The ABCs of buying a business

Debbie Gann, owner of Home Attendant Care, purchased the business after working there for 10 years. Even though she knew the ins and outs of the business, she still sought outside advice on how to buy the business.

Nicole Lanphear
   Purchasing a business is a big undertaking; the process is vital to get right the first time. The deal involves many players and a clear understanding of personal and professional goals. Each step is critical, from the mental preparation before looking for a business, to the ending negotiations with the seller or banker.

Before you shop
   The first step in purchasing a pre-existing business is making sure it fits with your life’s goals.
   Debbie Gann, owner of Home Attendant Care, Inc., worked for 10 years as a receptionist for the company. She said she loved the business and purchased 20 percent of the company in 2003 with the intent to purchase the rest of the business later.
   Gann said the process took a long time to sort out, but she had the help of a business advisor at the Small Business Development Center, along with the help of her lawyer and accountant.
   “It took a long time to iron out the details of the agreement,” Gann said. “And the Small Business Development Center was a huge help.”
   Tom Dorr, director of Small Business Development Center, oversees the creation, selling and purchasing of hundreds of businesses in Whatcom County every year. Before even looking to purchase a business, Dorr said to ask yourself, “Does this business fit with my personal goals?”
   “Your personal goals in life determine where you should go in business,” he said. “For example, if you want to have weekends off, don’t buy a retail business. If you want to be home with the kids at night, don’t buy a restaurant.”
   Dorr said understanding what you are passionate about is also key in determining what business to go into.
   “Owning your own business is hard work,” Dorr said. “It has its ups and downs, and the challenge is to have something you are passionate about to get you through those peaks and valleys of business ownership.”
   Arvid Garnaas, a CPA for 26 years, evaluates businesses for a living. He said when working with a buyer, he looks to see if they know anything about the business they are interested in. If not, they will most likely lose money in the business, he said. But if they do, they have a much better chance of success and of adding something new to the industry.
   Dorr also believes prior experience in the field is essential.
   Finally, before shopping for a business, Dorr said to look at what finances are available. What is the top dollar you can spend on a business purchase? Dorr said there is a big difference between shopping for a million-dollar business versus a $100,000 business.

Looking for a business to buy
   Dorr said looking for a business involves some digging.
   “Contrary to popular belief, there isn’t a database where you go and see all the businesses for sale out there,” Dorr said. “The reality is that every business is for sale at the right price. Don’t limit yourself to businesses you see advertised in the paper or for sale with a business broker.”
   Alethea Fourier, the new owner of the Great Northern Train Café in Fairhaven, worked with a business broker in purchasing the restaurant. Even though she had worked as an ad sales representative for The Puget Sound Business Journal, she had waited tables throughout college, so she had been in the restaurant industry for a while.
   “I talked to other people who had done business with the seller before,” Fourier said. “And I worked with a business broker who helped me figure out how everything needed to go on the books.”
   Dorr said business brokers bring skills, experience and expertise that the buyer and seller don’t have. Some are commercial or residential Realtors, as well. Owner-to-owner sales are common, where no Realtor or broker is involved.
   Purchasing a franchise is another option for a prospective business owner. The buyer purchases a business model from a regional or national company and then starts the business in Bellingham or Whatcom County. Dorr said there is a catch to franchises, in that sometimes the business model is based off lower rates than Washington state, which has higher wages than many states and can throw off the profit margin for the business.
   Other times, the opportunity to buy a business presents itself. Because Gann believed in the business of Home Attendant Care, she purchased the rest of the business in 2006, wanting to keep the business locally owned and operated. It took three years to transition the ownership, with many steps in between.

Analyzing the business
   In evaluating a business, Garnaas said the buyer must gather accurate information to make the best assessment of the possible profitability. These documents include tax returns, prepared financial statements, or CPA statements. Anyone selling a business can say one thing, Garnaas said, but the buyer needs to confirm as much as possible.
   After evaluating the business as a whole, Garnaas said to look at the specifics of the business, such as does the business sell just to one customer or rely on just one supplier.
   Dorr recommends examining at least the past three years of financial statements. He said CPAs can help evaluate the business so that the buyer doesn’t overpay, and accountants can also assist in normalizing financial statements from the seller. Normalizing the statements involves looking at wages or expenses that exceed or fall short of what the buyer would intend for the business.
   After looking at the financial aspects, Dorr said to do a feasibility analysis.
   “Ask yourself, ‘Does this business have the ability to pay me and service any debt I may have, as well as give an adequate return on the investment for the risk I am taking?’ Too often, people make emotional decisions around the purchase rather than practical decisions,” Dorr said.
   Dorr also said to look at why the seller is leaving the business: Is it because of health reasons, retirement, or were the previous owners simply unable to make the business work?
   Fourier purchased the Great Northern Train Café knowing there was a current dispute over the land, and she settled for a month-to-month lease because of it. Still, she said she looked at the worst-case scenario, and even then, the purchase of the equipment was worth the price of the business.

Assembling your dream team
   “You don’t want to screw up this transaction,” said Dorr. “The reason you want to talk to an attorney is for liability protection, and the reason to talk to a CPA is for tax-planning purposes.”
   Lawyer Philip Sharpe said the ideal team to have on hand when purchasing a business includes, in order of importance, a business advisor or consultant, an accountant and a lawyer.
   The business consultant has to evaluate business and look at how they will finance it, Sharpe said. The accountant works with the consultant to take tax returns and financial statements and normalize them to see what the business will look like when the buyer takes it over. The lawyer papers the transaction and helps the buyer come with a strategy to approach the seller to structure the transaction.
   Other people to talk to include business brokers, vendors, landlords, important suppliers and key customers, and insurance agents.
   Sharpe said a business purchase transaction is one that requires a paper trail of professionals. From the beginning, the buyer and seller need legal protections. For example, a buyer looking at a business might sign a non-disclosure and confidentiality agreement to allow a seller to share tax information or supplies with the assurance that the potential buyer won’t take the information to a competitor.

After the analysis
   After analyzing historical aspects, Dorr said to create a clear business plan.
   “Who is the target market? What are you going to sell? What are your monthly expenses? Where is revenue coming from? How are you marketing the business?” Dorr said are common questions to ask.
   Once a buyer has decided to buy the business, negotiations with the seller begin. The historical prospective helps drive a reasonable price, Dorr said.
   Sharpe said the next step involves a letter of intent stating the preferred price, the terms and what needs to be done to arrive at a binding purchasing sale agreement. While the letter is not a binding legal agreement, it sets the stage for due diligence and the time when the buyer is granted full access to the business to inspect the property, building, employees and equipment.
   It is also the time where the buyer can get finances in order, Sharpe said.
   Gann said when she worked with the bank to purchase Home Attendant Care, she didn’t realize how long and involved that process would be. She said it took many hours to put together the packet to request a loan and even more time to negotiate with the banks for the ideal interest rates and other conditions.
   During the transition period, Gann also worked with the current administration team to make a smooth transfer of ownership. She said it is important to realize the staff of the business is going through the process, too. While the process of taking over the business was long and stressful, Gann said it was worth it because she enjoys the business.
   “If you don’t have a passion for the business you’re buying, the process will break you,” she said. “If you do have a passion for it, keep plowing through. It is worth it.”

Your "To-Do" list for buying a business
   • Get professional advice. Everything needs to be well documented, so using professionals and advisors is key, said director of the Small Business Development Center Tom Dorr.
   • Know what is the reality. “People get anxious when buying a business,” lawyer Philip Sharpe said. “They are buying a dream. But when you are buying a dream, there is usually a difference between that dream and reality. The important thing is to make certain that the reality matches up with the dream.”
   • Test all assumptions. “People buy things based on a whole host of assumptions and you have to test every one of those during the due diligence period,” Sharpe said. “You assume the employees are going to stay with the business, you assume the business plan will remain constant. You make all sorts of assumptions.”
   • Make sure the price is right. “Just pay what it is worth,” CPA Arvid Garnaas said. Some business owners believe they can change what a business is worth through their management. A professional review of the finances will help to know what it is really worth.

What are you purchasing?
   As a buyer, it is important to know exactly what you are purchasing, since the liabilities and tax ramifications are different for both.
   • Stock: When purchasing the stock of the company, it includes everything: the assets and the liabilities of the company. If the company has warranty obligations, the buyer has those obligations to warrant a service should something go wrong.
   • Assets: In purchasing the assets, the buyer owns the equipment, the company name or customer list, but not the liabilities or stock.

Top

 

Related Stories