Why do people go into business for themselves?
Many studies have been done to explore this question. The following list provides the most common reasons people give for wanting to own their own business, in descending order from most to least important:
- Wanting to control their own destiny and do things their way;
- Being tired of working for someone else;
- Having the opportunity to use their skills and talents in a manner that they feel is best; and
- Understanding that they can make more money than they would as an employee.
The following are additional reasons have also been given in response to surveys:
- Being given the opportunity to enter a family business;
- Having inheriting a large sum of money;
- Desiring relief from conflicts with employers and the potential to take more control of their future; and
- Responding to being laid off or fired.
Why buy a business instead of starting a new one?
Buying an existing business has a much higher rate of success. Statistics vary on this, but this holds true by a dramatically high margin, usually stating that 70% to 80% of startups are not around by year three or at best year five.
There are many reasons for this. Existing businesses have proven track records and cash flow from loyal customers on day one of new ownership. They have the advantages of a position in the marketplace, mentorship from the seller of the business, more favourable financing available to existing businesses, and qualified and effective staff already in place. And, the previous owner has made mistakes that you don’t have to make because you will have access to valuable knowledge they have gained about the business.
For those reasons, even if you have a killer idea, you would probably be better off to buy an existing business and add your killer idea to the operations of that business than start from scratch.
What type of business should I look for?
There is much to consider but first and foremost ask yourself this question: “What do I want to do all day?”
To be successful in a small to medium size business, no matter the success of the previous owner, it is unlikely that you will experience the same success if you think going to work is drudgery. Don’t get caught in the trap of thinking that it doesn’t matter what the business does if it is profitable or is capable of being scaled into a multinational business that will put you on the cover of Report on Business. If you’re sleeping in because the thought of going to work in your business repulses you, you will not meet with success. You should want to get up in the morning excited by the prospects of the day, even the especially tough days, because there will be tough days.
Understand what is truly involved in the particular industry or type of business you are considering. There are many misconceptions about what is required to run certain types of businesses from a day-to-day operational perspective.
Financial considerations start with another question: “How much money do I need to make to operate this business?” Note that the question is need, not want. What you want to make comes later when you have mastered your business, started to grow it and have paid off the money you borrowed to purchase it.
Your Chinook representative will be an invaluable resource to help you explore these and other questions that will help you find the business that is right for you.
Why is the business being sold?
There are many reasons why someone would wish to sell their business. Many people are looking to simply retire or move on to a new venture with their businesses in perfectly good health. Sometimes there will be disagreements between owners or other difficulties in the operations. Personal reasons such as illness or a spouse with a new job in a different city may be motivating the desire to sell.
Why is confidentiality so important to the seller?
In most cases confidentiality is very important to a seller. It can be damaging to a business if its potential sale becomes public knowledge. Customers may not be interested in buying from a business that is up for sale, competitors could use the information to their advantage, and employees often experience anxiety which may cause them to leave. Suppliers and lenders to the business may also try to change their relationships with the business.
How are businesses valued?
The value of a business is rooted in what a buyer is willing to pay. The opinions of neither the seller nor the advisor, valuation specialist, friend, business broker or someone who just sold a similar business matter. That said, a buyer should come to the decision of how much to pay by considering how confident they are in the future earning potential of the business. After all, that is the point of buying a business. The business will have to pay for itself while paying you, the new owner/operator, as well. If you are looking at a business brought to market by Chinook, you will find that it is priced to do both of these things.
Business valuation itself can be a complicated affair. A more in-depth overview of valuation is found in the section called, “What’s my business worth?” in the Sell Your Business section of the website.
What is goodwill?
The math answer is that goodwill in a business purchase is the difference between the purchase price of the business and the value of tangible assets such as inventory, furniture, and equipment. A business that is prosperous will have a goodwill component because that business is more valuable than just the assets, or ‘stuff’, of the business on its own. The ‘stuff’ is used to make profits for the owner. Therefore, the ‘stuff’ combined with intangible assets such as processes, procedures, notoriety, customer appreciation and loyalty all combine to create a moneymaking machine. Take all that ‘stuff’ and sell it and you will get some money but, take that ‘stuff’ and sell it inside the context of a going concern, financially successful business and you get a good deal more money. The difference between those two amounts is goodwill.
At a personal level, the goodwill is your confidence that the business can go forward and continue to be a profitable success.
What is the difference between Profit (Net Income), Cash Flow, EBITDA and Discretionary Earnings?
All these terms related to how much a company earns can be confusing. There is discrepancy in how some of these terms are used. In general terms, the profit of a business is the amount of money that is left over after all expenses are accounted for. The Cash Flow is related to the flow of money being transferred into and out of a business. Cash Flow considers not just a business’s profit, but also typically factors in other owners’ benefits, interest payments or interest received, depreciation, amortization, principals, etc. Cash Flow shows how much cash the business is producing which, in most cases, is different than its profit from normal operations.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This and Earnings Before Interest and Taxes (EBIT) are the profit numbers used when considering larger businesses. EBIT looks at an earning figure after depreciation and amortization which is relevant when considering a business that needs to replace its equipment and other tangible assets with regularity. EBITDA is more commonly used where a business hangs on to its assets for longer stretches of time.
Discretionary Earnings is best used for owner/operator businesses. It reflects the amount of financial benefit available to one person who is the day-to-day overall operational manager of the business. This is the position held by most small business owners. This is the ‘profit’ figure that is most often given when businesses are advertised.
Why should I use a business intermediary or business broker?
Professional business intermediaries and business brokers, like those at Chinook, have experience and expertise that will help a business buyer through the many facets of a business sale. They are ready to help you keep your goals front and centre as you work your way through evaluation, valuation (which is a different matter from evaluation), negotiation, due diligence and closing. From writing the offer to helping find financing, you will find great value in working with a Chinook representative. As a plus, unless you’ve hired Chinook for one of our specific buy-side services, this is of no cost to the buyer as the seller almost always pays the commission from the proceeds of the sale.
Do I need an attorney or accountant to buy a business?
Buying or selling a business is a complex transaction that few people encounter in a lifetime. Though possible without professional advisors, Chinook strongly recommends buyers and sellers each have their own legal and financial advisors, who have experience in the purchase or sale of a business.
Buying a business is best done with a team of trusted advisors. That said, it is prudent to manage your use of them to avoid unnecessary cost. Imagine the steps of a business like a staircase: you plan to ascend to the top because you believe your goal of owning a successful business is there. With each step, the business in question becomes clearer. Each step you ascend has a cost to it. Take and pay for each step in turn. Don’t pay for services of a step that happen higher up the staircase until you have determined the view of the business from the step you are standing on warrants that you continue to your goal.
Bear in mind that any advisor will have his or her specific point of reference about the transaction and, to protect you, will present you with the most cautious of opinions or a string of worst case scenarios. However, you will have to make the decision for yourself. Take their advice, mull it over and compare it to your own experience. Then, with your own goals in mind, make your decision.
Your Chinook representative can provide you with a list of accountants and lawyers who are experienced at putting together successful business transactions.
What is due diligence?
After a buyer and seller agree on price and terms for a transaction, due diligence can begin. Due diligence is the opportunity for the buyer to examine all the records and dealings of a business to ensure that the business is what was represented and that there are no undisclosed issues that may affect its future viability. A systematic process is used to acquire and analyze information pertaining to the business. There is a short list of due diligence items in the Resources section of the website. The information obtained relates to all aspects of the business to be purchased. Due diligence should include both quantitative information, such as sales and other financial data, and qualitative information, such as an assessment of the existing management, internal systems, existing licenses, location and other matters. Sometimes the information to be reviewed can be quite technical or industry specific, so it is important that the person doing due diligence have a complete understanding of the information being reviewed.
The importance of due diligence is paramount in putting together successful transactions. Chinook works to be very supportive of buyers in this process, ensuring their professional advisors have access to the information they need in a timely and organized fashion.
When can I have copies of the financials and tax returns?
This information is available during the due diligence process. Prior to making an offer, the important financial information is present in the materials prepared by Chinook to help a buyer assess an opportunity.
How much cash do I need to purchase a business?
In most cases, a portion of the purchase price of the business is paid through some type of loan the buyer has incurred to raise the amount of the purchase price. Therefore, a buyer should plan on having one-third to one-half of the purchase price in cash plus some more cash for operating capital. Your Chinook representative can help you determine what you will need. Some small transactions do not have enough profit to service debt and pay the owner a decent wage and therefore a greater portion of the purchase price, if not all of it, will be required to pursue the purchase of such a business.
Where can I obtain financing to help me buy a business?
A variety of sources provide financing for the purchase of a business, including commercial lenders, asset-based lenders and seller financing. The availability of financing is dependent on a number of factors. The assets of the business, its historic financial performance, availability of availability, the business plan going forward, and the suitability and credit worthiness of the buyer are all typical small business lending criteria. When seller financing is used, the seller of the business takes back a promissory note for part of the purchase price of the company. That note is usually secured by the business itself and a general security agreement against the buyer. Seller financing is a good indication of the seller’s faith in the continuing operations of the business.
What type of training can I get from the seller?
It is expected that the seller of a business supply sufficient training to the new owner to ensure a smooth transition. This training can vary depending on the complexity of the business. We find that sellers offer more training than the buyer ends up requiring. This is useful to give the buyer confidence that they will get the support they need. At the same time, it is also important that the seller will be able to achieve his goal of exiting the business. Our experience is that sellers are committed to the Buyer’s success and support them adequately to ensure a successful transition.
If a business does not find a buyer what happens to it?
A variety of things may occur. Sometimes the owner will decide to simply close the business which can occur in a few ways depending on the kind of business. No matter how the closure is done, it is essentially a liquidation of assets to raise funds to pay off any liabilities and to put some funds in the owner’s purse. Some businesses simply stay on the market for long periods of time. This may be necessary because the business is very unique and there is a limited number of buyers who can take on that particular business. However, in many instances the seller’s expectations for a sale price are not supported by market conditions. If no buyer can be found, the business will normally liquidate the assets, pay off the liabilities and simply close.