Buying A California Business In The New Economy

Buying A California Business

In The New Economy

(Fresh strategies to successfully buy existing companies,

business opportunities and franchises in California’s

dramatically changed small business for sale marketplace.)

By

Peter Siegel, MBA

Published By:

Peter Siegel, MBA on Smashwords

Buying A California Business In The New Economy

Copyright 2013 by Peter Siegel, MBA

All Rights Reserved

This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each recipient. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.

Reviews:

* Anyone who wants to buy a small business in California should read this book first. Even if you've bought a business before, it's important to know how the market is changing and how to adapt.  Courtney Hood, Business Buyer

* Invest in the book 'Buying a California Business in the New Economy.' You'll get that investment back many times over with the tips and insights found in every chapter. Chris Lazuric, CBI, Broker

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Other titles by Peter Siegel, MBA

• Financing the Purchase of a Small Business Purchase in the New Economy <Link>

• Buying and Selling Small Businesses in the New Economy <Link>

• Selling a California Business in the New Economy

TABLE OF CONTENTS

Title Page -Published by Peter Siegel, MBA for Smashwords

Introduction

You’ve undoubtedly noticed that economic indicators are giving us mixed signals, and creating more uncertainty about the state of our economy than Californians have experienced for quite awhile. In fact, this type of economic climate has not been experienced in California during all the decades since the Great Depression. And yet many of us, despite the challenges and uncertainty, want to buy a business. How do we do that successfully in an economic environment that we haven’t seen before? Besides courage it takes some smart planning and creative strategies. Here’s how innovative Californians are successfully finding, negotiating and financing their purchases of good small and mid-market businesses.

1. Welcome to the New Economy

• What is Meant by the New Economy? (We’re not returning to the economy we knew before the recession)

• The New Economy for Small Business Transfers (Growing numbers of unemployed or underemployed people meet retiring baby boomer business owners)

• What the New Economy Means for Small Business Buyers – Three Changed Fundamental (Uncertainty, Unrealistic Expectations, Uncooperative Lenders)

• Unprecedented Changes (There hasn’t been a market quite like this before)

• Is This a Good Time or a Bad Time to Buy a Business? (Looking back on this time from the vantage point of five, ten or more years from now)

2. Rules For Business Buyers to Succeed In the New Economy

• Five Buyer Characteristics That Lead to Success (Five rules to follow)

• Five Powerful Strategies To Find The Right Business Before It’s Even Offered For Sale (More than half of the best businesses for sale aren’t being offered publicly)

• Learn a Great Weapon to Use in Negotiations With the Seller of A Desirable Business (A lot of deals that died at the bargaining table might have been saved by a buyer who knows how to achieve a win-win

3. What’s a Business Worth In the New Economy (Understanding valuations of small California businesses in 2013 and beyond)

•Familiar Valuation Approaches (Three classic valuation ideas: Comparables, Replacement, ROI)

• Influence of Market Pressures and Economic Conditions on Market Values (It’s important to account for the surge of buyers and growth in size of the retiring generation of business owners)

• What’s the Value of a Business? (Prepare for more surprises in the New Economy. And don’t expect valuation metrics to tell the whole story)

• Is Inventory Value Part of the Price? (Adding the cost of inventory can change the ROI calculation)

• How Smart Buyers are Bridging the Value Gap with Sellers (Sharing the difference can replace splitting the difference)

• The Important Principal Every Buyer Must Understand About Business Value in the New Economy (About buyers who overpaid their way to success

4. What Kind of Business to Buy Today For Success Tomorrow

• Business Characteristics That Are More Important Than Ever (Whether a new or old idea for an enterprise, some business factors remain important for the New Economy)

• Consider What Sectors of the Economy Are in Growth Mode (Ten trends that reveal what businesses are well suited to the 21st Century)

• Business Opportunities - a New Category of Offerings, Including Work at Home Companies (The advantages and draw backs of paying for a business idea and the tools and methods to implement it)

• Is the Company Equipped to Function Well in this Century?

5. If You Want to Own a California Business, Is it Best to Start From Scratch?

• Start-from-scratch Benefits and Drawbacks (Benefits of starting a business are the reasons against buying an existing business)

• Buying a Business Benefits and Drawbacks (Good reasons to buy a business might be the same as reasons not to start your own)

• Key Factors to Consider (Time, Cost, Expertise)

• Crunching the Numbers (Getting a realistic look at the options)

• Challenging Common Ideas (Some beliefs about which is better are based on the wrong information or faulty reasoning)

6. Is a Franchised Business Still Considered a Good Investment In the New Economy?

• Determining the Success of a Specific Franchise in the New Economy (Don’t believe that all franchises are either bound to succeed or destined to fail. Likelihood of success varies from one company to the next)

• Get to Know Franchisors; It is Worth the Effort (Why it pays to invest time and cost to visit the franchisor )

• What to Learn About Prospective Franchisors (When conducting an interview with a franchisor, there are some important questions to ask)

• Franchise Financing (Franchisor might be a good source of financing, but only if the company approves of your deal)

• Is a Franchise a More Secure Business Purchase Than an Independent Offering? (This is the question many ask and the answer is: It depends!)

• Are You Good Franchisee Material? (One factor that determines the success of a franchised business has to do with the ability of the franchisee to follow the company’s system)

7. Dealing With Deal Structure For Today’s Small California Business Purchase

• Growing Popularity Of The Earn-Out (Possible solution when buyer and seller can't agree on price)

• Earn-Out Alternatives (Other ways to compensate a former owner for an increase in business after sale)

• Other Partnership Arrangements (There are alternatives to a full sale if parties aren't ready to complete a deal for the entire company)

• Using Seller Financing (A more common strategy in the New Economy)

• Anticipating Lender Requirements With Seller Involvement (To get a deal financed by a conventional or SBA-lender might require careful structure of the carry back loan)

• What About Tax Implications? (Buyer and seller need to report identical price allocation schedules or risk IRS intervention)

• Inventory Purchase Strategies (Why buyers might not purchase all of the company's inventory at close of escrow; what other arrangements are used)

• Long Term Deal Planning (The ESOP can be an ideal way to structure a business sale to employees if planned long in advance of the transfer)

8. Should You Commit to an All Cash Transaction?

(Yes, sometimes the best purchase tactic is to give the seller all cash. Why to put all the money up front and how to do it. )

• Do the Math (Start by calculating the costs and understand the benefits of leverage)

• Good Reasons to Meet the Full Purchase Price With Cash (If you encounter one of these situations when searching for a good business to buy, entering into an all cash deal might be the best strategy to claim it)

• Where the Money Comes From (Institutional and private lenders)

• Risks of an All-Cash Business Purchase (Besides the problem of getting all those fresh bills together in one place, you might be negotiating away some of your business success insurance)

• Protecting Yourself in an All-Cash Deal (The cash out purchase of a business does come with risk, but they can be reduced if the buyer prepares intelligently)

9. New Rules For Financing Business Purchase With Financial Institutions

(There is a surprise or two in store for the buyer who thinks that finding the right business is step one, and getting the money to buy it is the second step)

• Find Out About the Money, Then Look for Business (Although this sequence seems backwards, it often is the smartest strategy in the New Economy

• Is SBA Loan Program the Best Funding Solution? (The SBA won’t lend you any money directly, but the agency can help you get needed business purchase cash with reasonable terms. The benefits of seeking an SBA-backed loan)

• Getting Cash from Financial Institution Not Backed by SBA (If your circumstances warrant it, looking for money outside of the SBA network of lenders may be the best idea What are those circumstances?)

• What You’ll Need to Qualify (Some requirements to qualify for a loan to buy a business are standard, some depend on the type of lender. The smart buyer targets the right kind of lender to save time, and that can mean saving a deal)

• Common Errors to Avoid (If you received a dollar every time someone made an avoidable error that ruined their chance of getting a business purchase loan from a financial institution, you’d have enough cash to dominate the market)

10. Where to Get Purchase Money if Financial Institution Isn’t the Answer

(A bank or loan company, whether or not it offers SBA loan packages, is not the best solution for everyone seeking to raise business purchase funds. Fortunately, there are alternatives)

• Private Money Sources (Hard money may be more expensive, but it often can be accessed quickly, and is a second choice if the banks won’t cooperate)

• An Old Idea That’s New Again—Funds from Friends and Family (People forget to talk to those close to them about their need for money to buy a business. Whether it’s a good idea or a bad idea depends on each person’s circumstances)

• Using Retirement Funds Without the Tax Bite (Not a new idea, but starting to be used more and more as entrepreneurs learn about its benefits)

• Equity Funding (The strategy for raising purchase money without actually having to borrow any money)

• Crowd Sourcing (This approach, a product of the social network movement, offers a great way to get some extra funding without signing loan documents or giving away part of the company)

• Other Creative Funding Strategies (For example, how about letting the company’s vendors help to finance the deal?)

11. How to Use Professionals to Purchase a California Business In the New Economy

(Working effectively with brokers, attorneys and other business transfer professionals, is important to a buyer’s success in finding and closing a good business purchase opportunity)

• What You Need from Business Sales Intermediaries (Not every broker or agent is going to lead you to the right business or help you achieve a deal. You need to know who can provide real service)

• Growing Need for Niche Advisor, Specialty Loan Broker (Increased challenges involved in getting purchase financing means the role of a loan broker can be critical)

• Your Attorney’s Job Is to Help Make Your Deal More Secure, Not Destroy It (It’s vital for you to manage your legal representative rather than allowing him or her to manage you)

• Using Due Diligence Experts Correctly (It helps if this professional knows more than you do)

• Seek Experienced Business Escrow Holder (This is no job for a beginner)

Appendix A: What a Buyer Must Know About a Business that Seems a Good Purchase Candidate (Questions to ask the seller, then fact check the answers)

Appendix B: Frequently Asked Questions

(Here are 25 questions that keep coming up in my discussions with clients and others in the industry, along with the answers)

About the Author

•••••••••••••••

INTRODUCTION: New Economy Presents Problems and Opportunities For California’s Buyers of Small Businesses

Anyone who reads, watches or hears the news knows that the California economy is in struggling mode. We haven’t experienced this much economic distress since the Great Depression. Starting with the mortgage meltdown in 2006 and 2007, we’ve seen how the marketplace where companies and consumers do business is severely impacted by a succession of serious problems: the banking crisis, the drop in consumer confidence, the deficits in government, small business and personal budgets, slowdown in most every sector of the economy and a general mood of uncertainty. This last ailment—the uneasy feeling that we don’t know what to expect—has been apparent from the beginning of the recession. The economic anxiety persists as we watch the unemployment numbers hover well above where they need to be for a healthy economy, and we observe the way the banks are investing in their Wall Street portfolios rather than plowing funds back into the community in the form of business expansion and acquisition loans. Business people are pleased to see gains in the housing market and in stock prices traded on the exchanges, but worry about whether we are observing lasting trends or the first puffs of air into a new bubble. Meanwhile, the public opinion pollsters can't decide about whether consumers are spending or saving--whether we are confident or anxious about the future of our economy. These dynamics are taking place against the backdrop of the heated rhetoric and conflicting ideas expressed by our representatives in Washington as they do battle over the right remedies for the fiscal cliff crisis, the deficit crisis, the sequester crisis and other looming crises. No wonder people are confused and uncertain about what's happening in ithe economy.

This sense of not knowing what to expect has hit the small business sales market with enough force that California’s rate of small and mid-sized business transfers dropped by more than one third from 2008 when 21,689 transactions were completed, to the next year when 14,277 deals closed successfully. The annual count has hovered under, or at about 14,000 every year since.

In addition to the concern about what will happen down the business road, which deters business owners/sellers as well as buyers from moving forward with their plans, there also has been a deal-throttling hesitancy on the part of the financial sector