Business Brokers Blog: Guide to Buying or Selling a Business

Understanding the 7 Business Entity Structures when Buying a Business

When buying a business, purchasers are often very consumed with the analysis and negotiation of the business, due diligence, learning about the specific business, and possibly the emotional roller coaster of being a first time buyer.  They often relay on the accountant or attorney to recommend which business entity type is best for them when buying a business.   Each choice has different tax consequences as well as liability concerns. Both your attorney and accountant should be consulted to find the best solution for you however it is best to start to understand the differences between the business entity types since you could easily become overwhelmed with all the tasks to be completed to buy a business.  Many buyers are first time business owners so they must go through the process of setting up a business entity for the first time.  There are 7 general business entity structures that most consider:

C Corporation – This is one of the most common business entity forms, which is often used by many large companies, both public and private.  The company is required to register and file forms in the state it is incorporated.  The entity pays tax at the corporate level and the capital gains are also taxed at the corporate level versus personal capital gains rates (which are lower).  Dividends that are paid to shareholders are taxed at the shareholder level and rates.  An advantage is that shareholders have limited liability in a C Corporation.

S Corporation – An S Corporation is incorporated just like the C Corporation but receives flow through taxation.  Shareholders also have limited liability in an S Corporation for business related transactions.

Limited Liability Company (LLC) - This also is a formal business structure under a state statute.  This type is somewhat of the most flexible in that the entity can be taxed as a partnership, a C Corporation, or an S Corporation, depending on the choice of the owner.  The members of this entity form have limited liability protection.

Limited Partnership – This is a formal business structure under a state statute.  It provides limited liability for limited partners but full liability to general partners.  An advantage is that the business entity structure offers flow through taxation.

General Partnership – This form could have a formal or informal formation when two or more individuals have ownership.  This business entity form has flow through income for taxes but the owners have liability exposure from operations.  There may also be issues where partners may be liable for another partner’s actions.

Personal Service Corporation – Created formally, this type is designed for personal service providers such as doctors, lawyers, and accountants.  It has a flat tax rate and does not carry limited liability for the owners.

Sole Proprietorship – This is the least formal entity type.  The benefit is that the business entity has flow through income for taxes.  However, the structure does not offer the business owner with protection from operations.

For your own due diligence, whether you are buying a business or starting a business from scratch, it is important to study the potential implications both financially and legally from your business entity selection.  A good accountant and attorney will be able to listen to your objectives and present the best options to you.

Business Brokerage Survey: Top 5 Reasons Decline in Deals in 2009

In a recent survey conducted by the Business Brokerage Press, business brokers were polled to get an understanding of several current issues in the industry.  One of the most important topics for any business brokerage firm is the number of completed transactions.  Not surprising, as in most industries, 2009 was a down year for the business brokerage community.  One of the questions in the survey asked business brokers their opinion of why 2009 experienced a decline in the number of deals, sales, dollar volume, etc.  Prior to answering the question, the survey said that the state of the economy was a given so the report was looking for a more detailed answer.  The fifth most common response was that buyers were unwilling to pay the seller’s desired price for the company.  The fourth reason was that sellers wanted to wait until the economy recovered to get a higher sales price for their business.  The third highest response was that sellers were unwilling to accept a price based on their lower profit, volume, and performance.  The second highest response was that buyers were unwilling or frightened to purchase a business during 2009.  Finally, the number one reason that business brokers felt that last year was a down year was because of the lack of financing.  This survey conducted annually, is the largest survey of its kind specifically for business brokers in the business brokerage industry.  Respondents came from 42 U.S. states as well as nine other countries.

Michigan Business Brokers Complete Computer Manufacturer Sale

Michigan business brokers of Confidential Business Sale, Inc., located in the Detroit Metro Area, recently sold a computer manufacturing business for sale opportunity.  This Michigan business for sale manufactures custom computers by assembling the most advanced components.  The company received awards for building personal computers that set performance records in their class of machines.  Customers include universities and businesses in addition to individuals.  This Michigan business for sale ships custom computers nationwide and was relocatable due to its lean operations.  The company has assembled computers that were optimized for gaming, home theatres and other circumstances where off-the-shelf computers were not sufficient for the client’s needs.  Steve Kandt, one of Confidential Business Sale’s Michigan business brokers, worked closely with both the buyer and seller to complete the transaction.  The purchaser of the business was from out of the state.  The business was at a point to be taken to the next level and the buyer recognized the solid foundation that was created by the seller.  The business had grown relatively quickly over a very short period of time, mainly due to its high quality of product and customer support.  The internet allowed the company to grow virally with minimal marketing or advertising of the business.  The transaction of this manufacturing business for sale opportunity was the most recent deal completed by the Michigan business brokers of Confidential Business Sale, which has had notable success in selling manufacturing, industrial, and distribution related companies.

Michigan Business For Sale Opportunity Recently Sold

The Michigan business brokers of Confidential Business Sale, Inc. (CBS) recently sold an existing Fantastic Sams franchise resale opportunity in the Metro Detroit area.  John Mulheisen of CBS working out of the Plymouth Michigan office, worked with the business owners to help prepare their Michigan business for sale. Don Wheelock one of the Ohio business brokers working out of the Cleveland office of CBS assisted the buyer in the transaction.  CBS has successfully sold a number of franchise resale opportunities over the years of various types in the industries of service, retail, and food.  The company works with the franchisors in screening prospects and finding a buyer that not only can make a deal with the seller, but also fit the right franchisee profile for the franchisor.

Fantastic Sams has developed a strong brand name in the Detroit Metro area.  They offer marketing and business support systems that an independent hair salon often cannot get.  This Michigan business for sale was being run profitably but the owners decided to make a lifestyle change resulting in the desire to sell the company.  By CBS finding buyer prospects and assisting in the negotiations, the sellers were able to move on to different things, the buyer was able to purchase a profitable business at a reasonable price, and the franchisor was able to keep a franchise location operating to continue the royalty stream.  Hair salons are recession resistant concepts.  The buyer of this Michigan business for sale is poised to build on this location’s 25+ years of being a suburban hair salon destination.

Buying a Business Using Your 401K or IRA

Buying a business might be possible when you thought that you could not afford to do so.  I have mentioned in the past that one attractive method of financing a business is through the use of your 401k or IRA funds.  This may not be the most desirable method for some individuals initially, but it may be that they are not fully education in how it can help them buy a business. Speaking from a position of knowledge of the process since I used this method to start up my own business brokerage company almost 7 years ago, it could be the right solution for you.  The retirement plan must comply with the Employee Retirement Income Security Act (ERISA) of 1974 and must meet IRS requirements to allow the rollover of funds from qualified plan to qualified plan without taxes or penalties.  There are steps that are important in the process to adhere to compliance regulations such as establishing a new company, selling shares of the corporation to the profit sharing plan to move the funds, having a plan that allows eligible employees to participate, and continuing administration to ensure ongoing compliance. This is not something that anyone should try to do themselves without professional help from companies with years of experience.  There are also guidelines on when funds can or cannot qualify to be used in such a plan.  Notably, there are two companies that we have had clients use to set-up the process successfully, Benetrends and Guidant.  Both companies are first class organizations and will take care of the process to ensure that all the requirements are met.

Why would someone want to use their retirement funds to buy a business?  There are many reasons.  One may be the inability to receive bank financing.  Another reason may be a way to avoid using banks and paying interest on a loan. It is possibly a way to create liquid funds in which could be leverage along with a bank loan.

Using the process of Benetrends or Guidant could potentially double the amount of money that you would have available when buying a business by eliminating taxes and penalties from the withdrawal.  If you went the path of withdrawing retirement funds early without this process, you would be subject to a 10% penalty as well as have to claim the funds as ordinary income, which in some cases could cut the amount of money in half.  So a person that has $100K in their 401k may only have $50K to buy a business versus the full $100K.  In the hypothetical situation in which a bank will finance a business with 20% down, this is the difference between being able to buy a business with a sales price of $500K and $250K.  Completing the analysis further, if both businesses were priced at a 3 times seller’s discretionary earnings, it could be the difference between buying a business that makes $167K versus $83K per year, before debt service.  Again, speaking from firsthand knowledge, I didn’t have much in regards to liquid funds when I decided I wanted to leave the corporate world.  However, I did put money away in my retirement account over the years that I thought was unavailable.  Finding this solution allowed me to become an Entrepreneur.  For others that are unemployed and can’t find a job, this is a perfect solution to create job security by buying a business.  Just make sure that you have a professional help you set up the plan.

Selling a Business is Nothing Like Selling a House

As a business broker, I am often asked what I do for a living.  This is often followed by a discussion about how I help business owners confidentially sell their businesses.  Many times, the response is - “Oh, you are real estate brokers.”  This is when I have to kindly take the conversation a step further to explain the major differences between selling a business and selling a house.

The first difference is that selling a business requires confidentiality.  We sell secrets so that employees, customers, suppliers, and general public don’t know that the business is for sale.  We have to be very vague in our marketing and require that a confidentiality agreement is completed before we share details to a buyer prospect.  Real estate, on the other hand, is sold with trying to tell as many people as you can and being open about the location and its details.

Another difference is in regards to preparation.  Preparing a house for sale may only take a few weeks.  Preparing a business for sale may take several years to properly make key changes and to position the business to maximize value for the owner.  This may include cross training employees, documenting processes and procedures, controlling expenses, and increasing revenue and profits.

Buyers of businesses for sale are very concerned about the financials of a business.  A business broker must be well versed on understanding income statements, balance sheets, and cash flow statements to present opportunities to buyers.  Business brokers often need to interact and discuss key points with accountants and attorneys, so they must be educated to tear apart financial statements.  Buyers purchase businesses to receive a return on investment.  A buyer purchases a business based on its current and future income producing ability.  While some commercial real estate has this same quality, businesses in general, often have many additional variables making the transaction much more complex.

A real estate transaction is often very straight forward.  Selling a business will require a complex purchase agreement contract often with promissory notes, non-compete agreements, employment agreements, various assignment agreements, and often other documents due to the number of items that get negotiated in a business for sale transaction.

Financing a business is often much different than financing a house.  Money for houses is much more available than money for business acquisitions.  A house can sit vacant for a period of time before it loses a lot of value in the worse case of a buyer defaulting on a loan.  A company, on the other hand, must stay in business to maintain its value.  If a business closes its doors, employees and customers go elsewhere and it will be very difficult if not impossible to bring them back.  A bank is not in the business of running companies.  Because of this, lenders are very risk adverse when it comes to making business acquisition loans.  “All the stars need to align” for a bank to finance. This often leads to the business seller becoming the bank.

The business sales cycle is often very long.  Houses on average sell in less than 4 months while businesses usually take 6 to 18 months – after the business is put on the market.  When you add the preparation time and the post-closing transition time, it is a several year process to sell a business.

After the transaction is complete for real estate, the buyer and seller go their own ways.  Very often, the buyer and seller never even meet.  In a business for sale transaction, both the buyer and seller must form a relationship and have chemistry for a deal to be a success.  Selling a business often requires both parties to spend time together after the sale from weeks to possibly years to transition knowledge and relationships that the business seller accumulated over the years.  Since the seller often has to finance a portion of the transaction, they have a vested interest in making sure that the buyer succeeds.

Other than both selling for large amounts of money, there are very few similarities between selling a business and selling a house.  A business broker is someone that can help a buyer and seller navigate through the steps to get to a completed transaction.

Ohio Business Brokers Sell Driving School Business For Sale

The Ohio business brokers of Confidential Business Sale, Inc., located in Independence, recently sold a driving school business for sale opportunity.  This Ohio business for sale was located in the Canton, Ohio area and has over a 10 year history.  This driving school for sale specializes in providing driver’s license training to adults and teenagers.  The company has multiple vehicles equipped for instruction as well as a location to facilitate classroom training.  The business sale allowed the sellers to retire and spend more time with their grandchildren.  The business developed an excellent reputation in the local communities surrounding the facility.  Don Wheelock, one of the Ohio business brokers of the company, worked with both the buyer and seller to consummate the transaction.  Confidential Business Sale works with individuals and companies that see the value in acquiring an existing business with established customers, suppliers, and employees.  Don worked with the owners to help them price the business and prepare the confidential marketing program to identify potential acquisition candidates without jeopardizing confidentiality.  The process requires that buyer prospects complete a confidentiality agreement as well as meet specific financial requirements to receive information on the business for sale opportunity.  He also worked with both to negotiate a deal that was satisfactory to both parties.

Distributor For Sale Opportunity Sold By Michigan Business Brokers

Confidential Business Sale, Inc., Michigan business brokers based in Plymouth, recently sold a Metro Detroit area janitorial distribution business.  This distributor for sale opportunity was acquired by another local company in the same industry that was looking to expand their customer base.  The sale of the business allowed the owner to begin planning his retirement. Overall sales and profitability had remained stable to the approximate 45 commercial clients. This distributor for sale was well-known and maintained a loyal customer base over many years without doing any marketing.  The Michigan business brokers office of Confidential Business Sale, Inc. worked with the owner to confidentially market and prepare his business for sale. Steve Kandt, a business broker working at the company, was instrumental in working with both the seller and the buyer to complete the successful transaction.  Having owned the business for over 25 years, finding the right buyer for the business was an important requirement for the owner. Steve screened numerous buyer prospects for sincere interest and financial capability and ultimately found a match.  The acquiring company was looking at expansion by buying a business versus internal growth.  Confidential Business Sale works with companies and individuals that see the value in buying an existing business over starting from scratch since customers, suppliers, and employees are already in place.  The acquiring company is often able to reduce or eliminate duplicate expenses to make the stand alone company more profitable after the companies merge.

Good Ol’ Bootstrappin' - The Real Funding Source for Entrepreneurs

In the latest issue of Entrepreneur Magazine, Kate Lister’s “The $48,000 question” article provides some interesting statistics around the financing of business start-ups. The article points out that there is not a massive set of data points to collect the information on how businesses were initially funded. The closest report that sheds light on this topic is a study that is currently being analyzed by the University of Michigan which is following 1200 companies that have started up since 2005. That being said, I think a study of 1200 companies does provide a decent amount of data points to start coming to conclusions. Here are the shocking revelations: More than 80 percent of these companies were funded by owner savings, personal loans, and credit cards and less than 5 percent of companies were collectively funded by the SBA, venture capital, or angel investors.

As a business broker that assists people in buying or selling a business, I can directly relate to this article. When I started my company in 2003, I did exactly what this article suggests, used my retirement funds to escape the bureaucracy of a large public company - without the use of a bank. As someone that works with individuals daily in regards to buying businesses, entrepreneurs deserve credit for taking risks in the pursuit to build and grow a company that not only puts food on their table, but creates jobs for others. As the study shows, these business owners are not playing with monopoly money. They are putting their hard earned money at risk to pursue their dream. I salute all of you business owners for believing in yourselves! W9E6NZW8GBT6

Selling a Business in 2010? It looks like you have a chance

I have good news to report to business owners that are looking at selling a business this calendar year.  It is no secret that times were tough in 2009 with lenders basically shutting off the access to business acquisition funding.  Lenders were only willing to finance the perfect business transaction.  As a business broker, we had to get very creative in the way we structured our deals for our businesses for sale opportunities.  Seller financing became the main method to financing in 2009 along with buyers using retirement funds to come in with a sizable down payment.

Over the past two weeks, we have completed a couple nice sized business deals. One of our Detroit business brokers completed a transaction on a HVAC company.  This business had a substantial amount of goodwill financed as part of the transaction.  For those that follow the SBA financing in the business acquisition arena, this has been an area that banks had been avoiding.  Lenders have preferred to lend when there have been enough tangible assets versus financing goodwill.  Our Detroit business brokers worked with the buyer and seller for months to complete the transaction and it was good to see that a leading national bank opened up their wallet to finance the transaction.

We also had another transaction come to completion in this time period by one of our Cleveland business brokers.  Our team of Cleveland business brokers worked diligently to find a buyer prospect for our insurance agency for sale opportunity.  The deal was financed by a specialty lender that had experience in financing insurance agencies.  This proved to us that even lenders that did not qualify for the government assistance are willing to step up and take on risk.  An insurance agency, as you can imagine, also has very limited tangible assets.

Selling a business with a large amount of goodwill was a big issue in 2009.  These two examples of recent transactions completed by our Cleveland business brokers and Detroit business brokers both involving lenders is an optimistic sign that we are beginning to return to an active merger and acquisition environment and if you a hoping on selling a business in 2010, you might have a chance.