Buying & Selling a Business in Lincoln, NE – 2019
There is a lot that goes into a business transaction. No matter if you’re the buyer or the seller, you’ll want to have a team of experts to guide you through the process. Just having the money to buy a business does not make you ready to buy that business. In order to make a smart purchasing decision, you’ll need to spend a lot of time working with the seller and checking every necessary consideration off the list. To ensure you are getting the best deal, it’s recommended to work with a trusted business advisor.
In order to learn more about this, we asked MJ Cassner from Transworld Business Advisors for some insight on the process of buying and/or selling a business. “For sellers, we make confidentiality and best price a mutual goal,” MJ said. “My advice is to sell when the business is doing well—don’t wait until you HAVE TO sell. At Transworld Business Advisors, we offer a professional business valuation at no cost to the seller. In addition, we’ll advertise your listing on over 100 websites both locally and internationally at no cost to the seller. Another important part of our process involves interviewing the seller to determine discretionary earnings and creating recastings from the business’s tax returns. This financial information is then shown to potential buyers. We adjust back in interest depreciation, and any owner perks or add-backs, to show the true value of the company. Transworld will get the business pre-qualified with a bank so the process is easier, and our team will recommend other financial and legal resources too.”
MJ shared some advice for first-time buyers as well: “First off, have a down payment saved and ready for purchase. I recommend 20–25% of the amount you can afford for a business (for businesses that cost $200k, have $50k cash available). Buyers should have capital start-up money available to get through initial months for unforeseen costs, improvements, deposits, payroll, etc. I also encourage buyers to strengthen their credit history to 700+. It’s important to be honest in disclosing your income, as lenders will check your tax returns. Choose a business you can feel passionate about. You may need to work a lot at first to get the profit you want. Even an owner-absentee business takes effort.”
The next expert we interviewed was Austin Zimmerman, team accountant at SP Group, P.C. “Buying or selling a business is often an emotional decision,” Austin addressed. “With all of the emotions involved, it is important to have a team of trusted advisors who know the right questions to ask and can provide an objective opinion to a prospective buyer or seller. A trusted tax professional can provide unbiased guidance in a multitude of areas, including the valuation of the business, the best structure for the transaction, and the potential tax consequences of the sale. Obtaining this valuable advice can help you feel more comfortable that you are truly making the right decision for your future.”
Austin offered some additional advice for anyone who is buying a business for the first time: “When considering the purchase of a business for the first time, remember that there is really no such thing as too much due diligence. Communicate early and often with your team of professional advisors, including your accountant, attorney, banker, and other consultants. Additionally, reach out to other business owners you know who have gone through this process before, as they may be able to provide valuable insight from their past experience. Using your network to your advantage will help you feel more prepared and at ease.”
“Now is a time of great fluctuation in the marketplace, but with that fluctuation comes opportunity,” added Austin. “Baby boomers are approaching retirement age, and a new generation of professionals is eager to step in and take the reins. However, it is important not to just take the first opportunity that comes along. Utilize your team of advisors to get expert feedback on the terms of a potential sale. Planning with a tax advisor can help minimize the taxes owed, or at least provide advance notice for when April comes around. Often times, an installment sale can be used to spread the proceeds of the sale over several years, which helps avoid having a huge lump sum due in one single tax year.”
As we get into the topic of financing the purchase of a business, it’s important to remember that financing the business acquisition is only part of the game. You still need funds to operate the business after the purchase.
The simplest way to finance a business acquisition is to use your own funds. These funds include your savings, retirement accounts, and home equity. No matter what you do, you will need to use some of your own established capital for the purchase, but it’s uncommon for someone to acquire a business by using only their funds for the purchase.
Along with seller financing, bank loans, and leveraged buyouts, one of the best options to finance a business purchase is to use an SBA Loan (small business administration loan). If purchasing a business or getting working capital is your goal, the SBA 7A loan is probably your best route. If you’re looking for a small business loan to purchase commercial real estate or heavy machinery/equipment, the SBA 504 loan is a better choice.
Certified Development Companies (CDCs) facilitate 504 loans to small businesses by partnering with conventional lenders. 504 loans are guaranteed by the U.S. Small Business Administration. To help us learn more about this, we talked to Jason Culver, SVP and chief credit officer for NEDCO. NEDCO is a great resource for anyone looking at buying or selling a business. Many business transactions involve the purchase of the business operations but also include real estate and equipment. NEDCO’s SBA 504 loan program can offer buyers the ability to purchase real estate and equipment for as low at 10% down.
“The low down payment can be key for business owners,” stated Jason. “Conventional financing can often require down payments of 20% or more. By allowing small businesses to purchase real estate and equipment with 10% down, it lets the owners keep more working capital in their business for other expenses, inventory, or to do an expansion in the future.”
“When buying your first business, there’s no shortage of things to consider,” Jason continued. “When buying an existing business you need to look into getting a business valuation to make sure the purchase price is fair. Along with the purchase price comes evaluating the business cash flow to make sure it generates enough profit to service any debt you incur from buying the business.”
According to Jason, in addition to the financial aspects of the business, there are a few questions new business owners need to ask:
- Will existing sales differ under new ownership, is there any risk of losing existing clients?
- Is there existing staff that will stay on after the change in ownership to help with the transition?
- Why is the current owner selling? Is it due to retirement or has something changed in the market that will impact the business in the future?
- Is the purchase for the assets of the business or for the ownership of the stock in the business? Most advisors recommend just purchasing the assets of the business but forming a new company in order to separate your new business from the old one to avoid any potential legal issues the old company may have.
- Will the seller offer to continue working at the business for a period of time after the sale? This can help with the transition as suppliers and customers get used to the new owners.
Currently, in our state, we are seeing a high number of business owners reach a point where they’re thinking about retiring and potentially selling their business. One of the great things for someone looking at selling a business right now is that interest rates are at historic lows. This can make financing much more attractive to potential buyers. This is especially true with the SBA 504 program offered by NEDCO.
“Our interest rates are at their lowest level and can be fixed for the entire life of the loan, as much as 25 years!” Jason announced. “By combining a low fixed interest rate and a low down payment, business owners can expand the pool of eligible buyers for their business.”
NEDCO’s goal is to help small businesses all across Nebraska grow and reach their full potential. If you are a small business owner, make sure to find out what NEDCO’s SBA 504 Loan can do for you!
Finally, the legal advice from your lawyer will be invaluable for a number of different reasons.
Get an indemnity from the seller, otherwise known as a comprehensive form of insurance compensation for damages or loss. Even if you and your advisors have torn apart the seller’s books and records, sometimes things get overlooked and you find yourself getting sued because of something the seller did or didn’t do before you took over the business. With indemnity, the insurer indemnifies the policyholder—that is, promises to make whole the individual or business for any covered loss.
If you’re looking where to turn for legal advice, we recommend working with one of the following expert firms:
Berry Law was founded in 1965 by Attorney John Stevens Berry, Sr. They continue to uphold a heritage of aggressive, effective, and reliable legal advocacy to individuals in Lincoln and the entire state of Nebraska. Susan Napolitano is a relentless civil lawyer at Berry Law who fights for her clients, specifically in the area of business transactions to make sure they keep all they have earned and that they continue to build upon their assets.
“Having handled the legal aspects of hundreds of business transitions, I’ve learned that the smoothest sales involve an attorney from the beginning to the end,” said Susan. “Ideally, a seller should visit with his or her attorney (and accountant) at least one tax year before listing the business for sale to prepare for a succession. It can be helpful when the seller’s attorney understands the seller’s day-to-day business, but it is imperative that the seller’s attorney understands the unique legal aspects of the seller’s business transition.”
Another key consideration when buying a business is the current employees. Does the business you’re purchasing rely heavily on a few key employees? If you’re looking into purchasing a service-based business, the future success of that business relies heavily on relationships. In this case, the key employees can be one of the most valuable assets for the business. Making sure you take time to identify who the key people are in the company, and ensuring those key employees stay with the company after you’ve purchased it, is a step that should not be overlooked.
That being said, employee retention can be very challenging in the midst of a substantial transition period such as a change in ownership. If you’re taking over a business and you’re coming in with new ideas and changes that affect the culture, expectations, day-to-day operations, etc., be prepared for some resistance. It is difficult for employees to adapt to a new normal once they’ve gotten used to things being done in a certain way. As an owner faced with turnover, it’s good to have effective staffing strategies in place ahead of time.
Now more than ever, the ability to tap the power of people with the right skills and experience can make or break a company. As the world leader in contingent and permanent staffing solutions, Manpower has talent resourcing options and workforce programs and solutions that will increase your business flexibility, agility, cost-effectiveness, and competitive advantage. Since a business acquisition can be complex and demanding, you can’t do it all yourself. When it comes to staffing, let Manpower help you source, recruit, screen, interview, and place candidates.
Did you know that, on the average, a business is introduced to about 20 buyers before selling it? There are a lot of moving parts. To give us a closer, final look at all these parts, we spoke with Jethro Hopkins, owner of No Coast Business Advisors (NCBA). “When you are looking to buy a business, smart professionals use a business broker to represent their interests,” Jethro stated. “The business owner or seller is going to have professionals on their side, including a broker, CPA, attorney, advisors, and others. Having a trusted broker is a great way to level the playing field and protect your investment instead of just hoping that no one on the other side of the table will take advantage of you.”
“The first and most important thing in the buying/selling a business process is figuring out the value of the business,” Jethro informed us. “Depending on if you’re working with a CPA, appraiser, or a broker, you’ll probably get different valuation results. This is because each entity is calculating the value of a business a little differently. An accountant will generally evaluate your business on the basis of its book value on paper. If you’ve been working with a CPA, they probably have a working knowledge of your business that other appraising agents do not, and would be a great source of information for questions about the tax consequences of selling your business. An appraiser is going to give you the hard provable value of a business considering the value of all equipment, fixtures, vehicles, and intangible assets, and deriving the net present value of its projected future earnings. Whereas a broker is going to use real-world market comparables from multiple sources to figure out a realistic selling price based on accepted methodologies and multiple valuation formats. Because it doesn’t matter what any professional says a business is worth, all that matters is what the market actually shows a business can sell for.”
Selling your business can be a full-time job in and of itself, and selling your business the RIGHT way requires specific experience, skills, tools, and relationships. Too often, someone tries to just wing it or they grind away in the process just to end up frustrated, disappointed, and making costly mistakes. One of the things Jethro pointed out was the issue of confidentiality.
“There are a variety of reasons that you, as the seller, would want to keep the sale of your business as quiet as possible,” Jethro said. “If you’re careful, your employees, suppliers, vendors, and competitors won’t know your company is on the market until wrapped up the majority of the process with a qualified buyer. Being discrete can make marketing difficult. This is why working with a business broker is crucial. We can confidentially market you business through many avenues to qualified and interested buyers in a way that does not breach the confidentiality of our clients. Before a prospective buyer is given access to company information, they must sign an NDA that restricts their use of privileged information. This agreement prohibits disclosure of protected information to parties that have not been approved for access by the broker and/or seller.”
Jethro also spoke to us about the condition of the local market for buying/selling a business: “The market is still booming. Any business that is operating in the green and has at least three years of established history, is a sellable asset that someone will buy. I’ve noticed that SAAS (software as a service) companies are a very lucrative business to sell right now. I’d say the average amount of time to sell main street market businesses is 5 to 7 months, whereas companies valued over $3 million will take 6 to 12 months because there are more details to prepare for a successful release to private equity groups. Another trend I see is absentee owner businesses, an individual or corporation that owns a business without actually actively managing it, are selling quicker than businesses with an owner who is actively involved in the daily operations process due to being of interest to a larger pool of buyers interested in acquisitions as an investment.”
Clients enjoy greater access to financing and additional vendor options through No Coast Business Advisors, a national business brokerage specializing in sale and acquisition. Every advisor with NCBA has been a business owner, which gives them unique experience that allows them to understand other business owners.
In addition, Jethro recently completed all requirements necessary to become Nebraska’s only business broker to hold the elite Certified Business Intermediary (CBI) designation, awarded by the International Business Brokers Association (IBBA). Someone would have to go to Kansas City to find the next closest advisor who can do what Jethro does.
No matter which side of the table you are on, business transactions require a careful process that demands a lot of attention, and it’s impossible to go about it alone. You’ll need to have trusted advisors in your corner to assist you along the way. Luckily, there are so many experts and reputable companies right here in Lincoln to do just that. Don’t be afraid to pick up the phone and ask for help!