Steps to Buying A Business - Part Two

How to Identify a Business to Buy

Once you've decided that you're committed to buy a business, and decided on the type of business that you're both passionate about and can be profitable, you have to decide how to identify the business.  Fortunately, you can use multiple avenues, you're not straddled with one source.  The main sources of identifying businesses are brokers, intermediaries, buyers' agents, and 'FSBOs'

Traditional Business Brokers

Traditional business brokers typically have an inventory of small, main-street type businesses for sale that they represent.  These are typically businesses that have less than $500,000 in revenues, and are priced at $200,000 or less.  Commonly these brokers are franchises, such as Sunbelt Business Brokers and others.  They typically have offerings in small non-franchise restaurants, small retail shops, etc.  

This type of broker represents the seller, and the seller will pay a commission to the broker upon the sale of the business.  Typical commissions are 10% of the actual selling price, and the seller doesn't pay anything up-front, very similar to a real estate broker.  The average broker has 10 - 15 active businesses for sale (or 'listings') active at any time, with the understanding that only 2 or 3 will sell in any given year.  

Some business brokers are very good, but in many cases the brokers are under-experienced and rely on multiple listings to generate income.  For this reason, it's imperative that you get referrals before using a traditional business broker.  In this model, the seller pays all sales commissions.

Intermediaries

Another class of business broker is the intermediary.  These are usually credentialed professionals identified as CBI or CBBI.  Although they still represent the seller and not you as the buyer, their goal is to facilitate the transaction and help both parties to obtain a successful transaction.  

The intermediary typically represents only a few businesses at a time, and typically expects a 2 -3 year sales cycles.  These also represent sellers with revenues up to $10,000,000 with sales prices of $1,000,000 to $5,000,000.  In this model, the seller pays all sales commissions.

There are fewer intermediaries than business brokers, and most are independent and not franchised.  The best source of finding these type of brokers are CPAs, lawyers, and bankers.

Buyer's Agents

 Another choice is the Buyer's Agent.  The main difference here is that the agent is representing you, not the seller.  The agent will actively seek out opportunities that are right for you, even if they're not actually for sale.  They will typically charge you an up-front fee of anywhere between $2,000 and $10,0000 for the initial search, and some percentage of the purchase price at closing.  These types of agents are many times able to find the "hidden" businesses for sale, that may be much more appealing than the businesses that are publicly for sale.

Business FSBOs

A final class of businesses for sale are FSBOs, or "For Sale By Owner."  These are typically found in the classified ads of newspapers (the few that are left), trade magazines, and websites such as bizbuysell.com.  The upside to these listings are that there are no commissions paid by either the buy or sell side.  The downside is that there is typically no packaging, and the process is ad-hoc at best.

Keep in mind, all businesses are for sale at the right price, even if they're not listed - some of the best businesses aren't listed for sale.  And, if you're already a business owner looking to expand you business by buying a similar business, the cheapest way may be to simply recruit their best employees!  Of course, they may try to do the same to you.

In my next post, I'll discuss the initial steps after identifying a business to buy.

For more information, feel free to contact us!

B. Dane Byers, CPA, ABV, CFF

Bassett & Byers, P.A.

Partner

3701 Lake Boone Trail, Ste 201

Raleigh, NC 27607

dbyers@bassettcpas.com

(919) 303-1049