Time to Get Going:

Opportunity Knocks!

by Glen Cooper, CBI, CBA, BVAL

Vice President, New Hampshire Business Sales, Inc. & President, Maine Business Brokers

Adapted from the Fall 2008 issue of Business Buying & Selling

The quarterly newsletter of Maine Business Brokers

 Uncertainty creates opportunity. Times like these create tomorrow’s business legends.

      Today’s global changes in telecommunications, science, economics and politics are overwhelming. People around the globe are seeking new ways to cope with these changes. We are right in the middle of the mess that will be tomorrow’s “best thing that could have happened to us.”

      For those of us who are entrepreneurs, these are exciting times.

 And we are in America!

When I really take stock of what I have in life, I remember that I can’t complain – I get to live in America!

      Okay, I’ll admit: we have our problems. Well, actually, I would be bored if we didn’t.

      The United States, however, is still the greatest home for our investments. America is as physically, socially, politically and economically safe as anywhere else on earth. Other places may be shaky, but things still work here. We also have a great lifestyle. Who in the world doesn’t want to have what we have?

      Owning our own small business is also the best kind of investment. First, WE are in control. Second, owning our own business is the single best way to shelter income from excessive taxes, precisely BECAUSE we are in control. Maybe the best thing about owning a small business is that it is an invigorating and growth-producing experience. Yes, small business ownership is hard work. But that’s good. Because it is hard, it makes us tough.

A Once-in-a-Lifetime Market!

It is, in fact, a great time to sell OR buy.

      “How could it possibly be both a great time to sell AND a great time to buy?” you ask. Am I nuts? No, I’m a little creative sometimes, but not nuts. This really is a once-in-a-lifetime business buying and selling market.

      Today’s unique population demographics, fast-paced telecommunications, scientific advances and temporary chaos of world financial markets are all combining at once to create this one-of-a-kind market situation.

      Precisely because most people hesitate to act in a time of uncertainty, it is the ideal time to make our move, to become a leader in our field. People follow leaders. This situation offers a unique opportunity for each of us to lead the way in whatever we do.

       It’s a great time to sell IF it’s our time to do so, or if we need to sell in order to buy something else. It’s a great time to buy IF we can. So, within that context, it’s both a sellers’ and buyers’ market!

  Time to Sell?

      If it’s our time to sell, now is a good time because capital gains tax rates – now and in the near term future – are likely to remain low, or get even lower, for small businesses. They ARE low right now. Both major political parties have also indicated they favor further capital gains tax reductions for small businesses in the future. The definition of a small business differs, but it often is set at “under 50 employees.” That’s about 95% of all businesses in the U.S.

      A second reason it’s a good time to sell is that third party financing (from banks and other lenders) is still available at low interest rates and on pretty creative terms. This unsettled banking environment will bring out more alternatives, not fewer. Just watch and see!

      A third reason it’s a sellers’ market is that the hesitant sellers have withdrawn from the market, lessening the number of competing businesses for sale. Many sellers pull back in times like these, even though there really isn’t a good reason to do so.

      Finally, if our sales are up in this down economy, we will get extra amounts of buyer attention. Most businesses are experiencing a sales downturn, so the ones that are stable or growing are getting second and third “looks” by motivated buyers.

Time to Buy?

      If we are potential business buyers, there are businesses to buy that are bargains right now. It’s a great time to take that second or third “look,” especially at businesses whose sales and profits are temporarily down. Some business owners simply must sell and can’t wait. In that circumstance, most sellers will offer reasonable prices and generous seller financing.

      When available seller financing is combined with still-available loans at still-low lending rates from third parties, the resulting down payment requirement and loan package combination can be quite favorable. Lenders actually get more creative when times are tough, especially for well-qualified buyers.

      Finally, differences in technological and/or business savvy between a seller and a buyer can often create an opportunity for the buyer. Today’s rapid changes and generational differences contribute to this current phenomenon. The seller may not see a particular opportunity at all, or simply may be unwilling to pursue it.

      Many sellers, for example, just don’t want to computerize their businesses or develop a marketing strategy that involves using the Internet in what is being called “social media networking.” There are many businesses that can be re-invented and grown quickly with better use of today’s technology.

We Have More Power Today

When the system is broken, we actually have more power. That doesn’t seem intuitively correct, but it is. Let me explain.

      We are witnessing vast changes in the variables I mentioned in the first paragraph of this article – telecommunications, science, economics and politics. Nothing is likely to stop these changes because they are worldwide, interconnected and growing geometrically.

      These changes are bringing more power to each of us as individuals, no matter what else happens. A single individual can now be heard worldwide. That applies to our businesses as well.

      For the first time in human history, the whole world is linked by instant voice and visual communications. And, the most commonly shared language, lucky for us, is increasingly English! Whew! For example, did you know that there are more people in China who speak English than in the U.S.?

      Think about that for a moment. It’s scary and thrilling at the same time.

      This is just one example – albeit a major one – that predicts major economic change in our favor. From an entrepreneur’s point of view, new markets are forming!

      People from all over the globe – even though there may only be a few in any one physical location – can now get just about anything they want from an entrepreneur willing to supply their unique and special needs. Many small businesses – even very small ones – already serve worldwide specialty markets.

      That’s the power I’m talking about.

A Tipping Point?

Many people have read – or at least heard of – Malcolm Gladwell’s The Tipping Point, a well-reviewed book published in 2000. In it, he defines tipping points as “the levels at which momentum for change becomes unstoppable.” He says it’s a sociological term meaning “the moment of critical mass, the threshold, the boiling point.”

      In so many ways and in so many different fields, the changes we are witnessing are creating multiple and cascading tipping points. This is why it’s time for leaders in every field of endeavor to move forward.

      If it’s our time to sell, we should, by all means, move forward without hesitation. The buyers are there. The financing solutions are still there. The next chapter of our life beckons!

      If it’s our time to buy, the opportunities are everywhere.

      Because we now can talk to each other worldwide, maybe we can forge worldwide solutions that prevent the very large problems we seem to face.

      Because we are making unbelievable advances in biotechnology, maybe we can cure, heal and otherwise fix things we never before thought we could.

      In a world financial crisis, we may find our way to essential reform of the system.

      In our current national election, we may really get some long-needed changes.

      Not all change is good, of course. It never will be. But change is now coming faster and faster worldwide. We don’t have any choice about it.

      In the meantime, let us continue celebrate our American blessings by actively choosing to do something. We need to go ahead and take that next step now. It’s NOT time to hesitate. Opportunity is everywhere you look. It’s time to get going.

  This week Forbes magazine rated Lebanon first, Keene third, and Concord, NH seventh in the top ten of a list of United States cities “least vulnerable” to recession, in a region that is relatively insulated from the national economic crisis.  This region, and most of NH has maintained stability due to our low unemployment rate, strong banking sector, and relatively stable housing market .

 Forbes used August unemployment figures from the Bureau of Labor Statistics and 2007 Census data on median income, poverty, education levels and outstanding mortgage debt to measure the economic resilience of 141 communities with populations ranging from 65,000 to 188,000. 

Our local bankers did not pig out on sub prime mortgages, leaving that market to the mortgage brokers who are mostly gone now.  So our local bankers still have money to loan to credit worthy businesses and other customers.  They were often criticized as too conservative over the past few years, but now they are still there for us during the time most of the country is in a bad economic spasm. Credit is available!  While the media has created a real hysterical mood among the public that will hurt most of our businesses to some extent, we are still in relatively good shape in NH.

Customers who would like to own a business ought to take a look at our inventory.  If you have a down payment and a good credit rating you CAN buy a business NOW!

Lately we have had a run of customers, who would have us believe they are buyers, asking for lots of information and trying to do their due diligence on a business purchase before they make a bonafide offer.

It is often hard to know how much information you should get before making an offer on a business that is for sale.   I also recognize that different brokerages treat the subject differently.  Some require that a customer make an offer before they even get access to any real financial information.  We don’t work that way.

We believe we have to give the customer enough information to make a reasonable judgment about the business. We most always provide financial summaries of recent tax returns or owners P&L statements.  We usually provide equipment lists, and we as accurately as we can represent all the assets that are being included in the business.  We also arrange visits to the property and visits with the Sellers.

However, it is unrealistic to expect a Seller to provide volumes of detailed paperwork or to allow the inspection of equipment, or to allow other professional inspections of the property, without an agreed upon offer to buy the business.   For that matter, it is really a waste of the customers time to go thru all that if they don’t have an accepted offer on the business.  It is also really not appropriate to have any interaction with customers or suppliers of the business before you have signed P&S agreement.  Businesses have been seriously damaged by interactions between would be buyers and suppliers and customers.

We include all kinds of inspection and financial record review contingency clauses in our purchase and sale documents, and often see buyers bringing in other lawyer drafted documents with more pages than ours, so we go out of our way to let the buyer review all the facts about the business before they go to closing.

One of the main reasons Sellers hire us to handle the sale of their businesses in to protect them from any unnecessary intrusion of the selling process on their daily conduct of business, and to protect the confidentiality of the sale process.  We take that duty very seriously.  We must protect our clients, the Sellers.

We just ask that we and our clients, the Sellers, receive a real offer, with money on the table as a deposit to make it real and legal, before buyers ask us to start the sometimes long and laborious process of due diligence.

During a recent discussion with a couple of our Associates we got into the subject of how people who want us to believe they are buyers make offers.

In the kind of tough economic times we are currently going through of course a lot of our customers are bargain hunters.  There is nothing wrong with that, we often have bargains for them.

But it is important to understand that we help our clients, the Sellers, place values on their businesses and properties.  We do so based on valuation techniques and of course always end up with some negotiation of the final offering price and terms.  The point is that the offering price reflects value, either of assets, or cash flow, or both.

Rarely do we have a Seller who says “let’s give the buyer a bargain and price this to just get me out of it”.

If you are a buyer you need to recognize that to get a serious response from our client (and us) you have to make an offer that has some reasonable relationship to the value being offered.  There is no question that the value to you may be different than to the Seller or someone else, (we like it when it is higher).  But if you always make a “fire sale” offer just expect that the response will based on that perception, and you will not really be taken very seriously.

Richard Parker, Founder & Chief Executive Officer, Diomo Corporation (www.diomo.com) Just published a really good blog that says, among other things, that ““A lot of you started out 2008 with the goal of buying a business this year. If you’re still looking, you had better get moving”.

 He points out that there will be a swing in the economy and that he bets it will go back up (it always has!).  Additionally he points out that if you are planning on becoming a small business owner you had better get used to taking risks.

He says “I would never suggest that you act recklessly. Nor would I recommend against the thought of proceeding cautiously. But, if you’re waiting for a good time to kiss employee life goodbye and get into your own business; there will never be a “good time” to do so. Just as there is never a prescribed “good time” to get married, start a family, buy a house, or make any major decision. 

Successful people take risks. They take calculated ones. They make massive, life-altering decisions. Some work, some don’t. The difference is that they make them as a result of being well-informed beforehand and they are right more often than not.”

We are seeing a lot of customers agonizing over the “credit crunch” and waiting for “the bottom of the market”.   Unfortunately the way you can be sure the market has bottomed out  is to chart it going back up, which means you missed it already!

Additionally, when you look at an individual business it does not really matter that much what the global market is doing, what matters is the situation in the neighborhood or segment of the economy where your business target is.  The basics of analyzing that stay the same regardless of what is going on in the rest of the world.

 Local Bankers are still telling us that they are sitting around waiting for us to bring them deals, and they need to put money to work to make money.

Additionally a customer the other day mentioned that a lot of our listings had “price reduced” signs on them.  That is right, we and our clients, the Sellers, have had to reflect the changes that have already happened in the marketplace.   There are some really good deals available.

  So if you made a New Years resolution last January, or decided since then, to buy a business this year it is time to get at it.  There is still time to get thru the two months,  more or less, processing period and get in well before this coming New Years!

It appears if you read the business news carefully that there are a few writers now starting to recognize that the economy is strong enough so that the Media and politicians trying to convince us that we are in a recession or even a depression, are wrong!

We have been saying right along now that it is a great time to buy a business. Loans are available at some of the best rates ever. Local banks have money and are eager to do business. Sellers are recognizing that the negative atmosphere means they have to price businesses realistically.

Get busy now, while the timid and meek are sitting on the sidelines. It is a great time to buy a business, and be in a great position when after the election the winning party, (either one) puts a positive spin on things and people shift back into a positive mode.

In my last post I talked about the need for trust between all parties in a business deal for it to be successful.

I also mentioned that Business Brokerage is a lot more complex than straight real estate brokerage. There is a considerable difference in the methodology and practices of the two types of activity.

The general public is being educated by consumer advocates and by real estate firms that they need to be represented by brokers working for them if they are buying real estate. I have no complaint about that. As a matter of fact I support it. Also in real estate brokerage many companies and agents represent buyers all the time and make a living doing it. Partly that is possible because a very high percentage of customers actually make a purchase.

In Business brokerage only about one percent of our customers ever buy anything. There are a lot of reasons for that, and one of them is the level of complexity of the deals we do. Probably the main reason for that low percentage is that so many customers are not prepared to, or can not afford to, buy a business, but they have to go through the process of looking at several potential purchases to get educated to that fact. We understand and accept that as part of what we do. We work hard at educating customers about the process and trying to help them be successful and part of the 1%.

When qualified customers do decide to make an offer on a business they are more frequently now demanding to be represented by a buyers broker. The parties involved in a business transaction usually include, in addition to the buyers and sellers, lawyers for each party, and accountants for each party, and a sellers broker (our role). It is really important that if an additional party representing the buyer is going to be involved that they be competent and understand the roles of everyone on the team. It is also important that they understand how Business Brokerage works, as well as being able to counsel the buyers on finding deal making lawyers who will properly support the process.

Real Estate brokers with no business brokerage experience have on several occasions recently demonstrated that they do not have the proper training and skill to do that.

Customers really need to find representation that understands the process they are involved in and is qualified to help them. That is true of course for their lawyer and accountant, and especially true if they decide to inject a buyers broker into the situation. There are commercial real estate agents who also have experience in business brokerage, and who can handle the job. But it is not appropriate for a buyer to hire an inexperienced real estate agent to help them and provide that agent with an on the job training opportunity.

Also the commission sharing process is considerably different in our business than it is in real estate transactions. We expect buyers to pay their representation if they inject buyers brokers into the process after they have started working with us, just like they have to pay their lawyers and accountants. Also we do not routinely offer to share our commissions on a 50/50 basis, particularly with real estate agents who have not earned our trust.

The bottom line - if you are trying to buy a business and want a buyers broker to help you, make sure you find one that has successful experience as a BUSINESS BROKER.

We have had a couple of situations lately that have been really bothersome, because we couldn’t work with folks who wouldn’t level with us about their financial strength.

We understand that some of our customers are going to be sensitive about sharing financial information with us. We also understand that some customers think that if they tell us what they have for resources that we will try to push them to make more of a down payment than they are comfortable making. We all have to get over those fears if we are going to work together.

For our point of view we are representing, and protecting, our clients. We represent people bringing their businesses to market, and in order to price them properly and market them we have to have access to tax returns and other sensitive financial and operational information. In order to help customers make intelligent choices we also have to share our clients information with them. We have to assume that if you won’t tell us how you are going to come up with the down payment that you are not going to be able to, and we can’t work with you.

It is not appropriate for us to share the financials for a company priced at $1,000,000 with a customer who is looking for 100% seller financing and has no money to put down on the deal.

We use the information requested in our online confidentiality agreement as part of our process of finding out what customers have to work with. If the forms are not made out properly we have to get on the phone and ask customers what they have for liquid assets to work with. If the customers can’t trust us enough to share that information we are not going to be able to work with them.

We very frequently get messages from customers that they don’t know what they have for a down payment. Or even worse they tell us that they have less than $50,000 to work with but want to have an income of $150,000. We can’t really work with either situation.

There is a large education component to our work. For example we help people who have resources figure out how to use home equity for a down payment, or how to use a 401K to set up an investment in a company they want to purchase. We also have to explain to folks who don’t have sufficient funds for a down payment that the are not going to be able to support a very high income level without a whole lot more to put down.

My plea is that you have to trust us, just like we have to trust you, to get a deal done. One of the reasons that the Code of Ethics of the International Business Brokers Association is such a big part of our orientation of new Associates is that we don’t tolerate anyone on our team who is not going to earn that trust.

Business Brokerage is different than real estate brokerage. We are dealing with a lot more sensitive information, a lot more complex factors, and their has to be a whole lot more trust on the part of all parties to make a deal work.

This is another in a fine series of articles provided by the International Business Brokers Association. This is written well enough so that I have chosen to just include it in total.

Consider the options – work as an independent contractor…start your own business…buy an existing company.

Certainly there are pros and cons to each option. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered…the risk-to-reward ratio is tipped in your favor when you purchase an existing business.

Admittedly, as an independent contractor, your risk is minimal. The up front investment and overhead costs are limited. However, without the ability to leverage the work of an employee base, the returns are limited by your own personal capacity.

Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.

On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.

There are a number of reasons to consider the purchase of an existing business rather that starting one:

· Proven Concept. Buying an established business is less risky – as a buyer you already know the process or concept works. Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record. A bank will be able to look at the historical results for the business, not just rely on projections.

· Brand. You’re buying a brand name. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up. That’s an intangible benefit that’s difficult to put a price on.

· Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build. It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer.

· Focus. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.

· People. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies. Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes too.

· Cash flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. Start up owners, on the other hand, often “starve” at first. Some experts say start-ups aren’t expected to make money for the first three years.

· Risk. Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. But risk is relative. A buyer may pay $1 million, for example, for an established business with strong cash flows of approximately $200,000 to $300,000. A lending institution funds the transaction because historical revenues show the cash flow can support the purchase price. For many people, however, that is far less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.

Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start up.

One of the unique services we provide, as Business Brokers, is an intermediary negotiating “service”.

I choose the term “service” because what we do is usually not done for our own interest, but for our clients and customers.

Most people are familiar with some of the aspects of negotiation. We have all been subjected to the exhortations to always try to establish win-win situations. If you think of those instructions you have seen or heard in the past they are usually written from the point of view of a principle beneficiary of the negotiation.

A Business Brokers role is to analyze the situation from a third party viewpoint, and suggest to both parties ways to attain the “win-win” outcome everybody wants, (Keeping our own clients interests clearly in mind!). That is why we are called “Business Intermediaries”.

We make sure all parties to a negotiation understand the issues. We have to be sensitive to the communication process and understand the facts, laws and regulations, and desires and objectives of each party to a negotiation.

We have to explain to each party what is possible, and help each party establish reasonable objectives.

And in some cases we have to understand when there is no further possibility of coming to any successful conclusion of the issues being negotiated, and gracefully tell the parties that they are too far apart to make a deal, and help terminate the expenditure of time and effort on something that is not going to work.

When things go the way we always try to have them go we end up with satisfied parties on both sides.

There is a great deal of satisfaction in being able to walk out of a closing with both the buyers and sellers satisfied with the outcome.