1. Lee, Hecht Harrison Seminar July 28, 2011
Jeff Goldblatt
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2. Small Business Overview
• Many experts are predicting that a huge wave of
businesses will become available over the next decade
as baby boomers look to sell.
• With the economy continuing to slowly climb upward,
it just might be the perfect time to acquire a business.
• The Collin, Dallas, Denton & Tarrant counties are in the
top 10 of fastest growing Texas counties. For example,
Collin County was 7th on the list with a 59% population
growth rate since 2000.
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3. Small Business Overview
• Before you take the plunge in to acquiring a business,
you need to become prepared on the business
acquisition process.
o “Price is what you pay. Value is what you get.”
o “It's far better to buy a wonderful company at a fair
price than a fair company at a wonderful price.”
– Warren Buffett
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4. Presentation Objectives
• To make you aware of a career option that many
individuals may have, owning your own business!
• To provide the core knowledge that you would need
when pursing ownership of your own business.
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5. Presentation Outline
• Advantages of Owning A Business
• 3 Paths To Owning A Business
• Why Owners Sell
• Buying An Existing Business – Advantages
• Types of Small Businesses
• Small Businesses Categorized By Revenue
• How Are Businesses Valued
• Business Valuation Terms
• 9 Steps To Acquiring A Business
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6. Advantages of Owning A Business
• Control Your Own Destiny
• Can Provide Financial Independence
• Job Security
• Benefit From Your Own Efforts
• Replaces An Income
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7. Three Paths To Owning A Business
• Buy An Existing Business – Least Risk, Buying A
System With A Successful Track Record
• Start A New Franchise – Moderate Risk,
Location Becomes A Big Unknown Factor
• Start An Independent New Business – Highest
Failure Rate
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8. Why Business Owners Sell?
• Retirement
• Burned Out
• Wants to Pursue a New Venture
• Business Has Grown Beyond Seller’s Means
• Business is Down-Trending
• Present Value May Be Greater Than Future Potential
• Health Reasons
• Capital Gains Rate Remains At Historical Low – 15%
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9. Buying An Existing Business
• Buying an existing business is an excellent option
that has advantages. You will have an established
name (brand), proven product or services, existing
customers and an immediate revenue stream. It can
provide a better ROI!
• The process of buying an existing business can be
time consuming, costly and frustrating. Even the
most skilled businessperson may find this experience
challenging.
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10. Buying An Existing Business Facts
• It takes at least 3 months to complete a business
purchase transaction.
• Studies indicate that 95% of established businesses that
are resold succeed.
• Conversely, US Government studies indicate that 60% of
start up businesses fail.
• Note that these facts are not intended to say that there is
no inherent risk in buying & operating an existing
business.
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11. Types Of Small Businesses
Retail Service
Restaurant Printing
Clothing Lawn care
Hardware Janitorial
Manufacturing Distribution
Equipment Auto Parts
Furniture Medical Products
Ironworks Food
• Close to 40% of the businesses sold are in the food & beverage category.
• Another 30% of the businesses sold are service related.
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12. Small Business By Reported Revenue
Annual Reported Revenue Amount Percentage To Total
< $25K 13,973,000 58%
$25K - $100K 4,765,000 20%
$110K - $500K 3,492,000 14%
$500K - $1M 805,000 3%
> $1M 1,078,000 4%
Total 24,113,000 100%
• The amount of small business sales in 2010 increased by 3% however, the median sales
price of decreased from $160K to $150K. (BizBuySell)
• The 20M+ small businesses create 2 out of every 3 domestic jobs & accounts for 39% of
the national GNP.
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13. How Are Businesses Valued?
• The most common method among the many
valuation methods is by applying a multiple to the
Sellers Discretionary Earnings (SDE).
(SDE x Price Multiple) = Asking Price
• SDE are determined from recasting the financial
statements .
• The pricing multiple is influenced by comparable
statistics of similar local market businesses that have
sold as well as reviewing industry valuations via
national databases(i.e. BizComps).
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14. How Are Businesses Valued?
Other factors that impact the asking price are;
• Maturity of Business
• Offer Terms(owner financing)
• Competition
• Risk
• Growth trend
• Facilities
• Desirability
• Ease of Replication
• Employees
• Lease
• Training
• Fixtures & Equipment
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15. Business Valuation Terms Defined
What is EBITDA?
• Earnings Before Interest, Taxes, Depreciation, and
Amortization.
What is Sellers Discretionary Earnings (SDE)?
 SDE is the measurement of the total economic
benefits of owning the company
 Earnings of a business before income taxes, non-
recurring income & expenses, non-operating income
& expenses, depreciation & amortization, interest
expense or income, owner total compensation.
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16. Sellers Discretionary Earnings Example
Recasting Jeff’s Boutique (Gross Profit + Add-backs = SDE)
Category $ Value
• Earnings/Net Profit $85,000
• Owner Income/Benefits $57,000
• Interest(different loan scenario for buyer) $12,000
• “Business Travel” $10,000
• Depreciation(non-cash item) $10,000
• Car Expense(unnecessary to the biz) $5,000
• Gifts/Donations(discretionary) $1000
• Total
$180,000
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17. Pricing Multiple Example – Jeff’s Boutique
• Selling Price/SDE = Price Multiple
$500,000/$180,000 = 2.8
• Most businesses on average are selling between a
2.0 – 3.0 price multiple, however certain businesses
do sell at a premium to their industry average
possibly due to their profitability, customer base, &
location.
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18. 9 Steps In Process Of Buying A Business
• Step 1 - Personal Assessment “The Choice”
• Step 2 - Education & Resources For Buying A Business “How Big?”
- Role of Business Intermediaries
• Step 3 – Research & Identify Potential Industries & Business
“The Hunt”
• Step 4 - Physical Business Tour “The Meeting”
• Step 5 - Comprehensive Business Review “The Qualifying”
• Step 6 - Complete a Letter of Intent with Contingencies
• Step 7 - Due Diligence
• Step 8 - Arrange Financing
• Step 9 - Close the Deal “The Big Day”
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19. Buying Process Step 1 - Personal Assessment
• Based on what you know about yourself, assess whether
a particular business is right for you.
• Does the business fit with your interests and resources?
• Can you grow this business? (Pay for the past, buy for the future!)
• Are you willing to invest the time that a particular
business demands?
• Cash, credibility, skills and contacts: do yours match
what this business will demand?
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20. Buying Process Step 1 - Personal Assessment
• Determine what size business your management skills
and monetary resources allows you to own & manage.
• Factors to focus on include, but are not limited to are
number of employees, sales volume, geography, and
number of operating units.
• Word of caution, don’t buy based solely on profits!
• A Business Intermediary can be an important resource
for you in assessing your skills and matching it to a
business.
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21. Buying Process Step 2 – Education & Resources
• Internet Reference & Education Search
– Google “Buying An Existing Business”
– SBA, E-How, Entrepreneur, SCORE
• Internet Business For Sale Sites
– Biz, Buy Sell
– Bizilla
– Biz Quest
– BusinessBroker.net
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22. Buying Process Step 2 – Education & Resources
• Especially if this is your first time to purchase a
business, working with a Business Intermediary can
eliminate costly mistakes & eliminate inefficiencies.
• A Business Intermediary will conduct a personality &
skill assessment, screen business opportunities,
intermediate on buyer concerns, assist in arranging
financing & navigate you through the closing process.
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23. Buying Process Step 2 – Education & Resources
Business Intermediaries……
• Educate
• Negotiate & Facilitate
• Save You Time
• Save You Money
• Present Facts
• Facilitate the Sale Between You and the Seller
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24. Buying Process Step 2 – Education & Resources
• It is important to your success as a business owner that
you can be passionate about a particular business.
• Time & energy invested in your business is an important
ingredient for success.
• You must assess your capital resources and only pursue
businesses that are a match to your purchasing ability.
Being under-capitalized is the main cause of business
failure.
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25. Buying Process Step 2 – Education & Resources
• It is important to think about the legal business structure
for your potential new business.
• The legal business structure options are Sole
Proprietorship, Partnership, Corporation(C or S) &
Limited Liability Corporation(LLC)
• The type of business entity you choose will depend on
three primary factors: Liability, Taxation & Record-
keeping.
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26. Buying Process Step 2 – Education & Resources
• A sole proprietorship is the most common form of
business organization. It's easy to form and offers
complete managerial control to the owner. The owner is
personally liable for all financial obligations of the
business.
• A partnership involves two or more people who agree to
share in the profits or losses of a business. Profits or
losses are "passed through" to partners to report on
their individual income tax returns. Each partner is
personally liable for the financial obligations of the
business.
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27. Buying Process Step 2 – Education & Resources
• A corporation is a legal entity that is created to conduct
business. The key benefit of corporate status is the
avoidance of personal liability. The primary disadvantage
is the cost to form a corporation and the extensive
record-keeping that's required. the S corporation (or
Subchapter corporation, a popular variation of the
regular C corporation) avoids the double taxation
situation by allowing income or losses to be passed
through on individual tax returns
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28. Buying Process Step 2 – Education & Resources
• A hybrid form of partnership, the Limited Liability
Company (LLC), is gaining in popularity because it allows
owners to take advantage of the benefits of both the
corporation and partnership forms of business. The
advantages of this business format are that profits and
losses can be passed through to owners without taxation
of the business itself while owners are shielded from
personal liability.
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29. Buying Process Step 3 - Research
• Most Business For Sale sites only have general & non-
confidential information on a particular business.
• Most Business Broker have prepared detailed
information in the form of a Confidential Business
Review(CBR) on their listed businesses.
• The Business Broker will not release confidential
business information until the prospective buyer signs a
Non-Disclosure Agreement(NDA), completes a Buyer
Profile & submits personal financial information.
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30. Buying Process Step 3 - Research
• The Confidential Business Review(CBR) provides a
Profit & Loss summary for the past three years.
• The CBR will also provide the location, years in
business, current ownership history, franchise history
if applicable, inventory & equipment if included in the
sale, other assets & staffing.
• Lastly, the CBR can detail the financing scenarios so
you may understand the available income after debt
service.
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31. Buying Process Step 3 – Basic Questions
• How long has the business been in business?
• How long has present owner been the owner?
• What are the reasons the owner is selling the business?
• Are the financials well organized?
• How dependent is the business on the owner?
• How dependent is the business on the employees?
• Is the lease on favorable terms?
• How many years remain on the lease?
• Is there a renewable option?
• Is this a franchised business?
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32. Buying Process Step 4 – Business Tour
• The Business Broker will arrange a showing of the
business, sometimes outside of normal business
operating hours due to confidentiality & availability of
owner/operator.
• The tour allows you to see the physical condition of the
business, its assets and it affords you the opportunity to
meet the owner and seek pertinent answers to
questions that arose in your review.
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33. Buying Process Step 4 – Business Tour
• Impress the Seller – if they feel you are the right one for
successfully running their business, they may be more
inclined to sell you the business & finance the
transaction
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34. Buying Process Step 4 – Business Tour
Questions to ask at the first Buyer/Seller Meeting:
• Tell me about your business?
• How did you get started?
• What services does your business provide?
• What role do you perform everyday?
• Why are you selling your business?
• What is it that you like best and least about the business?
• How long have you been considering selling your business?
• What keeps you up at night about the business?
• How much vacation do you take?
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35. Buying Process Step 4 – Business Tour
Questions to ask at the first Buyer/Seller Meeting:
• Tell me about the employees and their importance to this
business?
• What are the last three year's sales and SDE?(if not already known
through the broker)
• Who are your biggest competitors?
• What are your industry trends?
• Is your market share growing, shrinking, or steady?
• Have there been any significant changes in your marketplace?
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36. Buying Process Step 4 – Business Tour
Questions to ask at the first Buyer/Seller Meeting:
• What do you think I can do to increase sales and profits? Why
are you not doing these things?
• Ask the seller if he/she has copies of any trade publications.
They’re a great source for additional information.
• Will you agree to a covenant not to compete?
• Will the business sale include the transfer of real estate?
• What are the details of the lease? How long? Any options? Do
you anticipate any problems with the landlord assigning it to
me or entering into a new lease?
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37. Buying Process Step 4 – Business Tour
Questions to ask at the first Buyer/Seller Meeting:
• How long will it take me to really learn this business?
• How long can I count on you to train me after the sale?
• What do you believe is the profile of the ideal buyer for this
business?
• Do you anticipate any problems with me getting credit from
your suppliers?
• Do any of your suppliers represent more than 10% of your
purchases? If yes, who are they?
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38. Buying Process Step 5 – Business Review
• Consider the reasons for the sale and all of the key
learning from the business tour. Ensure that you have a
CPA and/or an attorney to study all documents.
• Review the liabilities as well as any assets that may be
included and determine their exact value. If there are
liabilities, will you assume them and can you break
even?
• Study the existing lease and ensure it is transferable. Is
there a renewal clause or could it be renegotiated?
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39. Buying Process Step 5 – Business Review
• Study factors affecting trademarks and logos, etc.
• Ask for and scrutinize the past few years’ income
statements and cash flow projection.
• Study the customer base as well as the employees on
hand and determine how they will react to the change.
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40. Buying Process Step 6 – Offer To Purchase
• Determine and valuate the business, making sure your
offer does not exceed the perceived value of the
business.
• Determine the capital necessary to begin operations
once you assume ownership and make sure that you
can qualify for a bank loan.
• Prepare an offer via an Purchase Agreement for the
business with the business broker.
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41. Buying Process Step 6 – Offer To Purchase
• Contingencies & conditions need to be determined and
included on the Purchase Agreement. They afford the
buyer protection.
• Earnest money needs to accompany the Purchase
Agreement.
• Negotiations may occur on the sale price, due diligence
& closing dates and the contingency clauses. Thus
revisions will more than likely be needed before the
final agreement is signed.
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42. Buying Process Step 6 – Common Contingencies
• Buyer to obtain financing on terms acceptable to buyer
• Buyer to make loan application within 5 days of
acceptance of this agreement
• Buyer examination & approval of 3 years of financials
and tax returns
• Buyer examination & approval of assets, inventory, and
equipment list
• Seller is to give non-compete agreement acceptable to
buyer
• Seller is to provide training period acceptable to buyer
• Buyer is to obtain lease of terms acceptable to buyer
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43. Buying Process Step 7 – Due Diligence
• “Due Diligence” is the phrase used to describe a buyer’s
investigation of a potential business acquisition. By
undertaking due diligence, the prospective buyer is
attempting to fully understand the benefits and
liabilities of a potential acquisition through an
examination of all aspects of its past, present and
foreseeable future.
• Process to confirm that the information he has been
provided thus far by brokers and sellers is accurate or
within a reasonable degree of tolerance to the buyer.
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44. Buying Process Step 7 – Due Diligence
• Financials – review 3 years of tax returns and validate
that they align to the profit & loss statements and other
financial documents that was previously reviewed.
• Employees - A list of all employees, their job titles,
duties, and current wage.
• Vendors - What vendors does the business use? Do
they have a good relationship? Will the vendors extend
the same terms to you as the new owner?
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45. Buying Process Step 7 – Due Diligence
• Inventory - If you're buying existing inventory, get a list
of its value. It's also a good idea to agree to a physical
audit before close of sale.
• Equipment - What equipment comes with the
business? How old is the equipment and is everything
in good working order? Are there any warranties? Is the
equipment leased or owned? Is there any money still
owed on the equipment?
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46. Buying Process Step 7 – Due Diligence
• Furniture and Fixtures - Include all computer and office
equipment and get a list of things like signage,
furniture, and any fixtures that come with the business.
Again, ask about warranties and whether items are
leased or owned.
• Debts - Are you inheriting debt? If so, make sure you
understand the amount. Examples of this might be
outstanding accounts payables, equipment leases, or
anything that comes with the business that is not fully
owned by the seller.
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47. Buying Process Step 7 – Due Diligence
• Make sure you are mindful of the due diligence review
period dates. Enlisting the help of professionals is
encouraged.
• If you're not an accounting whiz, ask an accountant to
review the companies financials. Accountants can
identify black holes or hidden financial issues.
• Have an attorney research the business and make sure
the seller has clear title to sell it. If the business is a
franchise, this is especially important.
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48. Buying Process Step 8– Financing
• The only monetary investment you have to make in a
business are the down payment, working capital and
improvements.
• The business should retire its own debt & provide a living
wage out of the existing cash flow.
• Due to the continuing difficult economic environment, it
has become more difficult to qualify for small business
loans.
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49. Buying Process Step 8 – Financing
• The SBA administer several loan programs in
partnership with local lenders, community
development organizations, and micro-lending
institutions (specialists in limited, short-term financing).
• SBA backs those loans with a guaranty against non-
payment that eliminates some of the partner's risk.
Your application for an SBA-backed loan is actually an
application with a commercial bank for a loan that is
structured according to the SBA's requirements
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50. Buying Process Step 8 – Financing
• If you have not done so already, develop a business &
marketing plan for your potential finance partner.
• Alternative financing options aside from an SBA
supported loan, traditional bank loan or seller financing
loan are:
– Self Financing
– Family, Friends or Angel Financing
– Partnerships
– 401K Funding > RollOver as Business Startups(ROBS)
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51. Buying Process – Comparison Financing
SBA Lenders Seller
• Rate - Prime + 2.0% to • Rate 6% to 10%
3.0%
• 20% Down Payment • 35-50% Down Payment
• Credit, Background • Simple Credit Check
Checks, and Detailed
Application
• Personal Guarantee plus
• Personal Guarantee plus the Business as Collateral
2nd position on House
• Average 5 to 7 year
• 10 year financing financing
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52. Buying Process – SBA Lender Needs
From The Buyer From The Seller
 Complete Loan Application  Seller’s Tax Returns &
 Personal Tax Returns for Financials for 3 years and
3 years (All Pages) Interim to the Last Quarter
 Purchase Agreement  Copy of the Purchase Agreement
w/an Allocation of the Purchase
 Business Plan and Projections
Price
 Copies of A/R & A/P Aging
 Equipment List with Serial #’s
 Copy of Existing Lease Agreements
 Copies of W2’s
 Detailed Evidence of all Add Backs
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53. Buying Process – Sales & Financing Data
• All cash transactions are rare and mainly occur with
businesses that sell for $100K.
• On average, a seller who accepts an all cash transaction
receives 70% of the asking price.
• Sellers willing to accept financing terms receive 86% of
the asking price.
• Debt service should not exceed 30% of the annual cash
flow.
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54. Buying Process Step 9 – Closing
• Closings are generally done either by means of an
escrow settlement or through the services of an
attorney who performs settlement.
• Several documents are required to complete the
transaction between business seller and business buyer.
The purchase and sale agreement is the most important
of these, but other documents are often used in
closings including the escrow agreement; bill of sale;
promissory note; security agreement; settlement sheet;
financing statement; and employment agreement.
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55. Buying Process Step 9 – Closing Attorney
The Closing Attorney
• Does lien searches
• Creates seller loan docs
• Has all parties sign closing docs
• Collects certified funds
• Files UCC 1 docs
• Distributes monies
• Holds back escrow funds
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56. Buying Process Step 9 – Closing
• Contingency Removal
- Buyer removes contingencies for the agreement to become binding.
• Escrow Settlement
• Lease Assignment
• Lien Search, Clearance or Assumption
• Inventory – Count & Value
• Closing
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57. Build Wealth – Return On Investment
SELL BUSINESS AFTER 5 YEARS @ 3.0 x
SBA Loan
SDC
• Sale Price $500,000
• Working Capital $50,000 3.0 X $230,000 (year 5) $690,000
• SBA Fee & Closing Costs $17,000
• Total Project $ 567, 000 Less Commission (69,000)
• Down Payment 20% (113,000) Less Closing Costs (6,000)
• Bank Financing $ 454,000
• 10 yrs @ 6.0% - Monthly Payment $ 5,040 Proceeds of Sale $615,000
• Annual Debt Service $ 60,484 Less Payoff on SBA Loan (261,000)
Net Proceeds of Sale, Pre-Tax $354,000
Assumptions For Jeff’s Boutique
1) Grow SDC by 5% compounded annually Plus R.O.I. Over 5 Years $192,000
2) Fair Living wage is $100,000/yr.
Total Return $546,000
3) Seller’s Discretionary Cash Flow (SDC) is $180,000
4) Reinvestment of $50,000 11 months return of down payment
5) Sell business in 5 years
for buyer (after debt service)
5 Year Cash Flow $1,044,000
Less 5 Year Debt Service ($302,000)
$546,000 Total Return /
Less 5 Year Living Wage ($500,000) $163,000 Cash Investment
Less Reinvestment ($50,000) = 235% ROI
R.O.I. Over 5 Years $192,000

58. Small Business Acquisition Reference Tools
• Encyclopedia of Small Business
• SCORE
• SBA
• BizBuySell, BizQuest, BusinessBroker.net
• BusinessesForSale, MergerNetwork
• IBBA.org
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59. Jeff Goldblatt Larry Lane
VR Business Brokers VR Business Brokers
321 N. Central Expressway 321 N. Central Expressway
Suite 350 Suite 350
McKinney, TX 75070 McKinney, TX 75070
Tel: 214-733-8282, ext. 23 Tel: 214-733-8282, ext. 24
E-Mail: jeffg@vrmckinney.com E-Mail: llane@vrmckinney.com
www.vrmckinney.com www.vrmckinney.com