pursuing the american dream....owning your own business presentation

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Lee, Hecht Harrison Seminar July 28, 2011

Jeff Goldblatt

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Small Business Overview• Many experts are predicting that a huge wave of

businesses will become available over the next decade as baby boomers look to sell.

• With the economy continuing to slowly climb upward, it just might be the perfect time to acquire a business.

• The Collin, Dallas, Denton & Tarrant counties are in the top 10 of fastest growing Texas counties. For example, Collin County was 7th on the list with a 59% population growth rate since 2000.

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Small Business Overview

• Before you take the plunge in to acquiring a business, you need to become prepared on the business acquisition process.

o “Price is what you pay. Value is what you get.”

o “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”– Warren Buffett

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Presentation Objectives

• To make you aware of a career option that many individuals may have, owning your own business!

• To provide the core knowledge that you would need when pursing ownership of your own business.

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Presentation Outline

• Advantages of Owning A Business

• 3 Paths To Owning A Business

• Why Owners Sell

• Buying An Existing Business – Advantages

• Types of Small Businesses

• Small Businesses Categorized By Revenue

• How Are Businesses Valued

• Business Valuation Terms

• 9 Steps To Acquiring A Business

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Advantages of Owning A Business

• Control Your Own Destiny

• Can Provide Financial Independence

• Job Security

• Benefit From Your Own Efforts

• Replaces An Income

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Three Paths To Owning A Business

• Buy An Existing Business – Least Risk, Buying A System With A Successful Track Record

• Start A New Franchise – Moderate Risk, Location Becomes A Big Unknown Factor

• Start An Independent New Business – Highest Failure Rate

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Why Business Owners Sell?• Retirement

• Burned Out

• Wants to Pursue a New Venture

• Business Has Grown Beyond Seller’s Means

• Business is Down-Trending

• Present Value May Be Greater Than Future Potential

• Health Reasons

• Capital Gains Rate Remains At Historical Low – 15%

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Buying An Existing Business

• Buying an existing business is an excellent option that has advantages. You will have an established name (brand), proven product or services, existing customers and an immediate revenue stream. It can provide a better ROI!

• The process of buying an existing business can be time consuming, costly and frustrating. Even the most skilled businessperson may find this experience challenging.

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Buying An Existing Business Facts

• It takes at least 3 months to complete a business purchase transaction.

• Studies indicate that 95% of established businesses that are resold succeed.

• Conversely, US Government studies indicate that 60% of start up businesses fail.

• Note that these facts are not intended to say that there is no inherent risk in buying & operating an existing business.

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• Close to 40% of the businesses sold are in the food & beverage category.

• Another 30% of the businesses sold are service related.

Types Of Small Businesses

Retail Service

Restaurant Printing

Clothing Lawn care

Hardware Janitorial

Manufacturing Distribution

Equipment Auto Parts

Furniture Medical Products

Ironworks Food

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• The amount of small business sales in 2010 increased by 3% however, the median sales price of decreased from $160K to $150K. (BizBuySell)

• The 20M+ small businesses create 2 out of every 3 domestic jobs & accounts for 39% of the national GNP.

Small Business By Reported Revenue

Annual Reported Revenue Amount Percentage To Total

< $25K 13,973,000 58%

$25K - $100K 4,765,000 20%

$110K - $500K 3,492,000 14%

$500K - $1M 805,000 3%

> $1M 1,078,000 4%

Total 24,113,000 100%

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How Are Businesses Valued?• The most common method among the many

valuation methods is by applying a multiple to the Sellers Discretionary Earnings (SDE).

(SDE x Price Multiple) = Asking Price

• SDE are determined from recasting the financial statements .

• The pricing multiple is influenced by comparable statistics of similar local market businesses that have sold as well as reviewing industry valuations via national databases(i.e. BizComps).

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How Are Businesses Valued?Other factors that impact the asking price are; • Maturity of Business• Offer Terms(owner financing) • Competition• Risk• Growth trend• Facilities• Desirability• Ease of Replication• Employees• Lease• Training• Fixtures & Equipment

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Business Valuation Terms DefinedWhat is EBITDA?

• Earnings Before Interest, Taxes, Depreciation, and Amortization.

What is Sellers Discretionary Earnings (SDE)?

SDE is the measurement of the total economic benefits of owning the company

Earnings of a business before income taxes, non-recurring income & expenses, non-operating income & expenses, depreciation & amortization, interest expense or income, owner total compensation.

Sellers Discretionary Earnings ExampleRecasting Jeff’s Boutique (Gross Profit + Add-backs = SDE)

Category• Earnings/Net Profit• Owner Income/Benefits• Interest(different loan scenario for buyer)

• “Business Travel”• Depreciation(non-cash item)

• Car Expense(unnecessary to the biz)

• Gifts/Donations(discretionary)

• Total

$ Value$85,000$57,000$12,000$10,000$10,000

$5,000$1000

$180,000

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Pricing Multiple Example – Jeff’s Boutique

• Selling Price/SDE = Price Multiple

$500,000/$180,000 = 2.8

• Most businesses on average are selling between a 2.0 – 3.0 price multiple, however certain businesses do sell at a premium to their industry average possibly due to their profitability, customer base, & location.

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9 Steps In Process Of Buying A Business• Step 1 - Personal Assessment “The Choice”

• Step 2 - Education & Resources For Buying A Business “How Big?”

- Role of Business Intermediaries

• Step 3 – Research & Identify Potential Industries & Business “The Hunt”

• Step 4 - Physical Business Tour “The Meeting”

• Step 5 - Comprehensive Business Review “The Qualifying”• Step 6 - Complete a Letter of Intent with Contingencies• Step 7 - Due Diligence

• Step 8 - Arrange Financing

• Step 9 - Close the Deal “The Big Day”

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Buying Process Step 1 - Personal Assessment• Based on what you know about yourself, assess whether

a particular business is right for you.

• Does the business fit with your interests and resources?

• Can you grow this business? (Pay for the past, buy for the future!)

• Are you willing to invest the time that a particular business demands?

• Cash, credibility, skills and contacts: do yours match what this business will demand?

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Buying Process Step 1 - Personal Assessment• Determine what size business your management skills

and monetary resources allows you to own & manage.

• Factors to focus on include, but are not limited to are number of employees, sales volume, geography, and number of operating units.

• Word of caution, don’t buy based solely on profits!

• A Business Intermediary can be an important resource for you in assessing your skills and matching it to a business.

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Buying Process Step 2 – Education & Resources

• Internet Reference & Education Search– Google “Buying An Existing Business”

– SBA, E-How, Entrepreneur, SCORE

• Internet Business For Sale Sites– Biz, Buy Sell

– Bizilla

– Biz Quest

– BusinessBroker.net

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• Especially if this is your first time to purchase a business, working with a Business Intermediary can eliminate costly mistakes & eliminate inefficiencies.

• A Business Intermediary will conduct a personality & skill assessment, screen business opportunities, intermediate on buyer concerns, assist in arranging financing & navigate you through the closing process.

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Business Intermediaries……

• Educate

• Negotiate & Facilitate

• Save You Time

• Save You Money

• Present Facts

• Facilitate the Sale Between You and the Seller

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• It is important to your success as a business owner that you can be passionate about a particular business.

• Time & energy invested in your business is an important ingredient for success.

• You must assess your capital resources and only pursue businesses that are a match to your purchasing ability. Being under-capitalized is the main cause of business failure.

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• It is important to think about the legal business structurefor your potential new business.

• The legal business structure options are Sole Proprietorship, Partnership, Corporation(C or S) & Limited Liability Corporation(LLC)

• The type of business entity you choose will depend on three primary factors: Liability, Taxation & Record-keeping.

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Buying Process Step 2 – Education & Resources• A sole proprietorship is the most common form of

business organization. It's easy to form and offers complete managerial control to the owner. The owner is personally liable for all financial obligations of the business.

• A partnership involves two or more people who agree to share in the profits or losses of a business. Profits or losses are "passed through" to partners to report on their individual income tax returns. Each partner is personally liable for the financial obligations of the business.

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• A corporation is a legal entity that is created to conduct business. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that's required. the S corporation (or Subchapter corporation, a popular variation of the regular C corporation) avoids the double taxation situation by allowing income or losses to be passed through on individual tax returns

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• A hybrid form of partnership, the Limited Liability Company (LLC), is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.

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Buying Process Step 3 - Research• Most Business For Sale sites only have general & non-

confidential information on a particular business.

• Most Business Broker have prepared detailed information in the form of a Confidential Business Review(CBR) on their listed businesses.

• The Business Broker will not release confidential business information until the prospective buyer signs a Non-Disclosure Agreement(NDA), completes a Buyer Profile & submits personal financial information.

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Buying Process Step 3 - Research• The Confidential Business Review(CBR) provides a

Profit & Loss summary for the past three years.

• The CBR will also provide the location, years in business, current ownership history, franchise history if applicable, inventory & equipment if included in the sale, other assets & staffing.

• Lastly, the CBR can detail the financing scenarios so you may understand the available income after debt service.

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Buying Process Step 3 – Basic Questions• How long has the business been in business?• How long has present owner been the owner?• What are the reasons the owner is selling the business?• Are the financials well organized?• How dependent is the business on the owner? • How dependent is the business on the employees?• Is the lease on favorable terms?• How many years remain on the lease? • Is there a renewable option?• Is this a franchised business?

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Buying Process Step 4 – Business Tour

• The Business Broker will arrange a showing of the business, sometimes outside of normal business operating hours due to confidentiality & availability of owner/operator.

• The tour allows you to see the physical condition of the business, its assets and it affords you the opportunity to meet the owner and seek pertinent answers to questions that arose in your review.

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Buying Process Step 4 – Business Tour

• Impress the Seller – if they feel you are the right one for successfully running their business, they may be more inclined to sell you the business & finance the transaction

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Buying Process Step 4 – Business TourQuestions to ask at the first Buyer/Seller Meeting:

• Tell me about your business?

• How did you get started?

• What services does your business provide?

• What role do you perform everyday?

• Why are you selling your business?

• What is it that you like best and least about the business?

• How long have you been considering selling your business?

• What keeps you up at night about the business?

• How much vacation do you take?

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• Tell me about the employees and their importance to this

business?

• What are the last three year's sales and SDE?(if not already known

through the broker)

• Who are your biggest competitors?

• What are your industry trends?

• Is your market share growing, shrinking, or steady?

• Have there been any significant changes in your marketplace?

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• What do you think I can do to increase sales and profits? Why

are you not doing these things?

• Ask the seller if he/she has copies of any trade publications.

They’re a great source for additional information.

• Will you agree to a covenant not to compete?

• Will the business sale include the transfer of real estate?

• What are the details of the lease? How long? Any options? Do

you anticipate any problems with the landlord assigning it to

me or entering into a new lease?

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• How long will it take me to really learn this business?

• How long can I count on you to train me after the sale?

• What do you believe is the profile of the ideal buyer for this

business?

• Do you anticipate any problems with me getting credit from

your suppliers?

• Do any of your suppliers represent more than 10% of your

purchases? If yes, who are they?

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Buying Process Step 5 – Business Review

• Consider the reasons for the sale and all of the key learning from the business tour. Ensure that you have a CPA and/or an attorney to study all documents.

• Review the liabilities as well as any assets that may be included and determine their exact value. If there are liabilities, will you assume them and can you break even?

• Study the existing lease and ensure it is transferable. Is there a renewal clause or could it be renegotiated?

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Buying Process Step 5 – Business Review

• Study factors affecting trademarks and logos, etc.

• Ask for and scrutinize the past few years’ income statements and cash flow projection.

• Study the customer base as well as the employees on hand and determine how they will react to the change.

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Buying Process Step 6 – Offer To Purchase

• Determine and valuate the business, making sure your offer does not exceed the perceived value of the business.

• Determine the capital necessary to begin operations once you assume ownership and make sure that you can qualify for a bank loan.

• Prepare an offer via an Purchase Agreement for the business with the business broker.

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Buying Process Step 6 – Offer To Purchase

• Contingencies & conditions need to be determined and included on the Purchase Agreement. They afford the buyer protection.

• Earnest money needs to accompany the Purchase Agreement.

• Negotiations may occur on the sale price, due diligence & closing dates and the contingency clauses. Thus revisions will more than likely be needed before the final agreement is signed.

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Buying Process Step 6 – Common Contingencies• Buyer to obtain financing on terms acceptable to buyer• Buyer to make loan application within 5 days of

acceptance of this agreement• Buyer examination & approval of 3 years of financials

and tax returns• Buyer examination & approval of assets, inventory, and

equipment list• Seller is to give non-compete agreement acceptable to

buyer• Seller is to provide training period acceptable to buyer• Buyer is to obtain lease of terms acceptable to buyer

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Buying Process Step 7 – Due Diligence• “Due Diligence” is the phrase used to describe a buyer’s

investigation of a potential business acquisition. By undertaking due diligence, the prospective buyer is attempting to fully understand the benefits and liabilities of a potential acquisition through an examination of all aspects of its past, present and foreseeable future.

• Process to confirm that the information he has been provided thus far by brokers and sellers is accurate or within a reasonable degree of tolerance to the buyer.

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Buying Process Step 7 – Due Diligence• Financials – review 3 years of tax returns and validate

that they align to the profit & loss statements and other financial documents that was previously reviewed.

• Employees - A list of all employees, their job titles, duties, and current wage.

• Vendors - What vendors does the business use? Do they have a good relationship? Will the vendors extend the same terms to you as the new owner?

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Buying Process Step 7 – Due Diligence

• Inventory - If you're buying existing inventory, get a list of its value. It's also a good idea to agree to a physical audit before close of sale.

• Equipment - What equipment comes with the business? How old is the equipment and is everything in good working order? Are there any warranties? Is the equipment leased or owned? Is there any money still owed on the equipment?

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Buying Process Step 7 – Due Diligence

• Furniture and Fixtures - Include all computer and office equipment and get a list of things like signage, furniture, and any fixtures that come with the business. Again, ask about warranties and whether items are leased or owned.

• Debts - Are you inheriting debt? If so, make sure you understand the amount. Examples of this might be outstanding accounts payables, equipment leases, or anything that comes with the business that is not fully owned by the seller.

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Buying Process Step 7 – Due Diligence• Make sure you are mindful of the due diligence review

period dates. Enlisting the help of professionals is encouraged.

• If you're not an accounting whiz, ask an accountant to review the companies financials. Accountants can identify black holes or hidden financial issues.

• Have an attorney research the business and make sure the seller has clear title to sell it. If the business is a franchise, this is especially important.

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Buying Process Step 8– Financing

• The only monetary investment you have to make in a business are the down payment, working capital and improvements.

• The business should retire its own debt & provide a living wage out of the existing cash flow.

• Due to the continuing difficult economic environment, it has become more difficult to qualify for small business loans.

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Buying Process Step 8 – Financing

• The SBA administer several loan programs in partnership with local lenders, community development organizations, and micro-lending institutions (specialists in limited, short-term financing).

• SBA backs those loans with a guaranty against non-payment that eliminates some of the partner's risk. Your application for an SBA-backed loan is actually an application with a commercial bank for a loan that is structured according to the SBA's requirements

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Buying Process Step 8 – Financing

• If you have not done so already, develop a business & marketing plan for your potential finance partner.

• Alternative financing options aside from an SBA supported loan, traditional bank loan or seller financing loan are:– Self Financing– Family, Friends or Angel Financing– Partnerships– 401K Funding > RollOver as Business Startups(ROBS)

Buying Process – Comparison Financing

SBA Lenders• Rate - Prime + 2.0% to

3.0%

• 20% Down Payment

• Credit, Background Checks, and Detailed Application

• Personal Guarantee plus 2nd position on House

• 10 year financing

Seller• Rate 6% to 10%

• 35-50% Down Payment

• Simple Credit Check

• Personal Guarantee plus the Business as Collateral

• Average 5 to 7 year financing

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Buying Process – SBA Lender Needs

From The Buyer Complete Loan Application

Personal Tax Returns for

3 years (All Pages)

Purchase Agreement

Business Plan and Projections

From The Seller Seller’s Tax Returns &

Financials for 3 years and

Interim to the Last Quarter

Copy of the Purchase Agreement

w/an Allocation of the Purchase

Price

Copies of A/R & A/P Aging

Equipment List with Serial #’s

Copy of Existing Lease Agreements

Copies of W2’s

Detailed Evidence of all Add Backs

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Buying Process – Sales & Financing Data• All cash transactions are rare and mainly occur with

businesses that sell for $100K.

• On average, a seller who accepts an all cash transaction receives 70% of the asking price.

• Sellers willing to accept financing terms receive 86% of the asking price.

• Debt service should not exceed 30% of the annual cash flow.

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Buying Process Step 9 – Closing

• Closings are generally done either by means of an escrow settlement or through the services of an attorney who performs settlement.

• Several documents are required to complete the transaction between business seller and business buyer. The purchase and sale agreement is the most important of these, but other documents are often used in closings including the escrow agreement; bill of sale; promissory note; security agreement; settlement sheet; financing statement; and employment agreement.

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Buying Process Step 9 – Closing Attorney

The Closing Attorney

• Does lien searches

• Creates seller loan docs

• Has all parties sign closing docs

• Collects certified funds

• Files UCC 1 docs

• Distributes monies

• Holds back escrow funds

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Buying Process Step 9 – Closing

• Contingency Removal

- Buyer removes contingencies for the agreement to become binding.

• Escrow Settlement

• Lease Assignment

• Lien Search, Clearance or Assumption

• Inventory – Count & Value

• Closing

Build Wealth – Return On InvestmentSBA Loan

• Sale Price $500,000• Working Capital $50,000• SBA Fee & Closing Costs $17,000• Total Project $ 567, 000• Down Payment 20% (113,000)• Bank Financing $ 454,000• 10 yrs @ 6.0% - Monthly Payment $ 5,040• Annual Debt Service $ 60,484

5 Year Cash Flow $1,044,000

Less 5 Year Debt Service ($302,000)

Less 5 Year Living Wage ($500,000)

Less Reinvestment ($50,000)

R.O.I. Over 5 Years $192,000

SELL BUSINESS AFTER 5 YEARS @ 3.0 x SDC

3.0 X $230,000 (year 5) $690,000

Less Commission (69,000)

Less Closing Costs (6,000)

Proceeds of Sale $615,000

Less Payoff on SBA Loan (261,000)

Net Proceeds of Sale, Pre-Tax $354,000

Plus R.O.I. Over 5 Years $192,000

Total Return $546,000

11 months return of down payment for buyer (after debt service)

$546,000 Total Return /

$163,000 Cash Investment

= 235% ROI

Assumptions For Jeff’s Boutique1) Grow SDC by 5% compounded annually 2) Fair Living wage is $100,000/yr. 3) Seller’s Discretionary Cash Flow (SDC) is $180,000 4) Reinvestment of $50,000 5) Sell business in 5 years

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Small Business Acquisition Reference Tools

• Encyclopedia of Small Business

• SCORE

• SBA

• BizBuySell, BizQuest, BusinessBroker.net

• BusinessesForSale, MergerNetwork

• IBBA.org

Jeff GoldblattVR Business Brokers321 N. Central ExpresswaySuite 350McKinney, TX 75070Tel: 214-733-8282, ext. 23E-Mail: [email protected]

Larry LaneVR Business Brokers321 N. Central ExpresswaySuite 350McKinney, TX 75070Tel: 214-733-8282, ext. 24E-Mail: [email protected]

pursuing the american dream....owning your own business presentation

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