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Friday July 30 2010

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Why Do Sellers require Buyers to sign a Non-Disclosure/Confidentiality Agreement?

A non-disclosure (or confidentiality) agreement is required by all Sellers of the businesses prior to disclosure of the name and location of their business, and any information regarding the business for sale, which does not appear on any public websites. Both Seller and Buyer want a smooth transition, which is always easier if the employees, vendors and customer/accounts are unaware of a possible sale. Unlike pure commercial real estate, it would be detrimental to the business to place a "for sale" sign in front of the business.

Why does the Non-Disclosure/Confidentiality Agreement ask for my Net Worth and Liquid Cash Available?

The business Sellers have entrusted the marketing of their business for sale with the Finder in part due to the confidentiality factor, but also so that they have a comfort level that if they are showing sensitive and confidential information to a Buyer prospect who actually has the realistic financial capability to consummate a transaction. The Finder usually knows what amount of liquid capital would be necessary to either purchase a business outright with cash or to possibly secure a SBA loan.

Do I have to make an appointment to physically look at the business?

Generally, the Seller wants all tours of their company to be by pre-arranged appointment only.

TOURING RETAIL

When you tour a retail business, please do so "as a customer" - discreetly. After the initial tour, an appointment can be set up with the Seller to answer more specific questions. Please note that even some retail owners only want tours by appointment or after hours due to confidentiality.

TOURING NON-RETAIL

In the case of a non-retail concern, all tours of the facility, meetings or phone calls with Sellers, are conducted by appointment only set up through the Finder. Unlike real estate, most Sellers do not wish their employees to be alerted to a possible sale. And as a Buyer, neither do you. All parties will want a smooth transition.

Some business Sellers require the business showings be in "off" hours or even at the Finder's place of business.

Why do Finders have Hold Harmless Clauses?

Finders are neither CPA'S nor ATTORNEY'S, and cannot give you advice as such. The Finders DO NOT VERIFY or INVESTIGATE any of the information provided to you in the business presentation package, nor do they investigate the accuracy of any supporting financial and other information. All of the information is provided solely by the Seller. You and your advisors (per the following below) should perform your own due diligence on the accuracy of the information provided, as a Finder can only state what the Seller has told them. Buyers should also engage the services of competent accounting and legal counsel of their choice. All of the business information provided has been initialed off, faxed or emailed BY THE SELLER. The Finders accept no liability for the accuracy, inaccuracy or omissions relating to any information on a business for sale. Not only are they generally not accountants or attorneys, the Finders are NOT involved in the business operations, nor handle the bookkeeping for these businesses, and therefore logically cannot be held liable for what they do not know.

The Finder is basically just that: One who "FINDS" the business for sale or "FINDS" the Buyer for a Seller. The Finder represents one party or another. The "Representation" is basically for Finding the deal, finding the Buyer, marketing, packaging with Seller's information, dissemination of information between the parties and usually in the coordination of the multitude of events or steps necessary to move a deal between a Buyer and Seller all the way through escrow and closing. All parties can choose legal and accounting representation at any time during this process. If a Buyer does not accept the onus (or liability for) his or her own investigation, then that Buyer should probably not purchase a business at all, and definitely should not proceed any further in securing information on any listings on this website. Every business purchase carries risk. This risk is inherent in that fact that it's a business. It is not purely a piece of real estate and building whose value goes up and down with the market and which depends on the local geographic economy - the location. When one buys a going concern business, there are numerous factors in addition to the above - not the least of which is how you will operate the business. How you treat the customers and employees. How you handle the marketing and sales. If you have working capital beyond the purchase price for slower seasons and for up-front out-of-pocket expenses like first and last month's rent, utility deposits, enough working capital to cover fixed expenses until your accounts-receivable are realized (as generally the seller retains all of the a/r up to day of closing,) etc.

In short, neither the Finder (nor the Seller for that matter) can guarantee how well you will do post Closing...

However, it must also be said that there is generally (but not always) less risk in the purchase of a going concern then there is in starting a business from scratch.

If I like a business and wish to make an offer, how do I do this?

Even though the Finder often represents the Seller, the Finder will use his/her best efforts in presenting your business asset offer. If it is not "as per listing," the Seller has the right to accept it, counter it, or reject it. If the Seller counters your offer, you have the same rights.

If the listing is not with the Finder with whom you are working, then that Finder member will automatically represent you the Buyer in the negotiations of a business asset purchase, anyway. However, again it must be noted that even in this case, the Finder does not perform any due diligence for you.

It is highly recommended that, once you have an interest in a particular business, you write the offer immediately. Even if a certain business has been on the market for several months, there maybe multiple Buyers who are interested in the same business at the same time. (This sudden interest level occurs with a much higher frequency than many Buyers realize.) If your interest is serious, you will want your offer to be in the primary position. All subsequent offers would then be in a back-up position (as long as it signed off by both parties) if the first one falls through, unless one of the parties has stipulations in their offer to the contrary.

Do the Finders have forms on which to make an offer to purchase?

Your Finder has access to "Asset Purchase Agreement" forms that he/she will help you complete by filling in the blanks. You may want to check the line item which stipulates that the purchase agreement is subject to a more definitive purchase agreement drawn by a competent attorney of your choice once the basic terms and conditions of the agreement are met to your satisfaction or you may want your legal counsel to review the form prior to an offer, which is always recommended. This process can often save the parties substantial sums in the long run.

Why do many Finders and Sellers view Letters of Intent (LOI's) as objectionable?

A "Letter of Intent" is not a binding offer on the part of the Buyer. However, most letters of intent include a "stand-still" provision the Seller must abide by - meaning you are asking them to take the business off the market and possibly miss out on a legitimate Buyer for the Seller's business, when you have given no commitment. The resulting transaction, if it does occur is not nearly as smooth as all of the major and minor economic and other issues have not usually been addressed. Thus everyone spends countless hours and a lot of energy, only to find out that an important issue has not been addressed or agreed upon.

Why is an Earnest Money Deposit required with my Offer?

All Sellers require an earnest money deposit in the form of a CASHIER'S CHECK (made out to a legitimate Business Escrow Company who specializes specifically in business closings) to accompany the offer to purchase. "EARNEST" money means just that - that you are serious about negotiating a deal. The amount is generally a minimum of FIVE THOUSAND DOLLARS ($5,000.00) and up to FIVE PERCENT (5%) of the total purchase price may be required by some Sellers.

Should your offer not be accepted or any of your contingencies not be met to your satisfaction, you would receive 100% of your earnest money back. (The earnest money is refundable in full as long as you have not exceeded time periods specified in the offer without writing an addendum or extension to address the outstanding issue and no escrow work has been done.) If the earnest money is deposited with a third party escrow company, the buyer and seller must sign off on the release of same.  Per most Sellers, a Finder is not allowed to present any offer without the good faith cashiered earnest money deposit which has been made out to a third-party business escrow company.

What are contingencies/conditions and what happens if all of them are met/not met?

Once your offer has been accepted, and you perform your due diligence on the contingencies that have been set forth in the offer; and once you are satisfied with these conditions or contingencies; once you have had adequate legal and accounting advice from your own respective counsel; and you have received a commitment letter from the lender saying they will lend the funds necessary to close the deal (if financing); you will sign the "Authorization to Open Escrow" and "Closing Acknowledgement."

What Contingencies/Conditions would a Buyer work on removing first?

BOOKS & RECORDS:

The first step will be to review any books and records and remove this contingency as soon as possible so that your and the Seller can proceed to the next steps.

IF Securing SBA Financing: the following steps must be performed on a timely basis.

Please note that the Finder will generally know which Lender is best suited for your loan and will most likely be successful in funding your deal. DO NOT wait until your personal contact turns you down before you make application to Lenders known to Finder. Starting over will extend the process, which could likely kill the "deal." Please make it easy on yourself and all involved.

APPLICATION PROCESS:

To complete the SBA loan application through one or more of the Finder's contacts (plus your own if you have one,) you will need to complete the following: (all of these will need to be resigned and dated.) Please note that the lender will require other forms and supporting documentation in addition to those listed below, which the lender will specify. Each loan is different as there are so many factors are involved in a business transition, with every situation being slightly different. Below, are just some of the basics that must be included in all loan applications:

1. Personal and Business Tax Returns
2. Personal Financial Statements
3. 3 Years of monthly Projections on a go-forward basis
4. Business Plan
5. If you own another business, the Lender will want the Tax returns for 3 years on that business in addition to those on any business in which you have 20% or more ownership. They will also want 3 years of Profit and Loss Statements on these companies.
6. If you are incorporated - they will want copies of articles of incorporation, by-laws, certificate of good standing, etc.
7. Should you have a Partner or any other Officers of the corporation (that will own more than 10-20% of the business,) they will also need to provide a Personal Financial Statement and 3 years of Personal Tax Returns.

Will an SBA Lender require that I carry insurance on myself and the business?

Most SBA Lenders will require a credit life insurance policy for the term of loan in an amount equal to the loan. The Finder will provide you with SBA Credit Life contacts who could secure your life insurance (insurance company original signed policies and original assignment to the Lender) in a timely manner. Most life agents will never get this done in time. Start your insurance application IMMEDATELY! It can hold up or kill a deal if not. DO NOT wait until the contingencies are removed! If there are any medical glitches - even something minor such as being too thin, too heavy, too many Doctor Visits, recent surgery etc., this can extend the process. Many times in the past, a Purchaser waited until the last 2 weeks, only to have the deal fall apart as the insurance policy was not yet completed. It takes 10 business days at best case scenario and up to 3 weeks or more (and this is only if you are using a Fast Track SBA insurance provider.) Again, in most cases it must equal the amount the loan and the lender must have the ORIGINAL signatures on the Life Insurance. (Securing the ORIGINAL insurance company signature is one of the processes that takes so much time.)

You will also need to shop around for personal property, liability (and real estate if involved) insurance to equal the amount of the loan - again Finder has contacts. (Landlords also require this in their Leases.)

When will I need my down payment available?

If your capital is in money markets, mutual funds or stocks, you will need to place your order to withdraw immediately as this process with some firms can take up to 3 weeks even if they tell you it will only take a week!

Remember that you will need the following in addition to the purchase down payment: Lease Deposit - minimum first month's lease amount, funds to open credit card accounts if applicable, funds for closing costs, funds for utility deposits, cash on hand. . In addition, if the business carries receivables which the Seller is retaining, you will need enough working capital to cover these so that you can comfortably cover your fixed expenses until the A/R is anticipated to be realized.

What if I need outside financing, can a Finder help me?

It is highly recommended - to be fair to you and the Seller - to use the help, knowledge and years of successful contacts of the Finder in finding a lender to work with. Most Finders generally know who finances which types of deals, and what many of the requirements are.

Note that a "neighborhood" bank is usually not the type of lender that will actually provide financing. The interest rates, etc. will be dependent upon current market rates, each individual business, i.e. its assets, profits, type of business, etc. and the credit history and assets of the borrower. (The down payment on deals without real estate is generally 25 to 33% of the total project price. If real estate is included it is generally 20-25% of the total project price.) Sometimes, the down payment requirements are less, but the above percentages apply to a majority of SBA loans.

Who will handle the Lease?

You will need to sign a release of information with your social security number and your spouse's social security number for approval of any lease transfer or equipment lease transfer. The Finder should have such a form.

Your information is generally not given to the landlord until such time as your loan commitment is in place and all other contingencies of sale are removed from the agreement. The lease can take some time. Often two weeks is standard for approval from the Landlord. If you can start the process early on, this is helpful. However, understandably so, most sellers absolutely do not want to go to the landlord until they are sure the deal will actually consummate. Otherwise, the landlord can become very difficult to deal with for any future transfer, should the first buyer's deal not be finalized. And remember, the Seller has to "live" with this Landlord until he/she sells. It's one of those necessary "catch-22's" if you will.

Landlords generally require a financial statement, tenant history with references, if any, and some Landlords require resumes and general statements as to how you will operate and why you will be successful - especially if you have no experience in the industry. Most Landlords now require a lease transfer fee to cover their legal costs of the documents. (This can be as high as $3,500 on certain leases.) Some will also require a face to face meeting and possibly require a business plan on a go-forward basis.

ADDITIONAL LEASE REQUIREMENTS FOR SBA LOANS:

The SBA requires that the total lease, including options, equal the number of years of the loan - generally 7 to 10 years. They will also require a Landlord's subordination agreement or "Landlord's Waiver" to be signed by the Landlord (again the Lender will need the ORIGINAL signatures.) Most Finders can help in this regard as they have handled lease transfers for SBA recipients for 20 years.

What are allocations of purchase price and when should this be handled?

Prior to closing, PLEASE begin the negotiation for this with the Seller immediately. Since allocations of price are related to tax issues, your CPA can help you with this determination of how much of this business price is goodwill, non-compete, consulting agreement, assets, proprietary trademarks, real estate, etc.  The best case scenario here to prevent issues at the ninth hour, is to have this handled before you put your business up for sale which allows the Buyer to see what your terms are regarding allocations from day one.  And the Buyer and Buyer’s advisors will probably want to include this allocation in their purchase agreement.  Again, the Finders cannot provide any accounting advice.

What if I want to incorporate?

If you plan to incorporate this process can also take 2 + weeks. Please begin this process immediately. The lease and any notes assumed, Seller notes or third party lender will require a personal guarantee anyway should you wish to incorporate post closing.

For more information on SBA Loans, go to www.SBA.gov.

What services does a business Escrow Company provide and do they represent the Seller or Buyer?

A third-party escrow company can perform all the lien searches; they can draw up any promissory notes, security agreements, bill of sales, etc., unless these are generated by the legal counsel of Seller or Buyer. And, if you request, provide document "proofs" of all the papers the parties will sign at closing. The escrow fees are split equally between Buyer and Seller. The amount of escrow fees depends upon the size of the deal and whatever special documents they must generate. For each side, the fees start at about $800.00 - $1,000.00 (for deals up to $300,000.) If real estate is involved, the escrow company works in conjunction with a title company. (SBA loan fees, if any, real estate fees, title searches, any bank fees, valuation fees, title insurance and survey fees are all extra and are the responsibility of the Buyer.  Sometimes the SBA Lenders will roll these fees into the deal as working capital.)

What is the timeline from to Offer to Closing?

Timing: If there is no lease with a 3rd party and no 3rd party financing involved, a deal can conceivably close within about 2 – 4 weeks. Your due diligence should normally take no longer than (7) seven business days to (14) fourteen business days to complete, assuming the Seller has cooperated in provision to you of the necessary documentation.

If a lease assignment is involved, but no outside financing, the deal could close in 3 -5 weeks, assuming the Seller can provide your proof of sales information on a timely basis and the lease assignment (if any) can be consummated by then.

If outside financing is required, the deal should take about 30 to 60 days once financing is approved, which approval should take 2-4 weeks from the time all the required lender information from Buyer and Seller is provided.

When would we open escrow with the escrow company?

ALL contingencies MUST BE REMOVED prior to opening escrow unless agreed to otherwise between the parties in writing. An escrow company can prepare all the closing documents and will be able to give you "proofs" prior to closing (if requested for your review.) They work hand-in-hand with 3rd party lenders. Any title fees are set by the State in which the property is domiciled if Real Estate is involved. Having the escrow company prepare the documents, which your attorney can review, generally saves the parties thousands of dollars. An escrow company generally requires seven (7) business days to begin the documents prior to closing.

When can I talk to the employees and tell others that I'm buying a particular business?

Employees are unaware of a pending sale 99% of the time. It is never advisable to disclose the fact of a pending sale prior to closing - Employees tend to think - "Uh, oh, a new owner? I'd better look for a new position as I may be fired." These are real fears and the sale should not be disclosed until after closing to ensure a smooth transition. So it is imperative that you do not "hang around" the business until after the closing. All appointments with Seller are handled through Finder unless otherwise agreed upon.

Also, all contact with Landlords, Note Holders, suppliers and customers/clients will be through the Seller only. No one wants to stir the pot so to speak unnecessarily until the deal is actually completed.

Risky Business/Risk Assessment:  

Again, it must be pointed out that in the purchase of ANY business, there is an inherent risk.  Please employ competent advisors to help you in any decision to make an offer or to purchase a business.  There are no guarantees that you are making the right decision.  There are no guarantees that you will be able to continue the business in the same manner; that you will be able to retain the same customer or account base, that your sales will be on the same level as the current principal’s, or that your earnings will be on the same level as the current company’s, etc.  Please also understand that if you are securing a loan on the business, while the interest for the loan will be an expense on your profit and loss statement, you will also have principal payments to tender, which will be on your balance sheet, but also will effectively reduce your cash flow until the note is paid in full.  You and your advisors will need to determine if this is a risk you can afford to take or want to take.  Get advice.  Study your options.  Do the “Ben Franklin” – are there negative issues in this business that you cannot live with, or are they items which you can live with, or overcome with a proper plan and proper working capital?  Do your homework.  If you are uncomfortable for any reason, do not buy the business. 

Do you have any firms you can recommend to me after I buy a business, i.e. printing companies, CPA's, web-site developers etc.?

Congratulations, you are the proud owner of your new business.

LibertyExchange.Com Finders have a broad contact base of business support service companies, often several in their same respective industries, to whom they can refer you. These may include marketing, advertising and PR firms, printing companies, CPA's, attorneys, financial advisors, graphic design firms, web-site developers, professional moving companies, promotional product companies, SEO companies, insurance agencies, etc.

Even if you think the business has proper marketing and sales programs in place, you may want to consider soliciting second opinions. Generally, marketing and sales (in addition to quality products and services) can be the driving force to catapult your business to the next level.

When you purchase a going business you are buying a platform if you will, from which you can grow your business (or if you are a strategic Buyer, as you know you will generally be able to expand and increase sales more quickly through acquisition in addition to realizing economies of scale.) Very rarely does an established business enjoy a revenue and profit stream which cannot be increased if proper steps are taken.

As to changes in operation, you may not want to change anything substantive in the beginning (with the exception of cosmetic changes.) Learn the business first. Learn what works and what doesn't. Any changes can be gradual and after careful study and consideration.

Above all, treat the employees, clients and customers with respect, friendliness and a positive attitude. They are the life-blood of your new venture. Especially on small issues, the old adage applies - the customer is always right. If the business you will own has quality procedures and policies in place, you may be well advised to maintain those until and if you create alternatives which are better. If something is not "broken," there is no need to "fix" it. Keep in mind, though, that positive improvements can always be made. Involve the employees post closing. Ask their opinions you might be pleasantly surprised as to what new ideas or concepts they will impart which you could implement to further the sales and profits of your new venture.

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No advertisement on this site in any way constitutes an offer to sell or a solicitation to sell securities or any partial percentage of a business. These businesses are structured as asset sales.

Statements, figures, and representations contained herein this website are provided by and are the sole responsibility of the business owner. Neither the marketing agents, the disseminating parties, or their agents have verified the truth or the accuracy of any and all information included in this advertisement, nor in any forthcoming business presentation report (including any supplemental information provided by sellers) and deny any responsibility therefor. Neither the marketing agents, the disseminating parties, nor their agents make any warranties or representations expressed or implied. As with any business purchase buyer should seek its own competent independent legal & accounting advice regarding due diligence, offers, closings, leases, etc. Caveat emptor.  The purchase of any business carries with it an inherent risk.

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