Be patient. Finding a business to acquire is not a quick and simple process. The first thing we advise potential buyers to do is to give some serious thought to what they “want” in a business vs. what they “require” in a business – then make a list for each category and prioritize your responses. Try to stay general in your terms – if you are looking for a flooring manufacturer with $500,000 cash flow within 10 miles of your home, you may never buy a business. However, if you set out searching for a manufacturing operation with a cash flow range of $250,000 to $750,000 in your surrounding counties, you will most likely have multiple options to consider.
There are really two possible questions here – how much can you afford to put down and how much can you afford in monthly payments? The down payment decision is really a function of what you are able and willing to invest in the business, but the monthly payment decision is a bit more complicated. As a general rule, we advise buyers to analyze their cash requirements – what does it take for you to live the lifestyle you are either accustomed to or are willing to accept? Once you have that figure and feel good about it, you can back into a rough business value that’s the right fit for you by calculating debt service. For example, if you purchased a $1MM business with an SBA loan at 6% for 10 years and put 25% cash down, you would be paying roughly $100,000 in note payments annually. If you determined your annual living expense requirement is $200,000, then you should be looking for SBA qualified businesses priced around $1MM with a minimum $300,000 cash flow.
There are primarily two ways to finance an acquisition we see more than any others – SBA 7(a) loans and seller financing. Of course there are dozens of other financing alternatives, but these two account for the lion’s share of deals priced up to $5MM. Typical SBA terms require 25% cash down and terms of 5% to 7.5% for 10 years. Seller financing is an entirely different story – there really are no guidelines because the terms begin and end with what a seller is willing to agree to. As a general rule, when seller financing is the best option for a deal, we will see down payments between 35% and 65%, annual rates from 8% to 10% and terms from 36 to 60 months. The advantages of an SBA loan compared to seller financing are the low down payment and low interest rate, while the advantages of seller financing vs. SBA loans are the shorter term and lack of a strenuous and difficult approval process.
We never like the word “all” or “every,” so the easy answer is no. With that said, you would be hard-pressed to find a bank that would tell you they don’t offer business acquisition financing if you asked them. Truth is, almost every bank has some sort of loan program for this purpose, but when you dig into their specialties and see the types of loans banks really do, there are significantly fewer that truly understand business acquisition financing and practice it as a core part of the banking model. Many times you’ll find that the seller’s representative has pre-arranged financing for the deal, so that is a good place to start when looking for financing options.
At some point in the process, you should expect to execute some sort of non-disclosure or confidentiality agreement on every business you inquire about. If you are not being asked to do so you are probably not dealing with a reputable company representing the business. Our approach to information dissemination is simple – we believe buyers need enough general information to determine if the business fits their basic purchase criteria – industry, cash flow, purchase price, basic financing terms and general location. Beyond that, you should have to execute an NDA to dig any deeper into the business. You should expect to get this request after your initial inquiry into the business.
As described above, prior to signing the NDA you should already know the basics about a business, such as industry, cash flow, purchase price, proposed financing terms and general location. After executing the NDA, you should gain access to historical financial statements and a much more detailed narrative on the business operation, including information on staffing, facilities, marketing, customer types, assets included, etc. In some cases you will also be given the business’ name and location at this time, while other offices will require you to provide some sort of proof of funds to demonstrate your ability to buy the business before disclosing anything further.
As we’ve all heard, everything is negotiable. We always suggest an analytical approach to negotiating price. If you’re going to offer less than the asking price, have a reason that you can back up with real numbers. It doesn’t hurt to ask the seller’s agent how the business value was derived – that’s a good place to start. Then do your own valuation analysis (which we offer buyers, by the way) and see where you come in as compared to the asking price. If you can make a thoughtful offer based on factual data and accepted valuation techniques, you will have a much better chance getting your number than if you simply made a low offer “because no one expects to get their asking price.”
Once you have inquired into a business, signed an NDA, reviewed the provided materials on the company, provided your own qualifications and a personal financial statement and met with the seller’s agent, the next step is to meet the seller. Keep in mind that you need to work around the seller’s schedule for this meeting – in many cases they will want to meet well before or after business owners, and sometimes they do not want to meet at their facility at all, for confidentiality reasons.
This is up to you. If you understand how to read and interpret company financial statements such as P&Ls and balance sheets, or if you are comfortable deciphering legal documents, then you may be able to handle this on your own. However, even if you do feel qualified, unless you are a professional in one of those areas, it’s probably a good idea to engage a CPA and/or attorney. Chances are you already have an accountant who handles your personal finances, and you may have even worked with an attorney in the past. When it comes to CPAs, many of them have business clients already so yours may be qualified to assist you in reviewing financial statements for the purposes of due diligence. Attorneys, however, are a different story. Given there are so many different legal specialties, you need to make sure you are hiring an attorney with business acquisition experience. We have dealt with hundreds of attorneys over the years, on both sides of the table, so we have a great list of referrals should you need one.
There are major disagreements about buy-side representation in our industry. Most people assume our field operates in the same manner as the real estate industry where co-brokering (when the seller’s agent shares commission with the buyer’s agent) is the standard, but nothing could be less accurate. Co-brokering is rare in our world – our office will only consider it in very unique cases. Our expectation is that buy-side representatives are paid by the buyers, just as we are paid by the buyer when we provide them representation. You should expect to pay some sort of deposit or retainer fee up front to buy-side agents, and then that amount should be apple to the total commission earned at closing.
Do you have to use and escrow agent to acquire a business? No. But do we highly recommend an escrow agent be utilized in all of our transactions? Absolutely! An escrow agent (escrow attorney or escrow company) is critical to a smooth closing, in our opinion. A good escrow agent handles so many little details involved in actually closing a transaction – without one you really run the risk of important aspects falling through the cracks. Keep in mind, you should never agree to use the seller’s attorney as the escrow agent, nor should you ever expect a seller to agree to use your attorney for escrow. The escrow agent needs to be an independent third party who has no affiliation with the buyer or seller, or the buyer’s or seller’s representatives. The escrow agent is a facilitator and has the sole charge of following the instructions outlined in the purchase agreement in order to see the transaction closed.
Any closing costs associated with a loan are the sole responsibility of the buyer, and certainly any attorney’s fees or other professional fees are the sole responsibility of the party who incurred them. However, closing costs associated with a third-party escrow agent are typically split equally between buyer and seller, even though the benefits a buyer gets from the escrow agent’s services far outweigh the benefits to the seller. In our experience, total closing costs associated with the escrow agent range from $1,500 to $3,000, depending on the specifics of the deal.
There’s really no right or wrong answer here. The biggest factor that impacts closing is whether or not you’re financing the purchase through a third-party. Other factors can include the time of the year (seasonality can effect a buyer’s schedule as well as a seller’s), the quality and completeness of the due diligence materials provided, the responsiveness of attorneys negotiating the purchase agreement and details uncovered during due diligence that necessitate the deal terms to be changed. Generally speaking, however, a transaction that involves a third-party lender will take no less than 60 days to close, and likely will be closer to 90. A deal with no bank involved moves much faster and can be done in 30 to 45 days.
Remember that an LOI is a non-binding agreement – it’s really a roadmap that outlines the major deal points and guides the buyer and seller to closing. While you want to be thorough and specific on some terms (like the sale price) there are other issues that would be premature to get into (like the training period). A reasonable LOI should include the purchase price and method of purchase (be it SBA financing, all cash, etc.), proposed financing terms (that are subject to change by a third-party lender), duration of due diligence, earnest money amount, purchase agreement deadline and closing date. You can certainly add other terms as dictated by the business or the seller, but these are the basics.
Very simply – can the buyer get the deal done. Every seller worries about whether or not their deal is going to close. It doesn’t matter how well the process is going, how much they like the buyer or how positive the buyer is being – they all worry that something is going to happen to kill the deal. To be more specific, sellers want to know if people are real “buyers” or just “lookers.” They want to make sure buyers have the funds do close the transaction, or that they can get the necessary financing. They get antsy when things start to drag out for no specific reason because they assume that means the buyer is reconsidering the deal. They worry that a buyer’s attorney is going to try and negotiate one-sided documents. The list goes on, but the vast majority of a seller’s concerns about buyers center on their confidence that the transaction will close.
"Sigma proved to be an enormous asset is helping us consummate a deal with the sellers that was mutually beneficial to all involved."
- Marcus Bodet, acquired Resource One, Incorporated
"We were lucky be have Sigma on the other side of the table. Without their creativity and guidance, this transaction would not have closed."
- Adrienne Hamblin, acquired PerWess Co.
"Sigma's online NDA system and video presentation made it easy to look at a business from 500 miles away. Before I even came to Dallas I knew I wanted the business."
- Ken Pierce, acquired L & L Pro Pac
Sigma M&A LLC: 18170 Dallas Parkway, Suite 203, Dallas, Texas 75287
Dallas Business Broker, Mergers & Acquisitions Dallas / Fort Worth / Texas