Perhaps yes.  Perhaps no.  You decide.  Should the broker or attorney involved require revisions to sign documents be signed again?  The professional is trying to avoid conflicts when the final documents are drawn including changes that were seemingly agreed.  People do change their minds and mis-remember, on all sides.  One party or both can be nervous and signature can calm their nerves.

Recently a buyer said to a broker ‘I know you want to keep track’ but we have to have some trust.  True, this would be best until one party loses trust or changes their mind.  Some transactions are totally wallowing in adversity.

The professional must feel their way through deciding when it is important and when not.  Erring on the side of caution is a best practice, e.g. getting the signatures.

Of course.  Everything has different perspectives and the buyer is no exception. She should be considering this:

1)  Know the business and don’t buy it without great comfort that it is as it is presented, where you are comfortable in knowing you can take/expand or enhance it, and that the price you are to pay supports the former, if not the later.  Use professionals to help you where you are less comfortable in the evaluation.

2) Pay the fair price at the fair financing terms. It is not unusual to ask the seller to support a share (at least) of financing.

3) Expect that you will have to present a solid net worth statement and credit report that demonstrates your ability to pay the owner in the circumstance of business failure.

4)  Secure the proper training and relationship with the seller that assures their continued willingness to reasonably answer questions beyond the initial training period.

5)  Routinely track your performance, correct and seek professional support as necessary.

6)  Pay as required.

If your performance is not as it should be and you can demonstrate that you have done everything correctly you will be in a much better position to weather economic downturns and seek support in the direst of circumstances.

Buyers, I know sellers, ones still have a claim through financing of a business, who have in the most dire situations

• moved in to take over businesses,
• restructure the financing to help the otherwise well-performing new owner, and
• elected to allow the business to fail.

Find other buyer tips at: http://dakinbusinessgroup.com/buy-a-business

Seller’s beware:  When you are selling a business have these rules:

1)  Know the qualifications of any buyer who proposes to have you finance the business for sale.   In many transactions, it is the seller who is financing a bulk of the sale price.  Before you, the seller, agree to the offer make certain the buyer is presenting their credit report and net worth worthy of your financing them and know they have the ability to run the business.  If you do not have this in advance, have in the offer the ability to look carefully at the buyer and an exit from the offer if they do not.

2)  Ensure that in the offer it states that a personal guaranty will be part of the final, closing documents, a personal guaranty that if the business can not support the payments to you that the buyer will through their personal wealth.

3)  If you can not be certain of 1 and 2 above, the seller should insist of outside financing or sell for cash.  The seller can mitigate uncertainty by having a reduced financed amount.

While adding these cautions for the seller, it is important to know that seller financing is a norm.  The more flexibility the seller has in this the greater the number of qualified buyers come to the table and the more likely the seller will get their price in the sale.

See more about seller financing at http://www.businessbookpress.com/articles/article147.htm

In the listing of the business, providing the prospective buyer with options for dealing with the real estate:

Offer the business for sale with a real estate lease at or below market rates with the opportunity to buy the real estate now or in the future.  Below market rates in the offer may not be wise unless it is the only way to have the business cash flow make sense.  It is unwise as it does not allow for the rent to be a negotiating point, securing the total package you want.  If you do offer the lease at below marketing rates, make it for a short term and perhaps with some business performance that triggers a higher rate.  When considering the rental amount for the lease, know that unless the location of the business is mandatory a buyer may flee as quickly as possible to a new business location.  (One need only watch the number of  moves businesses are making in this current economic environment to lower rental locations.  Also, many landlords are taking initiatives to reduce rents, hoping their reduce rent will keep them a viable tenant.)

The business-for-sale owner should be considering the entirety of the goal:  Sell the business with the right package to move on; have a viable tenant at the right rate over the long term; sell the property at the right rate at the right time.  Don’t allow pride of real estate ownership be detrimental to the entirety of the goal.  Also, know that the highest and best use of the real estate may NOT be the current business.   Be flexible in considering the sale of the business and outcome of the real estate in the transaction.

Professionals are best when they are working in the area of their expertise.   Business expertise,  valuations, operations and brokering, is complex enough, as is real estate valuation and brokering.  A business-for-sale owner should consider carefully their selection of broker(s).  When a lease is through a non-associated landlord, there is not much need for real estate expertise and the typical real estate professional does not know about valuation and marketing of businesses.  However, when determining the best lease and sale considerations for real estate owned by the business or business owner, real estate expertise IS important.  Know your professional’s qualifications.

Consider these implications of the real estate in the business transaction:

1)  If the business is put on the market ONLY with a sale of the real estate, the number of qualified buyers for the business is reduced because, likely, more cash is required of the buyer.

2)  If the business is put on the market as a lease at a rate that is higher than market, the prospective buyer may

• elect not to inquire deeply into the business because the cash flow the business puts off is not appropriate for the asking price or they recognize in a brief review that the owner is inflating the rent over market.  What else is being inflated?
• only be willing to buy the business with a lower lease rate, putting more pressure on negotiation points.
• only be willing to buy the business with no long-term lease agreement, looking for other lease options.

3)  Real Estate professionals are not (usually) business broker professionals and business broker professionals are not (usually) real estate professionals.  How can a business-for-sale owner ensure good advice?

4)  The owner of the real estate and business (whether direct to the business or underlying business owner) often has costs and cash outlays associated with the real estate.

5)  The underlying business owner has been enjoying generous rental income from the business.

6)  From time to time real estate markets are strong, benefiting either buyers or sellers.

What strategies can be implemented to resolve these issues?

ROI: Income (before distributions to suppliers of capital) for a period. As a rate, this amount divided by average total assets. Interest, net of tax effects, should be added back to net income for the numerator. (source-Managerial Accounting, Maher, Stickney, Weil 1994) Usually this is applied, in a larger organization to a division or a project.

In Wikipedia the definition is as follows:

“In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage rather than a fraction.” And, following, there are many examples.

Source: http://en.wikipedia.org/wiki/Return_on_investment

There are any number of ways of determining ROI but from a most simple standpoint a business buyer can look at the ROI from two vantages: One accounts for personal time spent running the business at a fair market rate. The other does not.

These examples demonstrate the difference.

Initial Investment: $200,000

Example 1:

Net to owner at the end of the year, not including owner wage salary: $100,000

ROI: $100,000/$200,000 = 50 percent

Example 2:

Net to owner at the end of the year, including an owner’s wage of $75,000:
$25,000

ROI: $25,000/$200,000 = 8 percent

I personally like the methodology of example 2 because it allows that if I take a job with some company and invest the $200,000 in the stock market, I would likely earn 8% on the investment PLUS my wage of $75,000. If I am not able to make in my own business a fair wage AND at least 8 percent, then, the happiness factor of being my own boss must be very, very high. Otherwise, I should take the job for the company.

Certainly recent economic conditions have taught us that there is no assurance in having a job or owning our own business.

Note: In this brief explanation, wage and benefits are assumed as one. In the declaration of investment, it is assuming a cash purchase of the business.

Mark, my other friend, just could not get his head around how to start a business from scratch. He invested $40,000 of his own money and borrowed from others to buy a business. His first year he had a fair market wage of $75,000 plus an ROI of 50%. Now, seven years later, all of the loans are paid back, his wage is $110,000 and he has an annual ROI of 25%. He too is a great entrepreneur.

The difference between Susan and Mark in this discussion is about preference and skill or not for starting a business or having and investing money to buy a business. Neither is better or worse, merely different.

My personal preference is for buying a business, though I have started them as well. It is hard work starting from scratch. Such a complex plan with many, many activities, some of which I feel inept at. Why not take the existing foundation and build on it? Susan will say that building a business with only $10,000 invested gives great satisfaction and means, usually, a greater return on investment…though the cash in-pocket can be less to begin with.

Perhaps the sophisticated mathematician wants to do the ROI over the extended period to see who is ahead. It will vary greatly with every business, varying with investments along the way, changes in market place etc.

The exploration of a business-for-sale or business-start-up transaction is more than merely a mathematical calculation it is a calculation of personal interest, skills, resources available, and more.

When exploring a business for sale, one of the first questions a prospective buyer should ask is “can I be happy doing this, running this business?” If the answer is “I don’t know” or “I am not certain,” pause before you make a move and reconsider. Why waste your and the seller’s time while exploring the business opportunity if you won’t be happy? Why invest if you have a clear dislike for the product or service or tasks.

The first business broker I met said “remember, most small business owners often find themselves sweeping the floors at the end of the day.” My personal experience of small business ownership has found me as the leader, technology repairperson, bookkeeper, collections, purchaser, personnel manager, sales person, garbage take-out person, and more. If I did not like the heart of the business, it would have been difficult to do all of these things, since some are not my favorite tasks.

As a routine the business owner should glow when they talk about the business. If the owner cannot tolerate the work or the purpose of the company, it will be hard to get into work in the morning and energize the company as only an owner can do. Unhappy owners can quickly allow a business to flounder.

Three simple business-for-sale pre-purchase tips:
1. Know yourself, your talents and interests.
2. Be clear about the product/service before beginning your exploration.
3. If you hate the product or service and do not see a future that is appealing, don’t continue the exploration and don’t buy.

The listing agreement said…

The offer said…

The various amendments said…

The buyer or seller says:  “but does it say this?”  The wise broker will say at the very most:  “My interpretation of the language is this….but you should check legal and accounting counsel.”

In a recent transaction the seller said, “I learned in my last business-for-sale transaction that asking the attorney or the accountant meant it cost me more money.  So, this time I did not engage either.”

In another transaction, the seller said “you piss me off because…”  Then, when checking the records, the professional they paid  had given the instruction that they accepted and then, subsequently, “piss(ed) me off…”

Reality: The buyer and seller (Principals) can not relinquish responsibility to the broker or seller/buyer to be responsible for the Principal’s decision.  The Principal is responsible and should use professionals to advise them. It is important to take the time to review.

Wisely spend money on these professionals, CPA and attorney, but don’t throw it away.

Perhaps the Principal is not a word person but nonetheless, stretching to understand is important.