Frequently Asked Questions by Buyers:

Why should I buy a business rather than start one?

The failure rate in small business is enormous in the start-up phase and the first three years. The existing business has demonstrated that there is a need for that product or service in a particular location. Financial records are available along with other information on the business. Most sellers will stay and train a new owner and many will also supply financing. Finding someone who will teach you the intricacies of running a business and who is also willing to finance the sale can make all the difference.

Why should I go to a Business Broker?

Selecting the right, experienced broker for YOU is of utmost importance. Your broker will carefully study your strengths and shortcomings, experience, needs, likes and dislikes and will provide you with a selection of different and, in many cases, unique businesses, including many that you would not be able to find on your own, that better suit you.

Business brokers are also an excellent source of information about businesses and the business buying process. They are familiar with the market and can advise you about trends, pricing and what is happening locally. Your business broker will handle the details of the business sale and will do everything possible to guide you in the right direction.

Goodwill

The sale of a business showing sales and profit is considered a goodwill sale. The fixtures and equipment are included in the sale unless otherwise specified. The sales and profit of the business must be proven to a buyer by the review of the seller's books and records. This is the seller's responsibility to provide the buyer with the documentation. In a goodwill sale you will see many times that the profit is an adjusted amount. Many business owners will charge personal use items against the financial statement. These are items the seller deducts from the profits, but are not used in the operation of the business. These items are what is called "add backs". They are added to the net profit to show an 'adjusted net profit'. Most goodwill sales are priced at a multiple of the adjusted net. Multiples will vary according to the quality and ongoing track record of the business.

Asset Sale F/F/E (Asset - Furniture, Fixtures, Equipment)

The sale of a business under the caption asset f/f/e is for a business that the seller has put on the market whereas they cannot prove profits - or there is no profit, or it is a break-even. Many of these offerings can be excellent values for a buyer with the vision to change or turn a business around. Many times the asset f/f/e price of the business is substantially less than if you were to go and buy the fixtures & equipment, do the build out and start from scratch. You will also enjoy some ongoing sales from the previous owner. Be advised there is no book and record review. You are buying the business as is.

Books & Records Review

The most critical part of the sale of any business being sold as goodwill is the books & records. The current business owner's responsibility is to prove to a buyer the profit and adjusted profit of the business. This is usually done after an agreed-upon price and terms have been completed between buyer and seller. This is to be sure the buyer will qualify to buy the business under terms and conditions suitable to the seller.

Note: no escrow is opened and no buyer's deposit is at risk until the books & records contingency has been removed. The books and records can consist of federal and state tax returns and state sales tax returns. Prepared financial statements - check registers and bank statements referring to the business. Again it is the seller's responsibility to provide the documentation to prove sales and profits, and the buyer's responsibility to perform due diligence to his/her satisfaction. The broker/agent will assist in seeing that the proper documents are provided - but will not participate in the due diligence.

How Are Businesses Valued?

There are literally dozens of formulas used for valuing businesses, but there are three primary components for determining value:

1. Fair Market Value of Assets (inventory,equipment,etc)
2. The ability of a business to generate earnings (often times it is necessary to compare the true earning power of a business by "adjusting" the income statement of the business for discretionary expenses of the seller...we call this revised calculation the "Adjusted Profit")
3. Demand (Certain types of businesses such as manufacturing companies will usually command a higher purchase price than retail firms with similar earnings).