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Frequently Asked Questions About Buying a Business.
At Franprise Advisors, we specialize in helping you find the best business to buy. We can help you navigate the options you have in front of you, so you can make confident decisions for your future.
Who should sign a Non-Disclosure / Confidentiality Agreement
In some cases, it's advisable to secure an NDA (Non-Disclosure Agreement) or CA (Confidentiality Agreement), before disclosing anything about your business endeavor to other interested parties. For example, whenever an experienced business broker or mergers and acquisition advisor engages a prospective buyer on your behalf, the first step is to attain an NDA, prior to releasing any of your confidential information. It’s our job to ensure your details are completely confidential and only disclosed to appropriate individuals (i.e. individuals bound to an NDA).
It doesn’t make sense for the person you have representing you to sign their own NDA. If the individual isn't familiar to you and is a possible competitive risk, an NDA is an appropriate method of securing their confidentiality. On the other hand, if the individual is a professional advisor, such as an attorney, accountant, or business broker, requiring them to sign an FDA is normally frowned upon – especially if you initiated the relationship. In fact, most, if not all, professional advisors will decline to sign an NDA in this scenario. Because if they did, they'd eventually be limited in who they can engage due to the conflicts that are created by having signed too many NDAs.
If you are completely risk-averse, go ahead and request an NDA, but don't let it be a deal-breaker if the person chooses not to sign. Chances are the most experienced and valuable contacts will choose to pass.
Why is it better to buy an existing business than to start my own?
There are several compelling reasons why buying a business is preferable to starting your own:
- Whereas a start-up business requires months or possibly years of losses before you break even, you could use this same money as a down payment on a business that will immediately generate positive cash flow, even after all debt.
- The failure rate among small businesses is mostly concentrated on the start-up phase. When you buy an existing business, you’ve already skipped past the start-up phase and the risk it brings.
- An existing business has established employee, client and vendor relationships, which have taken time to build and maintain. This is preferable compared to having to start each relationship from scratch if you were to start your own business.
- An existing business has demonstrated that there is a demand for that product or service in a particular locale, whereas you’re entering an untested market if you’re starting your own business.
What should I evaluate when buying a business?
Buying a business is an exciting and emotional journey. To identify whether a business is the right one to buy, there are several key factors you need to objectively evaluate.
What’s the nature of the business?
To be successful, you need to pick a business you can be enthusiastic about operating. If the business isn’t the right fit for you, you’re likely to burn out and lose your emotional interest.
How good is the business plan?
You need to see how a business can be grown in the future, and that means you need a business plan. Additionally, a business plan will outline how products and services are marketed and how the business compares to other competing companies. Specifically, you’ll want to know the current business owner’s goals and how they plan on going about achieving those goals. If they haven’t been able to formulate a coherent business plan, that could be a red flag.
How is overall operational performance?
To answer the question of overall performance, you should look beyond the financial performance of the company and assess several underlying factors. Here, you want to ask yourself more detailed questions like: How many hours does the owner have to work? Is a manager present to oversee operations? How many employees are paid overtime? Are employees living up to their potential?
What do the financials look like?
You’ll want to see everything from profit and loss (P&L) statements and balance sheets to income tax returns and more. Be sure to dig as deep as possible and validate the information you’re provided--if the info/data isn’t accurate, you should walk away and find another business to buy.
What are the customer demographics?
As a business owner, you’ll constantly need to measure your customer relationships and plan accordingly. That’s why you need to know who the customers are, why they keep coming back and how you can potentially add new customers while retaining your existing customer base.
Why is it important to understand property leases?
When you’re buying a business, it’s in your best interest to clearly understand your lease situation. You want a stable lease with clearly defined rules. Leases should never be overlooked when it comes to buying a business. After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business.
In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease. Each type of lease is different from the others and will impact a business in different ways.
A sub-lease is a lease within a lease. If you have a sub-lease it means another party holds the original lease. In this scenario, the seller is the landlord. In general, sub-leasing will require that permission is granted by the original landlord.
With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord. You’ll want to ensure you have a lease in place before buying a new business, or else you might have to relocate if the landlord refuses to offer a new one.
The third lease option is the assignment of lease. Assignment of lease is the most common type of lease when it comes to selling a business. Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating. In short, the seller assigns the rights of the lease to you. Note: the seller does not act as the landlord in this situation.
How can I find the best business for me?
Selecting the right business for you and your skillsets is vital to the long-term success of your business. It can be complicated finding the right business for you, even after you've evaluated important personal factors such as your skills and interests. Franprise Advisors can help you find the best business fit for your specific needs, personality, and goals.
Should I consider getting an SBA loan?
Finding the money to start your own small business can be a challenge. For years, people have relied upon the Small Business Administration (SBA) for help opening a business, expanding their existing business or buying a franchise.
It's important to know that the SBA doesn’t provide loans itself. Instead, they facilitate lending and even micro-lending through a range of partners. SBA loans are backed by the federal government, which means that lenders are more inclined to offer a loan to an someone who might not typically qualify for one. In fact, the SBA will cover 75% of the lender’s loss if the loan goes into default. This doesn't mean everyone who applies gets a loan, there are still significant requirements, but it's worth investigating, nonetheless.
What are the most important questions I should ask before buying a business?
Before you make the final decision to buy a business, you need to discuss some important questions of the seller. Some of the major questions you’ll want answered:
What are the biggest challenges you’re currently facing? The answer should help you anticipate any issues before you encounter them first-hand.
What would you have done differently? The seller’s response could clarify any immediate areas of potential growth.
How did you decide your asking price? Here, a seller should be able to clearly defend their pricing and any of the underlying financials they used to arrive at their sale price.
If you can’t sell your business, what will you do? The answer to this question can shed light on how much bargaining power you have in the transaction.
What skills or qualities do I need to run this business effectively? Make sure the answer aligns with your personal traits, before you go any further.
Do you have any past, pending or potential lawsuits? Pay close attention to the answer you get, as it could serve as a warning of financial risk ahead.
How well documented are the procedures of the business? This question aims to ensure your transition to ownership is smooth.
How much does your business depend on a key customer or vendor? If the answer implies that the business is centered too strongly around any one customer or vendor, you need to evaluate the resulting worst-case scenario. What if you lose the customer or vendor, how will it impact your business?
What will employees do after the sale? This question can help you evaluate the nature of the relationship between the seller and their employees, which in turn can help you identify the staffing situation post purchase.
What’s the difference between buying a business and buying a franchise?
Buying a business allows you to own and operate a business without a franchise agreement or royalties. Buying a franchise means you are buying the right to use a brand name, systems and processes developed by the franchisor, as well as ongoing support and advice.
Franprise Advisors is here to help you decide which option is the best fit for you, taking into account your goals, budget, and experience.
How do I finance the purchase of a business?
You can finance your business through a variety of methods, such as bank loans, venture capital, private equity, and debt financing. It’s important to research all the financing options available to determine which is the best fit for your individual needs. It's also important to consider the costs associated with the purchase, such as legal fees, taxes, and other costs.
Fortunately, Franprise Advisors can help you identify the right financing option and make sure you understand all the costs associated with the purchase. Our advisors will work with you to ensure you find the best fit for your individual needs, while ensuring there are no surprises. Let us help you take the guesswork and hassle out of financing the purchase of a business.
What other costs should I anticipate when buying a business?
Other costs to consider when buying a business include:
• Professional fees: Professional fees such as legal fees, accounting fees, and consulting fees.
• Licensing fees: The cost of obtaining any necessary licenses or permits.
• Insurance: The cost of obtaining liability insurance and other insurance coverage.
• Equipment: The cost of purchasing any necessary equipment or machinery.
• Inventory: The cost of purchasing any necessary inventory or supplies.
• Advertising and marketing: The cost of marketing and advertising the business.
• Training and onboarding: The cost of training any new employees and onboarding them into the business.
At Franprise Advisors, we know buying a business can come with unexpected costs. That's why our advisors are here to make sure you're aware of all the additional expenses you may face — so you can rest assured that there won't be any unpleasant surprises down the line.
What are the tax implications when buying a business?
It is important to consult with a qualified accountant or lawyer to determine the tax implications and to make sure the deal is right for you.
Some examples of possible tax implications are:
• Payroll taxes: Depending on the type of business, you may need to pay federal and state payroll taxes on wages, both for employees and yourself.
• Income taxes: Business income you earn is subject to income taxes, both on the federal and state level.
• Corporate taxes: Depending on the type of entity you buy the business under; you may be responsible for corporate taxes.
• Sales taxes: In some states, you may need to pay sales taxes on goods you purchase to run the business.
• Property taxes: If you purchase or lease property for the business, you may need to pay property taxes on it.
• Business licenses & permits: Depending on the type of business you buy; you may need to pay for certain licenses and permits.
• Excise taxes: Depending on the type of business, you may need to pay certain excise taxes.
• Franchise Tax: Depending on the state, businesses may be required to pay a franchise tax.
At Franprise Advisors, we understand the complex tax implications associated with purchasing a business. With our wealth of experience combined with preferred accounting and legal counsel partners, we'll take the stress out buying a business and ensure you make the right decision for you.
What is the first-time buyer process?
The first-time buyer process is a general outline of the steps you should take when buying a business.
Step 1 – Information gathering
Gather information on businesses to get an idea of what kind of businesses are appealing to you
Step 2 – Consult a broker
Get access to the experience and expertise you'll need to endure the process
Step 3 – Confidentiality and questions
Sign a confidentiality agreement so that you can learn more about a business that you find interesting. Once you have the business's marketing package, you can
meet with the seller and ask any pertinent questions you need answered. By asking the right questions, you’ll be able to learn more about the business and its long-
term potential.
Step 4– Evaluate
Evaluate all the information that you have received from the seller. Once again, a business broker can be simply invaluable, thanks to years of hands-on experience,
they'll know how to evaluate a seller’s information.
Step 5 – Make the decision
Decide whether to make an offer. If you are making an offer, you will, of course, want it to be written and include contingencies. If your offer is accepted, then the
process of due diligence begins.
Step 6 - Due diligence
During due diligence, you and your business broker will look at everything from financial statements to tax returns. You will evaluate the company’s assets. Again,
business brokers are experts at the due diligence process.
Thinking about buying a business? Franprise Advisors can help!
We specialize in guiding entrepreneurs through the process of finding the best business for them to buy, negotiating deals, and transitioning to ownership. Get in touch with Franprise Advisors to learn more about buying a business today!
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