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hi everyone thank you for joining us today at the maine small business development center for the very first 2021 webinar so we're getting the year started right we are consistently doing these about once or twice a week um each month we're putting out a calendar of all the events that we are doing and in each follow-up email after a webinar you'll get a list of all of the scheduled upcoming classes so definitely keep an eye on that calendar as it continues today we will be joined by uh business advisor and center director raynor large comes from avcog uh he'll be going over what goes into buying a business so maybe starting a business from scratch isn't exactly what you want to do established businesses are a great way to get your foot in the door so he'll be going over all the information you might need right now or perhaps in a future endeavor whatever these things uh tend to happen quicker than you imagine um and i'm sure he'll be going over all of that so you will also follow uh get a follow-up email from me after this that will include a recording including the slides so if you feel like there's anything that you missed or wanted to rewind to all of that will come to you in email with raynor's contact information as well and i'm sure that there will be time for questions at the end but in the meantime feel free to introduce yourself in the chat and submit any questions you have along the way there uh and we will circle back to anything that doesn't get covered towards the end so i will pass the mic over to raynor thank you kelsey yeah so my name is raynor i'm the center director here with the sbdc i'm based out of vavcog a bit of background the sbdc has about i think we're up to 18 advisors throughout the state of maine our primary work is done one-on-one uh so you know we like these webinars but uh our favorite thing to do is meet with you one-on-one we are state federally and locally funded which means we're a free service to you so if i cover anything and we're going to be covering a lot of information today uh that you have additional questions on or you want to follow up about a particular opportunity that you have please reach out to us directly a bit of background about myself i've been with the sbdc about two years prior to that i worked as a financial analyst for a turnaround firm i also work as a financial analyst currently for the largest uh listing business brokerage in the state of maine uh to this point i've done a little over a hundred opinions of value or valuations of businesses i've represented both buyers and sellers at the brokerage table so this is something that i do have some familiarity with and more than happy to kind of share that with you as we go through this today you know a copy of the slideshow and recording will be made available to you but like i said we do prefer to have that one-on-one so feel free to reach out my contact information will be available and you can register for advising right with the sbdc at www www.mainspdc.org we have quite a few people online today so we will mute your connections just to make sure we can get through this clearly i will stay on as long as possible at the end to answer any questions you have and if you want to drop questions in the chat as we go i'll try to keep an eye on that what we're going to cover today so we're going to kind of cover from the start to the finish of the buying a business process so kind of talk a little bit about why buy try to identify what exactly you would be buying how you'd buy it what it's worth some identifications of value structuring a deal and then some next steps best practices due diligence just some things i'll leave you with so why buy is always the first question right so i won't spend too much time with this i understand if you've signed up for this webinar and you're taking your afternoon to listen to me talk uh you've probably already given it some thought and you might just be tired of working for others you might want to kind of keep what you kill and have that hard work that you're putting into wherever you work now you really sweat equity right that you're building up with some bonus on the back end you know if if those two thoughts appeal to you but you're hesitant about starting a business from scratch that makes sense right you don't want to recreate the wheel an existing business often has a confirmed market presence there are a lot fewer assumptions you have to deal with you have an existing customer list you might have employees in base you know in place already so there's a lot of benefits that come from buying an existing business one of the things that we're going to spend a lot of time on is kind of identifying the structure and the deal and the price so it'll be what happens after you've identified the specific business that you have in mind right and for you where to start is really identifying what your relationship is with the seller like any negotiation like any purchase there has to be a agreement between two people right you can't unilaterally buy a business you have to have a ready willing and able seller and a purchase price that can be achieved by yourself a commercial financer or the seller working together so that negotiation that relationship i is is critically important both in the transaction and often surviving the close which we'll get to as well so identifying your relationship with the seller whether or not your staff or a family looking to i to buy out an existing owner or you're looking to buy an owner operator position in both of those you're really buying yourself a job right and what i mean by that is you're going to buy a business that already exists and you're going to plug yourself in where the owner is currently and ideally work 40 50 60 80 hours a week as the owner of that business so you are buying yourself the job security of owning the business that you work for now there's this other option which i'll touch on quickly but we won't spend much time with is the synergistic buyer right so if you have an existing business and you're looking to buy a book of business elsewhere what you're really buying is a market share you already have a job you're just expanding that job elsewhere uh looking at the participants we've had i'd say about 80 percent of you do not have a business currently so you're truly a startup buyer so my focus is going to be on those first two slots where you're either in the business already or you're looking to buy yourself a job now in both of those cases this question of how you will pay for it becomes critically important right so you'll use some combination of personal equity or a commercial loan or a seller note but you'll have to pay that back or justify it through the cash flow of the business which becomes very important when identifying a purchase price uh you know there's some advantages and disadvantages um but that part that i've bolded uh that paid for by the cash flow of business is really what you're buying right so when you're looking at buying a business you're buying the physical assets and you're also buying goodwill right that's the catch-all term a lot of people use for the website the customer list the reputation right the um the idea that the business has existed but the important thing here when you're a buyer identifying what you're buying is that you're buying the ability of the physical assets to demonstrably generate cash flow in a reasonable time frame there's a couple parts to this that i want to break down right so so the idea that there is a goodwill value unsubstantiated by cash flow is false it's unfortunate because a lot of people put you know blood sweat and tears into a business and i've had you know the best example i have is it you know a seller coming and saying well what's the business worth oh two heart attacks and a divorce right it's what i've put into the business now as a seller that might be what it's worth to you but again going back to that negotiation you have to have a buyer and you as a buyer have to be able to justify that price if those assets that exist are not generating substantial cash flow then there's no demonstration of value in those intangible assets whether or not we want there to be right that's a it's a very difficult conversation to have um but you know if i have a bunch of random assets in my backyard that's not a business i can make a website i can um you know i have a list of people who could potentially buy those things but at the end of the day unless those things are working together and there's an existing systems policies procedures in place that create cash flow above and beyond just the physical assets there is no good will value so it you know the demonstrably generate is is important as well right so if you sit down with a seller and they say well you know i don't like paying taxes so i just uh pocket half the cash that comes into my business well you know that's all going good but are you willing to pay for that you don't want a wink and a handshake um it's kind of a pay now or pay later if they haven't paid their taxes they have no demonstration of that cash flow so it becomes a very tenuous and difficult negotiation whether or not you as a buyer are willing to pay for it a commercial lender often won't lend to it and hopefully you have a team around you to protect you from decisions like that with an attorney or an accountant saying hey you know i'm gonna wave a flag here this might be a risk um and then a reasonable time frame is also very important so if i'm selling you some assets i'm calling that my business any business is worth a million dollars if you take you know 20 years to pay me back 30 years but what kind of return on investment is that for you as a buyer so being able to say okay here's the cash flow generated by these assets and the assets are working together and what i'm really buying as a buyer is yes those assets but all of the work the sellers put in to get those assets to work together to make something of them above and beyond just a couple pieces of equipment and can that generate my return on investment that i need so one of the things we're going to talk about and spend some time with is really reviewing tax returns and i start with tax returns because internal financials are good right a lot of the time there's more detail in the internal financials than just on the tax returns but the tax returns have an accountant's stamp of approval and they've been submitted right so someone somewhere is liable for those tax returns they've at least had that level of oversight right even if it's the owner submitting them themselves you know the owner has has said okay i'm comfortable with submitting these financials to the federal government and i stand behind them so there's that level of oversight so some things we're going to we'll look at that i recommend is taking several years of tax returns from the due diligence process and comparing them year to year right what you're looking for is continuity and trends uh large jumps and accounts uh is there a large miscellaneous account or other what are the question marks right and a lot of the strength of a business that kind of systems in place is reflected in the financials right if the financials are everywhere and there's no certainty and uh some things were office supplies one year and other another year and miscellaneous the third year and the owner doesn't know um you know that's a red flag right you're saying okay if you can't explain these things uh well then what am i buying what are the systems in place if if they don't do enough to at least show the business as a cash flow producing business uh and then you know the the other benefit of the tax return is that it's the income statement so if you're buying a business right you're buying the income statement which is the assets creating cash for the business and to a degree you're buying the balance sheet now a balance sheet is the list of assets and liabilities but if you're buying a business the assets are whatever you're paying for right the physical assets and the goodwill and the liabilities are however you're paying for them right it's the commercial loan the seller note and then you have the equity piece which is your down payment so you're creating the balance sheet on day one with the purchase the purchase structure creates a new balance sheet so you're not really as worried about that as the income statement the tax return which is showing you okay um what are what is the business doing with the assets it has is it generating enough revenue so when you're identifying cash flow right there's two major terms that get thrown around a lot the first is called ebitda right and the other is sellers discretionary earnings and a little graph here to kind of show that too so ebitda is used by commercial lenders and it's equity before interest taxes depreciation and amortization and all this is saying right really what it boils down to is what is the cash being generated by the business so you have your net income which is the bottom line of the business and then you add some things back so you add back depreciation and amortization which are it's a tax strategy more or less they're non-cash though which is important right so you add them back because they're not actually a cash thing it's just a way to diminish your tax burden then you add back your taxes obviously and you add back your interest because for you as a buyer your interest is going to be different than the seller's historic interest because your debt structure is going to be different than the sellers right so that gets you the ebitda now as a buyer and a seller there are some other things you can do right with your business to reduce taxes i'm not here to pass any judgments or do any you know how taxes are handled are entirely up to you and your accountant but you know as a business owner you might not want to pay as much in taxes so you might have your cell phone plan right you might have a 401k you might have other kind of ancillary expenses on your tax return they're legal right and verifiable you know this is nothing below the table this is just ways to expense things you know an automobile vehicle for the business you can you can expense it um but they're ancillary right they're not critical to the business itself and that's important because as a buyer you're saying okay um i might want to spend that money a little differently right where you had a vehicle i might call it education and i'm going to get my mba and have my business pay for it that's fine right that's part of the business um but we want to add those things back or at least account for them or a business owner might be taking out 120 000 a year in salary and you're saying geez i can live off of 80 000 a year uh so that gives me a little bit more of a buffer or you're saying i really need 150 000 a year to make this work so sde the seller's discretionary earnings starts with ebitda and takes it another step it says okay well what about this discretionary earning piece and what about the salaries the owner's salary seller salary because what they're selling is what you're buying right so that cash flow historically you can look at you can get the tax return you can work through it and you can say okay here is what is being generated by the business what i'm buying as a buyer in this case is that cash flow i'm buying that cash flow that's worth something to me what is it worth so that's where your perspective comes in so what you're buying what is being sold is the ability to support debt right and your salary needs so so you add back those things historically from the tax return and then you look at it and you say okay if i have fifty thousand dollars hundred thousand dollars five hundred thousand dollars what can i do with that so you have your own salary needs so you have to account for that right as a buyer you say okay here's my mortgage here's my monthly car payment here's what i need for food and clothes um here's what i want to put into my retirement account you have your your expectations as a buyer here's what i want to pay for myself then you have the ability to support debt which is really two parts right so a debt coverage ratio is w at a bank looks at and says okay um you know if it's 150 000 and you need fifty thousand dollars uh for personal salary we're not going to lend you debt that requires a hundred thousand dollars to pay every year right you're a hiccup away from missing a payment uh we don't like that so they usually build in what's called a debt coverage ratio where they they'll land 80 or 85 percent if you know it's a strong business so so it's two pieces right so you're saying okay you have a hundred thousand dollars to work with uh we'll lend you enough debt to support you know eighty thousand dollars a year and you'll have a twenty thousand dollar a year buffer in case a piece of equipment blows out or um you know a major customer leaves you who knows right that's that what if or another virus comes around um so we have we have that kind of built-in buffer now what is that cash flow worth so the the you know the idea of the ability to support debt is great but in the open market there's really kind of three pieces right that you're identifying so your alternative to buying a business is to go out and start from scratch right so that's really your ceiling is to say okay um you know if my alternative is to go down the street rent a place put a down payment on a building you know buy all the furniture fixers and equipment buy the inventory run for six months at a loss uh build my customer list for two years and then i'll have what you have now right so if all of those costs fully loaded into that calculation is who knows five hundred thousand dollars um and they're asking seven hundred thousand dollars for their existing business it doesn't make sense right you can just you can recreate it it's gonna take some hard work um but you know if you can put that money in and you've got the money anyway you know that's the better alternative for you as a buyer now then there's market price right the market price is saying okay i can buy your restaurant or your you know business or i can go one town over and buy another restaurant or another business what are they asking for theirs so it's the equivalence right the market price um and if the cash flow of the existing business supports a value greater than the assets themselves then there's some goodwill there right so that's another common misconception is that you you know the ability to support debt is one purchase price of goodwill and then you have to buy the furniture fixtures and equipment on top of that that's not the case so if the ability to support debt is 70 000 and the equipment's worth 50 000 then the goodwill is only the difference between those things so the goodwill is the amount above and beyond the physical assets now the floor value of a business is a seller just wanting to walk away right so if you're working in the business and the seller says you know this is my last winter in maine i'm sick of it i'm not going to work with a broker i'm not going to market it i don't care i just need to turn my keys over and walk away then you're just buying the physical assets right it's a you're buying the furniture fixers equipment whatever inventory is on hand they turn the keys over so there's really kind of three values that we're looking at the market price is the most pertinent um but you know one thing that i i really want to reiterate to you as a buyer right is that what a business could be is what you're what you're buying right you're looking at this and you're saying this is my opportunity because it's missing this piece and i bring that piece to the table this business is great but it doesn't have a primary sales person and i've have 20 years of sales experience so i can take this business to the next level or you're looking at here you know it's uh i'm excellent operationally and this business has struggled without a primary operator for the last five years so i can take it to the next level but you're not paying for that right you're paying for what it is you're buying what it could be if you overpay for something then you know whatever however long it takes you to get there you're losing money right so one thing i you know this is the same graph we've already looked at that historic seller's discretionary earnings you've got that ability to support debt you know you know more or less what the down payment expectation is going to be you can work with the lender to figure out a reasonable interest rate and term length that gives you a supportable purchase price now if the seller is coming to you and saying okay um you know the actual purchase price is above and beyond what it can support you might be okay with that you might say what i'm bringing to the table is strong enough to get it there right but it's gonna take six months or it's gonna take a year and until then you know that the debt is above and be you know the monthly mortgage payments on your debt uh can't be supported by the business so you're going to have to be paying out of your salary to cover that piece um you know it burdens the business and then the question becomes how quickly can you can you build the sde to a point where it can support the business and your salary um how long does it take to get there and what are the risks right you know is it guaranteed or is it a slam dunk if it takes six months instead of three months you know where does that extra cash come from do you have a reserve in your personal bank account that you can bring to the table um you know that's up to you i'm not here to tell you one way or another but be aware of the debt you're creating and if you over leverage the existing business you're going to be working day and night uh and taking less of a salary to make that you work might be something that you're comfortable with so then the question always comes up right what about multiples right so my my accountant told me it's uh three times gross income you know okay well what does that mean right so it's a suspect method at best you know there are rules of thumb out there and i don't want to knock them i think it's a great place to start negotiation it's a great place to kind of understand generally what you're talking about um but you know different multiples apply in different ways so anytime you're buying yourself a job right you're in the business already and you're buying a job or you're looking to buy out an existing owner and you're going to work in the job i don't use a top-line multiple right and the reason for that is a top-line multiple a gross sales multiple is really only applicable when you're talking about buying a book of business right so if you're an accounting practice and you're buying out another accounting practice you're just buying the market share if you're a medical practice or an attorney or anybody buying a market share then you might consider that kind of top line gross income multiple but if you're buying an existing job right your insurance is going to look very similar your payroll is going to look very similar all of your costs are going to be more or less the same so the only applicable number is that bottom line is that sde that cash flow available to you um if they're doing a million dollars in sales but they're not generating any income for themselves that's not really worth a top-line multiple right because the systems in place aren't generating any cash there's no benefit to buying it as it is you're just buying furniture fixtures and equipment so why use a top-line multiple um a bottom line multiple might be applicable but again you know the difference between that sde and ebitda is substantial right it's a whole salary it's some other benefits sometimes a multiple means ebitda sometimes it means sde and those could be very dramatically different numbers so be aware of what the multiple is implying and then the last thing is it's a rule of thumb right it has no indication of what kind of inventory is included in that transaction is inventory included or not in the multiple um you know if if you're buying a retail store and there's a million and a half in inventory on this on the shelves you know is a multiple really the way to go or is it more of a discussion of you know how that inventory is appropriately priced um you know vendor relationships how long have the employees been in place you know all of these things matter and they differ from business to business and a rule of thumb multiple has no you know reflection of that value so if you're just talking about a rule of thumb you don't know how old the equipment is you don't know how often it's been replaced you don't know if you know their primary sales person just quit and what you're buying is an incomplete org chart right so there's a lot that goes into that can you use it as a good place to start sure but again it's a start so structuring the deal i want to talk a little bit about this because it's a lot more convoluted right than just buying a building or buying a house right so commercial lenders typically are very comfortable with tangible things because in their mind they're thinking okay if this doesn't work out i can take those tangible things and i can resell them and i'll be fine not really you know not giving too much thought about how it impacts you but as a lender i have to protect myself right so so they're looking at the real estate the furniture fixtures and equipment the inventory and then they're applying that kind of that loan to value ratio the buffer against it right so if they're looking at real estate and the real estate appraises at two hundred thousand dollars they're not gonna say here's two hundred thousand dollars because in their mind they're thinking okay if i have to take this back from you and i have to pay a broker to five percent to go out and sell it as commission or whatever and i have to winterize it because it takes six months to sell i'll lend you 90 of that value furniture fixtures and equipment the same thing right it's i'm not going to give you a dollar for dollar amount of the value i have to pay an auctioneer to go out and sell that i may make 60 cents on the dollar so that's what i'll give you so the you know the the less they're able to resell that the more equity they're expecting from you and those physical assets are kind of the cap right of what they're willing to lend now what if the seller wants a higher price than the collateral supports so going back to this what if this supportable purchase price or the actual purchase price either one you know the cash flow is there but the assets aren't right so so the business looks good but it doesn't have the tangible assets to offset it there are other options right so you might have some personal assets that you're willing to leverage up you know second mortgage on a home is very common for a buyer um you know a seller might be asked to hold some paper right so the seller might say okay i'm gonna have a second note behind the lender and the debt you know the debt the total amount of debt is covered right by the cash flow of the business but part of it is a commercial lender in first position and part of it is the seller in a second position then you get fun right you can get some like you know creative solutions like you can have a consulting agreement with the seller where you pay them x amount at close and then you keep them on staff you know and you call them monthly or they check in or they're available to you for a period of time and you pay them out of the business for that um or you have a flexible purchase price with benchmarks where you say you know if i hit this benchmark i'll give you some extra cash at the end of the year or if uh you know or if it's not there if what your promise me you know that you're hiding isn't actually hiding it just doesn't exist in the first place uh you know maybe you don't get paid right so you can tie those benchmarks you can have some ongoing agreement with the seller um outside of what the lender the primary commercial lender is willing to lend you know those those other options once you start getting creative you know that's where you know a good broker and a good you know financial analyst and a great attorney really come into play because you know good attorneys make good contracts right you want that in writing you want to know what if something happens what happened like you know the the more clearly everything is stated and all of the possibilities are kind of uh thought about in advance and addressed the easier it is to negotiate you know later on down the line if two years out something happens um you just look at the contract and say okay this is this is how we execute on this uh so you know if you're entering into an agreement with a seller that that exists after the close right after you buy and the transfer of assets takes place you know that good contracts make good partners right and they're a partner up until the point where they stop they get paid off in full or the contract is terminated they will be there in some fashion so if you're able to identify that in advance that's a perfect way to structure the deal but make sure you're understanding their responsibilities their ability to have oversight their input you know the last thing you want maybe is six months down the line the seller looking over your shoulder and saying you i really like to do it that way you should do it this way you know it's i don't know it's my business now so just make sure that's part of the contract is identifying what responsibilities they have and where that line is so one thing i do did want to touch on right is a lot of the time you're talking about uh sale right you're saying i'm buying the business there's actually two types of purchases that can occur right so there's a stock sale and an asset sale it's important to understand the distinction so 95 99 of transactions in the state of maine are asset sales right an asset sale is you're buying the existing assets of the business in a predetermined list and an asset can be tangible or intangible right so you can say i want all of these pieces of equipment and i want um you know the website and i want the social media accounts and i want the phone number and i want historical financial information and customer list so all of you know the latter part of that would be considered intangible but they're still assets and you can still buy them and the key here is that you are buying only the listed assets and you're buying them as a new company right so that is where your balance sheet is created on day one as part of that kind of the purchase price of the assets and the asset list being what you're purchasing the distinction there is a stock sale you're also buying the liabilities so sometimes people say oh it's easier to just you're just buying my stock 100 of my stock and you're going to become owner and that works you know it can work because maybe there's some outstanding accounts receivable and accounts payable and some work in progress and it's just kind of this ongoing and all you're doing is stepping in as owner of the company and you're running it now where it doesn't work is if you acquire some liabilities that you're not fully aware of so if there's a credit card uh in the company name for 25 000 and you didn't realize that you own the company right that's your credit card now the second that transaction takes place you are responsible for those existing liabilities so in some ways it's easier to kind of understand because there's not all of those little individual transactions that have to take place it's just you step in as owner but in other ways the due diligence has to be a little clearer because then you're saying okay um what are the liabilities that i'm that i'm taking on here are there any outstanding debts that you uh you know that you don't show on the books because you figured you were never going to pay them but hey oh all of a sudden there's a lawsuit and i didn't realize it right so um just be aware of right and part of that asset sale which is again is far more common um is identifying those kind of other considerations so who keeps the accounts receivable so if you have if you're buying a construction company and you're stepping in and there's twenty thousand dollars of work that's been billed but not collected is it the seller's responsibility to go out and collect that do they get to keep it or can you go out and collect it and is that potentially twenty thousand dollars that you get to keep for yourself same thing with accounts payable right you don't want to step in as an owner um and have all of these outstanding debts not get paid by the old company right because those are vendors that you want to work with that's a relationship that you want to maintain so do you require that as part of the purchase you know 100 of the vendor debt gets settled on the day of close you know that's fairly common um are there some you know agreements that can be made along the way absolutely but identifying it is first and foremost right so this the due diligence the negotiation part of the purchase and sale is saying okay who's responsible for paying what right how is this get settled so that i have vendors that are happy with me going forward um work in progress same thing right if they've done part of a job and you're stepping in and running that job from then on uh who keeps the down payment who keeps the um you know the inventory what how does that get settled how is the inventory even priced right do you walk through the day before and you know do a final accounting of all of the inventory on the shelves um you know if you if you walk through it when you make your offer and there's you know every shelf is full and then on the day of close you go in and everything's been emptied out and sold off uh you know that could be an issue right so so that is all part of this discussion which is fine right that's that's the complicated part but it's important to identify kind of and set the table so so yeah so i'll i'll dive into the kind of the next section um keep an eye on time here but um so when you're going through that due diligence you're identifying the business that you want to buy i've listed some things here that you should kind of identify right is is the current owner replaceable if they're selling you um an operating company but they're the primary sales person and they've handled every major account for the last 20 years and everybody only knows the business because they know the current owner how transferable is that right transferable assets are purchasable assets same thing with standard operating procedures policies systems in place if everything's just up here with the seller what are you buying how transferable is that you know maybe you maybe you buy that you know maybe you pay for it as an employee contract and you say you have to remain on staff 40 hours a week for the next three years to get your purchase right because what what i'm buying is your knowledge and i need that knowledge and if you disappear down to florida on the day of close you know that all that knowledge goes with you um so so identifying what they've put in place to step out and how easy it is for you to step in it's really important what contracts can be assigned right this is a big one do they have vendor contracts customer contracts real estate leases employee contracts how easy is it for those to be transferred or renegotiated if you're buying a business based on two major customer contracts uh and neither one of them survived the close what are you buying again good contracts make good partners we kind of talked about that clear lanes of responsibility clear exit strategies if something goes wrong really identify okay if this happens then this will happen right you know if the business isn't what it's worth then you get paid less if um you know if i do something then you don't have the right to tell me not to do it or to do something different right so uh and then you know really identifying is this business right for you as a buyer you know is this the weaknesses the historic weaknesses of the business do those align with something that you bring to the table i really like the idea of that day one equity you're saying okay i know as long as i do what i do best i can step in and make this a better business that's a great deal for you right because you're you already know that your strengths align with the weakness um you know you don't want to buy something where your strength is already replicated right where you're a salesperson and they have a great sales person okay you know now you have two sales people that's that's good but would it be better to go out and find a similar business where they don't have a sales person and that's what they're really lacking and you can step in and say you know here is the major customer accounts that i'm going to go after i'm going to really grow this thing [Music] and then kind of identifying some of the the other things talk to the vendors right talk to the customers talk to the employees you know if there's a lot of complaints or red flags along the way don't buy it right there's you off you know that i also did some work with turnaround management and troubled asset liquidation and often i'd have people who had bought businesses come in who had either over leveraged or ignored red flags right so they they were kicking themselves because they said i thought i could grow this business quickly enough to cover the debt and i just couldn't right so kind of over optimism is a red flag and then the second thing was saying um jesus you know the customers were complaining and the vendors said it was they had bad relationships and uh you know average employee turnover was every six months they'd have to hire someone new um and i thought i'd step in and i'd fix it all um but you know it's just it just wasn't a good opportunity right so they spent their whole time trying to repair the damage that had already been done rather than growing and moving forward so you know don't be afraid to step away if you see those red flags and then the other thing you can start doing right now is really build your team right so so this is a it's a long process uh as i've kind of indicated there's a lot of negotiation there's a lot more gray area than just buying real estate or equipment surrounding yourself with people who have done it before who understand it and who know the questions to ask is so critical right so a good attorney is worth their weight in gold and i know some of them charge an arm and a leg but being able to have that contract in place and do that due diligence is critical an accountant same thing having someone who can look at the financials and say okay here are some red flags here are some questions we can ask that's fine right not all questions are red flags sometimes it's an easy answer but just that understanding the ability to kind of analyze and crunch numbers and look through it is so critical i love financials that's like i won't get too far into that but that's um you can tell so much about a business with the right perspective and looking at the financials most common timeline is something like this right so you you meet with the len or the seller and you confirm their interest right if they're not interested in selling it's not going to work right so you say okay i might be interested in buying your business would you have interest in them sometimes they say yes and if they say yes usually they want a confidentiality agreement signed right they don't want to just open their books to a stranger so you work with an attorney you get a confidentiality agreement signed and then you put together a letter of intent outlining terms usually kind of a purchase price a timeline you know financial structure proposed you make sure that they're interested you know that that interest extends to a reasonable purchase pricing timeline so if they say yeah i'm interested in selling in 10 years for 20 million dollars and you're like oh that doesn't really help me um then you know the conversation ends but if you come to a reasonable purchase price that you agree to and they agreed to and you're comfortable uh then you put together a purchase and sale agreement and the purchase and sale agreement is the contract so when something's under contract that's what they're talking about it's signed by both parties and it really outlines kind of the terms through the close now there's two major periods in that that purchase and sale from the day the purchase and sale is signed until the day of close the two terms are due diligence period which is a period of time in which you can pop the hood and have it look right you do an inventory assessment you look at all of the equipment you have employee interviews you look at the historic financials and tie it out internal against tax returns and you know you contact vendors and customers and all of all of what you want to do should be listed in the purchase and sale agreement right because some sellers will say i don't want you talking to my employees until you know you've identified a timeline and gotten financing where they say i don't want you bothering my vendors until a week before close right so you can structure that timeline in a way that works for both of you but part of that due diligence is saying okay when can i do what and what is reasonable for me to ask for and i do include a due diligence list i think on the next slide so i'll cover some of that a little bit more and then the second piece that happens in this time period is a financing contingency right so a financing contingency usually gives you as a buyer a chance to pull the plug if you can't find the money right so usually you're you have a proposal in place for the financing where you say okay i want to find financing for less than seven percent interest of 50 of the purchase price and i want the seller to hold the note for 40 of the purchase price of the same interest rate and the same term length and i will bring to the table 10 in equity right so so by the time the purchase and sale agreement is signed those kind of rough terms are identified and agreed to so if you're asking for a seller note the seller is aware of that going into the purchase and sale agreement and you have something you can take to a bank most important so if you're looking for a piece of this to be financed commercially you have a purchase and sale agreement saying here's what i'm buying here's the asset list here's what i'm paying for it here's how i'm paying for it and you can take all of that to a lender and say is this reasonable and the lender can give you a letter of commitment within a time frame and you will have money at close if the lender says this is not reasonable i'm not going to do this then you have the ability to back out of the agreement right same thing with the due diligence right both of those are contingencies because they give you a timeline with which to identify potential flaws and if they are identified in that time frame you can leave without consequence you can get your earnest money back and walk away so making sure that those two pieces are part of your purchase and sale agreement understanding what you can do when and what you can ask for and who is responsible for what in that time frame is so critical because that gives you the chance to say i didn't realize this or and this equipment's a lot older than i thought or your organizational chart isn't what you presented to me and i have to go out and hire these people and i'm not comfortable with that i'm going to walk away if you get through both of those time periods and you're still satisfied then you get to the day of close right and the day of close there's a specific point in time where the physical assets identified if it's an asset sale get transferred or 100 of the stock gets transferred if it's a stock sale then there are some things that survive the close and by survive the close i mean exist beyond that day right so the purchase and sale is terminated is closed on the day of close when the cash transaction takes place right so there's a you know transfer of deeds or whatever is being transferred gets transferred right that happens then something survive so if you have an employee agreement or consulting agreement with the seller that survives you want to have that written up for the day of close right a non-compete same thing you want that written up and signed on the day of close and that survives so part of your agreement is you can't go out and start a competing business within 30 miles you want that signed before you know before you close otherwise they can go out and start a competing business with the money you just gave them to buy their business seller note you'll want that formalized art collection ap collection um inventory identification all of those things survive the close if there's something built in so if it's their responsibility to pay the vendors you know the existing debt on the day of close you want to make sure that survives so that you can hold them accountable to do that and then just some last you know i i threw some things together for common due diligence items that i've seen most commonly asked for you know at least three years of tax returns very common detailed equipment list this is important uh you know the details are critical here because you're kind of identifying how old is this equipment you know if you're buying a construction company and an automotive company and the purchase price is a hundred thousand dollars uh but you have to replace eighty thousand dollars in equipment on day two uh then in your mind you should be thinking this is a hundred and eighty thousand dollar purchase because i have to replace all of this equipment in order for that cash flow to continually be generated uh so maybe the purchase is only twenty thousand dollars and you have to build in eighty thousand dollars in new equipment um so you know just something to think about is how old is that equipment how often does it have to be replaced what's the mileage uh make model you know are these good is this good equipment or bad equipment dig into that organizational charts you know longevity is a big part of this um you can i've seen deals structured where the employees actually get paid a bonus part of the sale price after a year right so you know the the seller really wanted to ensure that his his employees uh had a job for a period of time so he said i'm going to take a haircut on the sale price but i want my guys to get a bonus a year out and from the the buyers perspective it was great because he had a team in place right guaranteed or as closely guaranteed as you can get without an actual contract he's dangling this carrot out in front of them saying you know stay on board with me through this transition you get a bonus on the flip side um you know their responsibilities make sure everything's covered any contracts employee contracts make sure you understand those sales by customer reports are very helpful you can kind of see okay you know as is all of their business from one customer and if so how secure is that customer is that a red flag is a lot of their business repeat or do they have to go out and solicit new business every year is that good is that bad proposed schedule of inventory ar and ap at time of close so accounts receivable is what people owe you ar ap is what you owe to people right so your vendors primarily um who handles that just identifying it right it can go either way it could be the sellers it could be yours there could be a split between the two how is that handled uh any contracts right equipment leases real estate leases what's assignable we've kind of talked about that intellectual properties one that you know a lot of people kind of think about peripherally until the day of close passwords right who's who has the passwords to the social media accounts when was last time the linkedin was updated um you know who has the keys to the building uh who has the company credit cards that are you know do the drivers all have credit cards that they're walking out with um you know who has the uh the payment software you know can that be transferred internal financial documents i think are rather important you can compare to the tax returns make sure there's nothing too egregious you know there's no large differences between them licenses and permits you know can you operate on day one of the purchase do you have your licensing and permitting in place or can those licenses be transferred um and then there's some industry specific stuff right so always ask your your attorney your broker your accountant what you're missing right what you should be asking for that might not be listed so i think i'm 30 seconds over my time but tried to keep it i can stay on as long as possible i'd love to answer any specific questions you might have um and like i said you know at the beginning we're a free service right i i transferred to the sbdc about two years ago after having my first kid and before having my second as part of just kind of a quality of life thing i love being able to provide service and help without charging for it so you know we're here for you uh the sbdc as a whole myself whatever questions you have if we don't know the answers we know who does and we can either help you find them or point you in the right direction talked a lot if you have any questions please reach out and i'll just stay on for a couple extra thank you very much thank you very much for all your information this is very well presented thank you yeah that's what we're here for all right yeah yeah really really well presented i really appreciated all the information have a very good day thanks henry and the recording and slideshow will go to you so if you missed any of it or you want to double check it you'll get that as well no really very thorough gave me a lot of applause for some of the more detailed items that i probably would have overlooked so again thank you and have a very good day reyna don don smith here i have a question one of the uh what's the downside of purchasing a franchise how would you find the background info i it's a good question um i haven't actually done that many franchises i would say the downside is you know they often come with with substantial material finance uh financial commitments right so you do have to pay a franchise fee every year every hour not yet typically every year and at the start you know a larger one now there is that's not necessarily a downside it is it is a downside but it's often offset with advertising and marketing or some assistance on the back end um so you know that is it goes hand in hand with also some of the benefits of buying a franchise there's a group called grand fit f-r-a-n-f-i-t uh that helps with franchise acquisition so i can reach out to them and see they represent quite a few franchises and help with that kind of uh identification of appropriate franchises as well as location and startup okay all right thanks of course is there a formula for finding values for equipment or tools when purchasing a business um it depends i wish i had that straight answer for you i mean like so restaurant equipment is notorious for you know losing 70 of its value on day two um i would so keenan and keenan auction yeah uh so they're one group they do like desktop appraisals which basically you give them an equipment list with you know age name and type and they can just put together a quick kind of thumbnail cost approach for a fee um there's so you know i might reach out to them and ask rule of thumb it really depends on how old it is what type of equipment the industry i mean there's some construction equipment that lasts 30 40 years uh restaurant equipment's notorious just because it's got to be replaced every couple years so it really depends okay thank you so much great uh great presentation someone asked uh in the chat what's the best source for finding main businesses for sale uh there's a number of resources biz by sell is probably the most common there's also any cpe new england commercial property exchange has a business section to their website um craigslist you know for you know for sale by owners people people often turn to craigslist uh and then there's you know different brokerages as well so magnus and balfour is the largest listing business brokerage uh there's main business brokers there's a couple others as well for just for just simple online search though i'd probably start with biz by sell that's kind of the most common is earnest money involved in commercial sale much like a real estate transaction yes yeah you know particularly with businesses because uh there's the due diligence is so intensive right so it's an inspection on a building is fairly simple and straightforward but a seller for a business has a lot more emotional involvement you'll find in the sale um and having someone go through and critique everything which you should do right that's part of the due diligence process does have an emotional cost um and so for for you to demonstrate that you're willing to do that and put them through that there is usually earnest money involved and again you know identifying a financial contingency and a due diligence contingency so you can protect that earnest money and get it back is critical so make sure that's part of your purchasing sale agreement earnest figures uh entirely arbitrary there's not really a rule of thumb usually it's a couple percent of the purchase price is you know a starting point again it's you want to balance you know not putting too much on the table where it gets really contested and heated if you decide to walk away uh while also you know not insulting them so you don't want to kick them a couple hundred dollars and call that earnest money but nor do you want to put a hundred thousand dollars on the table so somewhere in between big window all right well if there are no other questions our contact information is on here i certainly appreciate you taking the time again your afternoon keep in touch reach out if you need