, which should always be included with the Business Plan.  One applicant did not want to provide a resume, because he thought it was none of the Lender’s business!  Arrogance is not a qualifying trait that Lenders admire, either.

Unreasonableness.  We had a very nice, very well meaning guy ask for a multi-billion dollar – that is with a “b” – loan for a mammoth energy plant.  Neither he nor his “team” had any background in building or managing such a plant.  He had no money to bring to the table.  He thought that WE were the unreasonable ones…

Yes, the Lenders are in the business of lending money, and yes they are making money off of the money loaned to you.  But YOU are asking THEM for money.  They turn lots of people away.  You need to impress them with your worthiness, your business’ worthiness, your ability to repay the monthly note until it is paid in full, and the fact that you have worked diligently to show that you have planned and will continue to minimize their RISK.  Because RISK is a curse word, among Lenders.

This is also a reason why getting a loan with no money down is not a rational expectation.  If you do not have sufficient confidence in your business to invest your own money, why should the Lender feel any more confidence than you?  And, if you have not saved any money to invest, the Lender is going to wonder why.  They want to know that you have worked your way up in whatever business you have already been involved, have gained some semblance of earning power by showing you have used your skills and worth ethic to get ahead, and have had the maturity to save some of that money.  If you have no savings, they do not really care why.  For all they know, you have blown your available cash on booze, boats and poker; their worry is if you cannot handle your own money responsibly, you surely will take no greater care in safeguarding theirs.

The moral is, do not come across as an amateur.  Loan applications and Business Plans are like that old cliché:  You only get one chance to make a first impression.  If you blow it, no Lender is likely to come back and ask you why you made a lousy first step.  Too many loan applications are coming across their desks, every day.  They will just yell, “Next!”  And your package will go into the circular file.

 

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

Looking for a “Cheap” Business?

There are a number of people populating the Net, asking for “cheap” businesses.  One writer, as an example, posted a notice on a business site that asked for leads to purchase a Gas Station, costing under $20,000.  Are you kidding?  Filling the tanks with gas is going to cost more than that!

There are a number of ways to react to this kind of request:

1.  Since it was posted on the Net, it is possible the guy is just kidding…except that people   call us with those kinds of serious requests, as well.

2.  The writer knows NOTHING about Gas Stations and their operations.

3. The writher knows NOTHING about business, in general.

It is one thing to say that the Buyer has $20k to put down; that would permit him/her to potentially take out a loan and buy a business with a purchase Price of $100,000 to perhaps $200,000.  But in so doing, you have to know that the Cash Flow would allow you to then make payments on a loan for $80,000 to $180,000, plus what you need to live on.

The point here is:  The smaller the Price, the smaller the Cash Flow.  Some people use “rules of thumb” to determine the price.  And the rule of thumb for a Gas Station CAN BE about 2.5 times Cash Flow.  If the Seller uses that multiple on a Gas Station that is priced at $100,000, that means you will have $40,000 in Cash Flow with which to pay yourself and the note you took in buying the business.  If you had $20,000, you took a note for $80,000, and on a 7-year loan at an interest rate of 7%, your monthly payments would be about $1,207 per month, or $14,489 per year.  That leaves you with $25,811 to live on.  And you have to pray like mad that nothing goes wrong that will adversely affect your business, because that leaves you nothing to fall back on.

Using that same rule of thumb, the guy that wanted a Gas Station with a Price of $20,000 is attempting to buy a business that pays an annual Cash Flow of $8,000!  What is the point!??!  You can earn more than that, working VERY part time at a Gas Station!  (You might want to also read our post entitled, “No Money Down!?!?”)  Whether the Seller uses that rule of thumb or some other methodology, a business of that kind will always be a reflection of Revenue or Profitability, which is why we say that the lower the Price, the lower the amount of Cash Flow or Profit.

Some criticism of this commentary may note that the Buyer is obviously trying to purchase a “turnaround” business.  But Gas Stations are normally not the type of business that is radically turned around easily.  The average Station that is having difficulty in generating Revenue is, in all probability either suffering from very difficult competition, or a terrible location.  You are not going to turn around competition from some of the giants, such as Wawa, Costco, BJs and others that we see in theMiddle Atlantic States.  And if it is location…are you just going to relocate a Gas Station?

Then, there is the concept of Inventory.  Gas Suppliers like BP and Exxon are going to demand deposits against future Inventory purchases.  Large deposits!  And if you have a small Station, you may have tanks that total 14,000 Gallons.  When filled to the legal amount of 80% of capacity, that means you could be filling them with orders of 11.200 Gallons.  At $3.50 per Gallon on the wholesale price – which as this is written in April 2012 would be VERY low – your COD payment for a full load would be $39,200.  That is almost double the Price of the Gas Station.  And that does not include any Inventory for the Store that may be attached.  (Although, at a purchase Price of $20,000, how big can the Store be?)

You might say, “I will not buy a full load of gas, and at settlement, I will ask the Seller to have the tanks at low levels.”  Well, that is great!  Except that, if you do that, you have nothing to sell.  We sold a Gas Station just last year, with that exact kind of scenario.  The original Buyers had no money, and their Operation Expenses sucked up all of the Revenue, so they could never catch up enough to keep a consistent Inventory.  This caused two problems.

First, customers never knew when the Station would have any gas to sell.  Frequently, they would pull up to the pumps, only to realize there was nothing to buy.  After several experiences like that, they simply assumed it was not worth their time to even try, and the regulars drifted away to the competition, quickly.

Second, gas suppliers got tired of the irregular ordering pattern.  The owners of the Station attempted to purchase partial loads of gas, but that meant that the suppliers were driving out of their way to sell only a fraction of what they could sell to more regular customers.  So the suppliers began to provide Inventory, only when they had no other customers that competed for their time and deliveries.  That meant the Gas Station had even more irregular deliveries, leading to greater spans of time when their tanks were empty.

When we sold the Station, we actually sold it only for the value of the Real Estate which, fortunately for the Sellers, they had also managed to purchase.  That was far more than a $20,000 deal.  But it is an apt example for someone looking to buy a Gas Station – or many other businesses – completely on the cheap.

There certainly are businesses that can be bought at a discount and turned around.  However, this is not to be undertaken lightly; you REALLY need to know what you are doing, you have to REALLY understand that specific business, in order to accomplish this feat.  And you have to have deeper pockets than just the Price needed to purchase the business, itself.  If it is sold at a deep discount, it is undoubtedly losing money.  You have to have the money to inject into the business to make up for whatever faults are inherent in the business, when you buy it.  If it is a Motel, it may involve huge investments in décor, in bedding, in a new roof, televisions, etc.  If it is a Convenience Store, it may mean new shelving, huge amounts of cleaning, signage, increased and more varied Inventory, and so on.  Some fixes, some businesses are more expensive than others.

But you have to have that money in your pocket.  Very few (if any) lenders will provide loans for turnaround projects.  (An exception MAY be if you already own a dozen, similar operations and have turned them around, successfully.)  And the money you may need is not just for the kind of fixes that need to be applied and the Inventory that may need to be added.  You also need to determine how long it will take you to fix what is wrong with that business, and how long it will take you to turn it around.  Because if the business is being sold at a discount because it is losing money, you will need to cover the losses until you can turn it around.

With a Business Plan, (see our two other posts on this subject,) you can develop a strategy to overcome all of this, and make a decision as to whether it is even worth your while to invest in someone else’s problems.  Be absolutely certain that the price you pay is worth the added difficulty you can experience in buying such a business.

All-in-all, sometimes the best deal you do is the one you walk away from.

 

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

Is an Attorney Necessary, in Buying a Business?

Some of our best friends are Attorneys.  We are not the kind of Brokers that feel that Attorneys “break deals – they don’t make them!”  On the whole, we have excellent relations with Attorneys and get many referrals from them.  Certainly, we have had our share of Attorney-horror stories.  But we have also had horror stories about Sellers that kill deals; Buyers that kill deals; Brokers that screw up and kill deals…

But to succinctly answer the original question of whether an Attorney necessary, the answer is an unqualified

YES!  YES!  YES!  YES!  YES!

We have read that 70% of ALL of the World’s Lawyers are in theUSA.  There is unquestionably legal overkill, in some areas.  But Attorneys are like Insurance Policies:  You have no idea how vital they are, until they save your sorry butt!

The purchase (and sale) of a business can be a highly, technical transaction, legally.  As a Buyer, how do you protect yourself from debts and other liabilities that were historically generated by the Seller?  Is an Asset Purchase or the purchase of the Corporation best for you, and how does that relate to the previous question?  Legally speaking, does timing matter?  This is particularly true if you are dealing with permits and licenses, such a Liquor Licenses.  What about Employment Agreements that may be in place?  Or Employment Agreements that you may wish to attempt to create, when you take over the business?  How does Bulk Sales Tax affect your purchase?  This is something that varies from state-to-state, and it is something that is not only decided with your Attorney, but with your Accountant, as well.

What about contingencies to a Contract of Sale that allow you to withdraw from the deal without penalty or liability, if you find something has been misrepresented or undiscovered in prior discussions with the Seller or Broker?  That does not necessarily mean that they purposefully hid such a negative characteristic of the business from you; but such information can radically and justifiably cause you to change your offer or simply withdraw from the transaction – and you cannot do that if your Contract of Sale does not permit it.  Without contingencies, you could be facing a long legal fight, potentially costing you even more in legal fees than if you had simply worked with an Attorney in the review and development of the original Contract.

Most Brokers – and we are Brokers – are not Attorneys.  Some Attorneys do Business Brokerage, but frankly we do not feel that is an appropriate use of a Lawyer’s skill or time.  Many may be great legal minds, but lousy promoters of businesses, and even worse in performing positive negotiations.  In the initial negotiations, ideally you want to have the Buyer and Seller working toward a common goal, rather than in opposition to each other as you would in a lawsuit.  Moreover, does the Attorney still work on an hourly basis, when he/she is acting as your Broker?  (Most Business Brokers only get paid if and when the business sells.)  If that Lawyer/Broker is on an hourly rate, what is his/her incentive to get the deal done efficiently and quickly?  But that is another story…

Many Buyers and Sellers want to save a buck and ask us to do Contracts.  A smart Broker will not do that!  Ever!!!  For one thing, it is not legal, (at least inMaryland); that would amount to practicing law without a license.  Even as non-Attorney Brokers, we know that much.

Moreover, if we represent one party to the deal and try to write or review a Contract, and the other side of the deal has an Attorney, we would be completely out of our element, in negotiating technical, legal issues.  We would be doing a tremendous disservice to our Client.  It would be like going into a duel against a Navy Seal, and us never having used a gun before.

We sold a large Motel a couple of years ago, which was owned by a Bank.  The Bank AND ITS THREE (3) ATTORNEYS provided the Contract.  Our Buyer said he did not need a Lawyer and reviewed the Contract, himself.  We begged and pleaded for him to retain his own legal counsel, and we refused his request to help him read through the Contract.  We told him we were not adequately trained to do so, and we backed our concerns up verbally, in e-mails and even certified mail.  Our communications were in part to try to impress him with the critical nature of our concerns, admittedly as well as our effort to protect our own derrieres, from a legal perspective.

He went into the transaction on his own, and as a result, he probably incurred about 20% more in avoidable costs, than he needed to.  It would have cost him less than 2% of those cost overruns, in legal fees.

We had another Buyer who wanted us to write the Contract of Sale.  We told him we could not legally do that and that it would be to his disadvantage for us to do so.  Then the Seller retained an Attorney, and we emphatically explained to the Buyer that he must do the same.  He is no longer speaking to us – though he is going through with the deal – because he feels we are “just costing me a lot of money…I will talk to the Lawyer, but not to you!”  We are sorry he feels that way, but when we received a 23-page Contract from the Seller’s Attorney, we knew we were correct in our stand.

On the other hand – Attorneys, do not read this part – Attorneys are not gods!  And all Attorneys are not created equally.  Moreover, some have skills in specific areas that you would not use for buying or selling a business.  A specialized divorce Attorney would not necessarily be the best to author a business Contract of Sale.  This would be like asking your next-door Gynecologist to take your tonsils out!

In over a dozen years of being part of the Business Brokerage industry, we have had only two (2) Buyers lose their deposits; and in both cases, it was caused by negligence on the part of their Attorneys!  In both cases, we warned both the Attorneys and the Buyers of the danger of this occurring, with plenty of time in each case to avoid the loss, verbally and in writing; and in both cases, the Attorneys told us that we were not Lawyers, we did not know what we were talking about and to stop interfering with the professional relationships they had with their Clients.

Benjamin Franklin potentially said it first, but not in these words:  Question authority!  Do not assume that your Attorney knows everything about your transaction.  You need to protect your own interests from the other party in the transaction, from the Broker, from your own Accountant as well as the Seller’s CPA, from the Bank, Title Companies (if applicable) and from both Attorneys.  DO NOT ASSUME ANYTHING!

This is potentially the biggest business transaction you will ever do; it could financially make you, or ruin you, if you do not plan and research and monitor every step along the way.

We sold a business to an Attorney, once.  He was the walking stereotype of an arrogant, tough, shrewd, lawsuit-oriented Lawyer, and we dreaded the deal.  We thought he would be scrutinizing every syllable of everything that was said or written to and for him.  We thought the deal would take months and months and months to settle, if it settled at all!

No way!  It was the smoothest and even most enjoyable transaction we have ever done.  And when it was over, we said to him, “Nate, we were prepared to hate you.  How come this was so easy?”

The part we liked best was when he said we provided him with everything he needed to make an informed decision on each issue that came up.  But more importantly he said:

“When I represent a Client, in any transaction, I feel it is my duty to tell him/her all of the horrible things that can possibly go wrong, and prepare the Client by inserting protective language for each issue, in the Contract.  But as an Attorney, I know there are some things that have a billion-in-one chance of happening.  I know there are things that I would ordinarily contest or throw into a Client’s Contract that I just did not need to worry about.”

A suspicious mind might ask whether that such a Lawyer is “inserting protective language” truly for the benefit of the Client, or simply to ratchet up billable hours.  But, for whatever it is worth, think about that when your Attorney tells you, “This is language you need if a comet hits the Earth, and the Seller demands his money in the hours just before the comet hits…”

Remember that YOU are paying the Attorney; YOU are the boss!  There is a very delicate balancing act in arguing with your Lawyer, because you are paying him/her for his/her legal expertise.  But there are also issues of common sense that you need to keep in mind; and the Attorney also does not know the business as well as you do – IF you are doing your homework, before you ever get to the Attorney’s office.

 

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

Time to Buy/Start a Business?

This is a bit of a follow-up to a prior post, which discussed whether it is a good time to buy or start a business, given the current recessionary state of the economy.  The economy is definitely not a situation that remains set in stone; current events suggest that things are moving aggressively and quickly, in the areas in which we principally operate.

That last phrase can be key.  Geographic issues are always to be considered, in terms of economic cycles.  While the American financial scene will follow similar trends across the Country, and theUSitself will be impacted by World-wide economic cycles, the highs and lows of the cycles, the speed of any decline and recovery can be affected by the region in which you live and work.

Take for example theDetroitarea.  It was highly affected by the Auto Industry, and that Industry crashed early and more deeply than most other areas of the Country.  While the media now reports that Ford and GM have made substantial gains – as we write this in March 2012 – Chrysler has not been as fortunate.  And the recovery of Ford and GM are in part a result of their efforts to scale back, in combination with reduced salary/benefit packages negotiated with the Auto Workers, as well as elaborate pricing and financing to prospective Auto Buyers.

What this means is that their recoveries have had a cost to the overall marketplace for other goods and services, inDetroit.  There is a recovery going on, but it is tempered by the area’s lowered income levels and continued high unemployment, which will have implications for you, if you are looking to buy or start a business in that City.

Compare that to theMarylandarea, where we experienced serious difficulties in economic losses, as well.  But nowhere near as deep as those in areas that were more dependent upon heavy manufacturing or tourism, such asFlorida.

InMaryland, manufacturing had left the area over the years, going more toward southern states of theUS, for those manufacturers that have remained in the Country, at all.  Clothing manufacturers and the steel industry have made the move to Asia, in many cases, where they can enjoy the cheapest of labor and other reduced business expenses (like a lack of concern for employee safety or the environment, and the investment required to protect those expendable items…) that cannot possibly be replicated here.

What has replaced them, in theMarylandmarket are increases in various aspects of the Medical and High Tech Industries, and more importantly, a fairly radical increase in Government expenditures and the employment that accompanies such growth.  A large portion of the increase in High Tech businesses is also a result of Government spending.

Therefore, though property values dropped inMaryland, many areas were not as radically impacted as areas likeDetroitandMiami.  And the resurgence in prices has begun inMaryland, particularly in those sections that are close to Washington (DC) or some of the military bases that are actually in growth modes.

So, what does that mean?  Does it mean that the recession – at least inMaryland– is over?  Well, we are not economists, and anything can still happen, particularly with the scare and speculation over oil, given threats in Iran and instability in Syria; unemployment is still up and consumer confidence is rocky, both of which can affect the markets; the US election makes for incredible instability…and that is not an editorial comment about the candidates; and the continuing soap opera with the European economy can have a radical impact on our own recovery, here.

But we are seeing much more in the way of expressions of pent up demand, on the part of Buyers, within the past three (3) months.  Far more Buyers are in the market, with buying power and a willingness to move ahead.  Maybe that is a sign of their confidence in the recovery.  Maybe it is a sign that they are resigned to the current market, have gotten used to the fact that this level of market activity is the “new normal”, and they figure they need to make the best of the situation, no matter what it currently may be.

There are also expressions of pent up demand by the way of Seller activity.  They are seeing their businesses either stabilize or even increase, and feel more confident in the potential of selling at a fair price, than they have in several years.

Money is available for loans.  The SBA is seeing the stability and growth of businesses that are being processed through that organization, and increasing numbers of loans appear to be approved.

Consumer spending is reportedly to be opening up – in part, as demonstrated by the example cited earlier with GM and Ford.  Not all businesses are doing well, but many have reported increases to varying degrees, which bodes well for the economy in general, if the trend continues.

What this means, from our perspective, is that Prices for the purchases of businesses are increasing.  Demand, in most purchases, influences prices in an upward mode.  So, the more demand, the more the Sellers can command.  Not necessarily by anything the Seller might do, either.  When we advertised a specific opportunity, perhaps a year ago, getting Buyers was a slow and laborious experience.  Today, advertising that same opportunity might provide us with multiple Buyers, multiple offers and sometimes, one Buyer trying to outbid another!

Know your market!  This may be the bottom of the economic cycle.  It may be time to look at what is going on in the business area you have been considering, to determine whether this is YOUR time.  If you are starting from scratch, what is the current demand for your proposed product or service?  What is the competition doing?  How are they performing?

If you are buying a business, what has been that company’s historical trend?  Look on a month-to-month basis, not just annually.  The time for paying at deep discounts appears to be over, for many businesses.  Now may be your best opportunity to get any semblance of a “deal”, before prices start to potentially skyrocket.

We are not telling you to start or buy a business, right now!  We are telling you to look at the market carefully, and make that decision in an informed manner; make intelligent decisions based on timely facts, not generalized opinions from the media, which frequently reports on business trends that are months old.

 

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

Recession-Proof Businesses

In many of the ads you will read for franchises or mature businesses for sale, you will frequently see the advertiser boast that the offering is “Recession-Proof”.  Frankly, the vast, vast majority of that is known as “puffery”.  Puffery is actually a legal term that describes exaggerated benefits or positive features that cannot really be proven.

Some people believe that some Restaurants are Recession-Proof, particularly less expensive, fast food operations.  They believe that, despite any Recession, “ya gotta eat!”  And that is essentially true.  But speaking to a Burger King Franchisee recently, we learned that they are struggling somewhat as well, and some of the reason for that is due to the competition from other, slightly more upscale Restaurants, in their efforts to maintain themselves in tough economic times.

This is because Restaurants such as Appleby’s (and a host of others,) are making tremendous deals on discounted, full meals, that suddenly come close to what it costs the consumer to purchase a full meal at a fast food Restaurant. So, the places where you eat with your fingers are suddenly competitively priced to places where you can eat with – what do you call them? – forks and knives! After tips and such, the full service Restaurant is more expensive than Burger King. But people do not necessarily think all the way through such decisions when they are hungry and there is an Appleby’s right in front of them! And when you have the opportunity to be seated comfortably and eat something other than a burger and fries, the added expense can be much more easily rationalized.

And Restaurants are just like any other retail operation, in one essential way:  They bring you in based on a bargain, and then “up-sell” you with other items that increase the ultimate amount you sell, regardless of your initial intention.  So, fast food does not guarantee that the Recession is not a factor.

Some Auto Repair franchises will tell you that they are Recession-Proof.  Not really!  Yes, some people will delay making purchases of new cars, because of the economy.  But we have just seen that the deals with extremely low or creative financing, in particular have allowed GM and Ford to come out of the Recession, very well – so far.  On the other hand, many Auto Repair businesses are note faring so well.  The key may be in the financing that the  Auto Dealers can make it attractive.  But if you are trying to hold off buying new, and holding onto that old car, you have to pay cash for that repair.  Yes, you can use a credit card; but payment terms and reduced amounts of credit will lower your ability to do too much of that – the out of pocket payment to Repair Shops frequently do not compare as well with terms from Detroit, at least on the short term.  And as we have seen with Restaurants, short term thinking is sometimes more powerful than long term, more rational thought.

Liquor Stores are one of those things that are claimed to be “Recession-Proof”. People frequently point to Liquor Stores and say, “Even when people are broke, they still drink. Maybe more so!”

True. But some of the Liquor Store Owners we know have certainly experienced a downturn in business, as a result of the 2007+ Recession. One Owner told us, “I sell as many bottles of Scotch now, as I did before the Recession started. But now, instead of selling Johnny Walker Black at $57 for a 1.75L bottle, people are buying Inver House Glen at $13 for the same sized bottle.” He is selling the same number of bottles and even has the same Gross Profit Margin on a percentage bases; but a Gross Profit Margin of 27% on a $13 bottle, results in a far lower Dollar amount than when it was 27% of a $57 bottle!

Almost any business is going to be affected by a Recession, and the kinds of effects that are felt depend on the operating characteristics, or demand characteristics of the business.

For example, if people are out of work, or threatened with the loss of their jobs, they are going to delay or give up on making larger purchases, such as houses, cars, television sets and so on.  This is why the Automakers and Television manufacturers had to radically discount their pricing and offer extremely liberal terms, to get their goods sold.

What this means is that, in the majority of businesses, there is probably a way to survive, if you can be careful and wise with your own ability to alter your marketing and operational strategies.  (It helps if you are an Automaker or a Bank and have the Federal Government to bail you out…)

One way is to put money together in the good years that will help you re-tool your business and withstand losses that will normally occur, during the tough months or years.  This is one of the reasons we feel it is incredibly foolish to get involved with purchasing or starting a business with no money down.  Recessions are a normal part of a wide variety of economic cycles; although they come on irregular schedules, the fact that they will routinely and eventually occur should not come as a surprise.  As a business person, you MUST plan and be prepared.

Constantly re-evaluating your supply lines and Cost of Goods, is always a good idea.  Being able to understand how to cut those costs is paramount.  Methods of operation also need to be reviewed, on an ongoing basis.  Typically, when cutting Operational Expenses, many companies lay off their Sales Personnel, because they are some of the most expensive people to maintain.  However, we know of several companies that cut internal staff, telling the Sales People that they then needed to not only chase sales opportunities, but when they got an order, the Sales Rep then needed to come inside and fulfill the need.

To cut the Sales Reps meant that those companies that laid off such people had no ability to go after the small amount of sales opportunities that still remained, in the market.  Those that kept their Sales Reps incurred higher costs, but could still promote their products and services, and were far better poised to rebound more quickly and profitably, as the recovery took hold.

The key here is not to just listen to people about whether a business is Recession Proof.  Those people have their own agendas, which are normally not in keeping with your best interests.  If a Seller, if a Franchisor, if a Broker is selling you something, he/she has personal and professional reasons to push you to buy.  YOU need to be your own best counsel, in researching a given industry’s behavior during various recessionary periods.  This is – once again – the power of writing a Business Plan!

There is no question but that you cannot plan for any and every issue that may arise.  The most recent Recession virtually destroyed the credit system, as we knew it.  Some Banks, in a panic, called notes on commercial loans that had been performing flawlessly.  The Bank simply decided it no longer wanted that kind of loan in its portfolio, and told the Customer to find another lender!  How do you plan for that?!?!?

You cannot foresee that kind of circumstance.  But you can “hedge your bets” by looking for other, more common difficulties, and planning accordingly.

 

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

Bad Advice

Have you ever heard the expression:  If it looks too good to be true, it probably is!

The Internet is full of that kind of garbage.  The problem is that people frequently believe anything that is written, is true.  And people look for advice on the Net because it is FREE.  But another good expression is, you frequently get what you pay for.  Which is to say, if you paid nothing, much of that advice is probably worth just that:  NOTHING!

(Not this one, of course.  But all others!)

Many self-appointed experts espouse a lot of misinformation that other, well meaning people act on, daily.  When looking at information about buying or starting a business is no exception, and the problem with that is that people can lose their shirts on following errant advice.

• When someone tells you it is easy to get a loan, question it.
• When someone tells you that you can start a business with no money down, question it.
• When someone tells you that a business they are trying to sell is recession proof, question it.

When someone tells you that you can earn mammoth amounts of money each week with a given business, question it.

How do you question these claims?  By studying and researching the issue, from various directions and sources.

Let’s start with the last one on that list – about the ability to earn mammoth amounts of money from a given business.

Certainly, there are a lot of businesses out there that can be extremely profitable.  But the first thing to note is that FREQUENTLY – not always, but in the majority amount of instances, BIG money comes from BIG risk.  That means that the more money you put into a given business, the more you risk and the more the potential rewards you are bound to make.  It may also not mean a big risk in terms of money, but in terms of time.

By time, we are talking about personal risk, here.  That means that you may need to work for weeks/months/years, devoting enormous amounts of time each day/week/month/year, in order to make your business idea work out.  Is that real risk?  Sure!  The more time you have to devote to your business, the more you have to sacrifice your time and effort on other jobs where you earn the money to fuel your dream, your family, friends, free time, vacations…  Frequently, that’s what it takes.  In fact, personal risk or investment is common in any business you start or purchase.  But the bigger the returns – again, frequently – the more personal investment and the resulting risk is involved.

So, when someone offers you an easy way to invest in a low cost, minimal risk business with huge potential for profits, it is only natural to want to look into it.  And those kinds of things can happen.  But so can winning a Lotto ticket jackpot for a lousy $1 investment…at odds that are against you to the tune of 175,223,510 to 1, according to Powerball’s own Web Site.

When people offer to put you on easy street, you have to look at it in a very critical manner.  You have to ask a LOTof questions.

One such question is, what is in it for them?  How to they benefit?  Are they offering to do this out of the goodness of their hearts, or are they getting a Dollar out of your involvement?  And how do they get paid?  If it is up front, which is to say if they get money before you get anything, then you better look even more carefully.  We know a Broker that will not release information until he get a sizeable deposit – $25,000 to $50,000 up front – in advance!!!

You need to check on the people making the offers:  How reputable are they; how long have they been in the business; what kind of businesses do they represent, if they are Brokers?  We once talked to a woman who was offering a potential Buyer an incredible deal (she said,) that would allow the Buyer to earn hundreds of thousands of dollars per year, starting in the first year, with about $25,000 down.  When we did some checking on the “offices” of the woman making the offer, we found the address to be in a garage in a low-rent area ofHouston, and she was operating solely from a mobile phone.  Not exactly the mark of a successful Seller of such opportunities.

There are others that offer incredible opportunities to purchase businesses with no money down, again operating out of their car, or some other extravagant location.  (Sarcasm is intended, here.)  If the business they own is so darned good, why are those Sellers not doing it themselves, rather than selling the deal to you?

Frequently they use the Brokers’ curse word:  Potential!  Certainly, there is potential in every business that you might to own.  But it is with EXTREME rarity that you buy a business predicated solely on its potential.  If the Owner has had the business for five (5) years and has not earned a cent from it, do not let him/her try to sell you on the potential!

Many of these deals contain advertising wording like, “Have to sell quickly; father is terminally ill.”  Judging from the number of these kinds of statements, the Bubonic Plague must be back!  The idea is to instill a sense of urgency in you to act before you can sensibly think about the horrendous deal they are offering you.  They think that because you are concerned about the Seller’s poor father, you will move with emotion, rather than intellect.

And people do act out of emotionalism.  They will also, even more frequently act out of greed!  This is how the famous Nigerian scams work:  The greed offered by these ridiculous schemes motivate them to act, in spite of the commons sense they would ordinarily employ, in making such decisions.  Intelligent, educated people still fall for these kinds of scams, which involve putting up various amounts of money in advance, in order to obtain huge sums, down the road.

This is exactly the same kind of thing that many business purchase schemes or business startups do, in luring novice entrepreneurs.  As stated above, we know of one, particular Business Broker that demands a large deposit, in order to provide the Buyer with fundamental financial information on the business in question.  We know of Loan Brokers that demand retainers, before they even know whether either the Buyer or the business being purchased is eligible for financing.  And many of the Loan Brokers demanding retainers and such, do so by offering incredible deals that do not match anything you can find, anywhere else in the lending fields.  There is a reason you can’t find them elsewhere:  They don’t exist!!!

Other questions to ask are in that same vein:  What are other deals like, in comparative transactions?  Whether is it the profitability for a given business line, or a specific kind of loan, what makes this one special?  If the typical, comparative business yields a maximum of 20% Net Profit, why does the advertised one earn 40%?!?  We saw one that actually offered Financial Statements, attesting to the inflated earnings.  What we realized was that the Rent was not included in the Financial Statements.  When you inserted that detail into the Expenses, the normally amount of 20% Net was realized.  Was the Rent an oversight, or an overt attempt to mislead?  No idea; but it was a vital issue, regardless of the reasons.

You need to know about your intended business and whether the numbers make sense.  If a Restaurant, you should know what the national numbers are for Food Cost, Rent, Personnel Costs, etc.  If the Food Costs are high, why?  Is it because the Seller is not reporting all of his Revenue?  Is it because of Employee Theft?  Does the Seller use of Food for his/her own Personal Consumption?  It is because of waste, perhaps spawned by the type of food, the ordering strategy or cooking methods?

But on the other hand, if a given food type normally involves a 30% Cost of Goods, or Food Cost, and the Seller says he/she is experiencing only 20%, WHY???  You need to know WHY???  And you need to research the issue enough to know whether the Seller is telling you the truth, lying to you, or simply not in touch with his/her own numbers?  Is he/she dealing with some of the cheapest ingredients and charging high prices?  If that is the case, what is the quality of the food, and can the demand be retained, under these circumstances?

We are dealing with one (non-Restaurant) business where we asked, “What are your Personnel Costs?  The answer:  “I dunno…”

What were your Revenues for last year?  The answer:  “I dunno…”

What is your average Cost of Goods?  The answer:  “I dunno…”

What is your average amount outstanding for Receivables?  Well, if he did not know how much he billed, we were in no doubt that he had no idea how much his Clients owed him.  The answer:  “I dunno…”

Sometimes, the Seller is truly not aware of any of this.  Some Sellers make money in spite of their lack of knowledge.  Some even lose money, and do not necessarily even know it!

One, common statement by Sellers is:  We are losing money now, but if we just sell more volume, we can make it up!

MOST OF THE TIME, THIS IS ABSOLUTELY NOT TRUE!!!

If a Seller says this, the first thing to do is to look at their COG (Cost of Goods).  If Revenue minus the COG shows a loss, volume will simply bury the Owner even deeper.  If you manufacture a Widget such that your COG is $10.00, and you sell it at $9.00 (Revenue), then you lose $1.00 per Widget sold.  If you increase the volume by 20 times, you then lost 20 times $1.00, or $20.00!  This is not magic!!!

There are some cases where your COG can be reduced, with volume production.  But that is scary!  How long will it take you to get to that kind of volume, and how many Dollars do you have to lose, until you get to that point?

All of these are specifically the kinds of questions – and answers – that come up and can be resolved in a Business Plan.  YOU NEED A BUSINESS PLAN!   (See our other blogs for how we feel on that issue.)

But generally speaking, be suspicious.  Question everything!!!

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

 

Signing Non-Disclosure Agreements

A fair number of business Buyers have written us about whether Non-Disclosure Agreements (NDA), or Confidentiality Agreements are necessary.

In our view:  Absolutely, without question, no doubt!

The issue is that it protects both the Seller AND you, the Buyer, by not arbitrarily letting the World know the business is for sale.  That is left to be done at a precise time, with strategic planning and an understanding of the potential reactions of all of the personalities, involved.

We had a situation recently that actually demonstrates the problem.  A Seller came to us to list his Restaurant.  It had been previously listed with a Commercial Real Estate Broker, who did not actually broker businesses.  But because the Seller had both a Business and Real Estate, he thought this was the way to go.

We know the Commercial Broker, and he is excellent at Real Estate.  We are also a Real Estate Brokerage, but more because of the legal requirements to be licensed in that way, in order to sell the Real Estate that accompanies some businesses.  If we have a building to sell, we refer it to a competent Broker that specializes in that segment of the business.  He should have done the same, when selling the Restaurant.  To have a specialist is critical!  You would not go to your next door neighbor – a Gynecologist – if you wanted to have your tonsils taken out, would you?

When advertising a business, the vast majority are described in general terms and for the general vicinity, but not the specifics that would allow the public to identify that particular business.  But the Commercial Real Estate Broker did what he normally does with any property, and placed an ad in the local paper, as well as in various databases used by Buyers and Investors to prospect for property…including the address and several pictures.  The problem is that the Customers saw the ad and drifted away; Employees began to give their notice as they found alternative jobs, figuring they would lose theirs at the Restaurant when it sold; and the Seller’s Suppliers suddenly got very tough on terms, not wanting to get stuck with unpaid bills, once the place sold.  It became a nightmare, for the Seller.  What had been a previously, profitable business, had become a terrific facility with very little Revenue, and no profit.

Another situation was even worse, and also occurred with a Restaurant.  The Seller had gone to a Residential Real Estate Agent she knew on a social basis.  That Agent actually put a “For Sale” sign on the grassy area, directly in front of the business!  The Agent happened to put the sign up when the Owner was having surgery; therefore, she was not personally at the business for two days; and knowing she was having surgery, her employees were hesitant to call her.  It was a disaster!

As a Buyer, when you walk into a place of business that you are looking to purchase, you need to be aware that you should not talk to the Customers, the Employees, the Vendors, the Landlord or even the Owner him/herself in any way that hints that you are looking to buy!  An NDA requires your consent to those terms.  If you are in a Restaurant, eat a meal.  If you are in a Gas Station, buy some gas and buy a soda.  If you are in Nightclub, have a drink and a dance.  If you want a tour, arrange it with the Seller or his Broker, but under the term of the NDA.

Your attempt to look at and ultimately attempt to purchase a business should not endanger the Seller’s ability to continue to earn a living and protect his/her investment.  Moreover, if you let on that you are looking to buy, and then actually do it, you could ultimately harm your own ability to maximize the value of the business, by being careless in exposing the event, before the right time is at hand.

Ultimately, you will also be provided with Tax Returns, Leases and other confidential information about the business.  The NDA requires your confidentiality with these documents.  You can share them with your Lender, your Accountant and your Attorney, but not with anyone that is not directly involved in your purchasing process.  In many cases, the NDA requires you to return any such documents within a very short period of time, should you decide not to buy the business.

READ THE NDA CAREFULLY!  There are some instances where you can be required to agree to other terms that are simply slipped in, with the hope that you will not read the Agreement carefully.  One of these is to appoint the Broker that issues the NDA as your “Buyer Broker”; this could mean that you are stuck with that Broker, for any subsequent deal you try to make, and this can result in you paying him/her for that supposed representation.  Others will try to put in terminology that means you owe them a fee, if you buy even that business.

Both of these are unusual cases; but you should never sign any agreement you do not completely understand.  And if it is an NDA, it should only stipulate terms for that purpose.  If you want to name a Buyer Broker, that really should be executed under a completely separate agreement.  If you do not understand the NDA, if they put in other terms, DO NOT SIGN IT!  Seek the advice of an Attorney.  Or walk away, completely.

It is not unethical, illegal or unreasonable for a Broker or a Seller to require an NDA.  We are amazed at the number of Buyers that ask, in their initial calls to us:  “What business is it?”  “What is the address?”  “Can you fax or e-mail the Tax Returns?”  And at the same time, they refuse to even give us their names and telephone numbers!    We are under no obligation to send you personal, confidential information without some semblance of information about you.  Some Brokers require Personal Financial Statements from the Buyers, prior to giving them sensitive information about the business.  This is to ensure that the Broker knows you the financial ability to buy that business.  This is also not unethical or illegal.

What IS unethical or unreasonable is for the Broker or Seller to demand a deposit, in order for you to get detailed information.  We know of one Broker that would freely give out an abstract of financial information, but to get Tax Returns, he demanded the Buyer provide him with a Letter of Intent and a $50,000 deposit!  We knew one family doing the Buying personally, through this Broker.  The family was foreign-born, with somewhat limited English proficiency; as a consequence, they were very uncertain of their position and very timid.

They requested our help when the Tax Returns did not reflect the same information as was provided on the previous financial statements, and the Broker tried to withhold the deposit on the basis of the LOI.  …Let’s just say we walked into the Broker’s offices and prevailed upon him to release the funds.  We have done that only once, and never want to do it again!

An NDA should not intimidate you; it is not an out of line demand.  But know what you are signing!

When in doubt, see an Attorney.

 

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

The Seller as a Potential Liability!

When we speak to people about starting up businesses, or when we speak to Business Owners that are thinking of selling, invariably they will ask when they should get the business ready for sale.  The answer is the same:  You start the sale process when you first start the business!

At any time we are asked to list a small business for sale, one of the very first questions we ask the Seller is:  When we get you a Buyer, and you walk out the door at the moment settlement ends, what happens to the business?  Forget the signs, the widgets you might sell, forget the number of years in the business and the good will; is the business so tied to the name, the face and the personality of the current Owner, that any Buyer is going to find the business slumps, sometimes fatally when the Seller leaves?

If it is a business that is highly dependent on personal sales activity, and that sales activity is closely aligned with the current Owner, there is potential trouble for a Buyer.  When you start a new business, frequently the Owner IS the face of the business.  There may not even be another face in the place, except for that of the Owner.  But if the Owner does not turn over that responsibility to others, he/she can become unquestionably attached personally to the success of that business.

Companies with names of the founder – such as Frank Smith & Company – can have the same difficulty; but over time, if Frank Smith turns the public representation over to others, it does not run the same risk.  Clients do not necessarily need to know that Frank Smith is there.  If they are not dealing with Frank Smith on a day-to-day basis, they may not care, at all.  What they really care about is the person with whom they work on a daily basis; the person the Customer feels knows them and their needs, and will take care of those needs with the most care.

If they were first introduced to the Company’s services by Frank Smith, and gave all orders to Frank Smith, turned to Frank Smith for any problems they incurred with the products or services they ordered, so that good ol’ Frank personally dealt with any complaints and their resolutions, then Frank becomes indispensible to the continuance of the business, itself.  You, as the new Buyer potentially have a tremendous difficulty in overcoming this.  When John Unitas left the old Baltimore Colts, he was such an icon that everyone was going to hate the new guy, no matter how good he might have been:  He was just not John Unitas!  The same happened when Brooks Robinson retired from the Baltimore Orioles.  Sean Connery was such a great movie James Bond, that no one has ever achieved that same allure.  Sports fans and movie goers felt some kind of a connection with these people, and the analogies really have merit.

This does not have to kill a deal.  But careful planning by both Buyer and Seller is crucial.  If a Seller has not established a separation between him/herself and the business, it can mean reducing the price to anticipate losses that are inevitable, when such a Seller leaves.  Sometimes it means a long transitional period, where the Seller stays on to give the Buyer a chance to catch on with the Customers.

In some instances, an “earn-out” is appropriate.  This is when the price is more or less set at a maximum, or in general terms, rather than as an absolute dollar amount.  Payments are then usually made on the basis of the actual performance of the Company after the sale, perhaps on a percentage of Revenue or Gross Profit.  This is typically done over a three (3) to five (5) period, on a declining payment basis.  For example, in the first year, 50% of the agreed amount is paid; in the second year, 35% is paid; in the final year of a three (3) year payment system, the last 15% of the agreed payout is made.  If the business erodes because of the Seller’s disappearance, so does the total amount paid.

This is common in service businesses, where the Principal is an active part of the business and his/her presence is a major factor in its success.  In this situation, business retention is not something that can be taken for granted, as it might be in a Gas Station where the brand and location are more important than the Owner.

One of the biggest deals we have done in this way was a company that was the largest Real Estate Brokerage in its service area.  In that case, the issue was that the Real Estate Agents were not guaranteed to stay with the Company, since they are Independent Contractors and are free to move among other Brokerages, at will.  If they decided they did not want to stay, they could have left en masse, and the Buyer would have been left with nothing but a big, gorgeous, empty office.

The earn-out demanded that the Seller remain with the Company, at least on a superficial basis, sometimes working actively with the Agents in the beginning, then tapering his activities slowly over the three-year payout period.  The earn-out made him a participant in the success of the transition.  Large Hair Salons can be sold on the same basis, because the individual Hair Stylists are also Independent Agents who can leave at any time, for any reason and take their “books” of business with them.

A business with an Owner, who is the key to the historical success of any business should be viewed in the same way.  Understanding how sales leads are generated, how transactions to the business are closed and who and how customer relations are handled are key to understanding whether this is an issue, in your purchase.

 

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service.  It’s Princpal Broker possesses 25+ years of Business Sales and Divesture.  Although most of our work is involved in the Mid-Altantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well.  Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)