Start & Operate Your Own Lucrative Business Brokerage Practice (Full-Time or Part-Time) RGL Publishing

Transcription

1 Build Wealth & Financial Independence Start & Operate Your Own Lucrative Business Brokerage Practice (Full-Time or Part-Time) RGL Publishing

2 Welcome Congratulations and welcome to the world of Business Brokerage. Whatever reason motivated you to take steps in that direction, I can assure you that you made the right decision. As you follow the advice in this course and build your practice, you will start to really realize that this profession offers a golden opportunity not found in too many places in the business world. If conducted properly, you can (and will, if you follow the advice given in this course) gain momentum to build a multi-million dollar organization if your goal is to do so. I wish you all the success that can be yours if you take the time to apply the Business Brokerage principles taught in this course. Sincerely, RGL Publishing

3 CONTENTS 3 Welcome Introduction to the Business Brokerage Profession QuickStart Guide: How To Jump-Start Your Practice And Get Your First Sale Fast How To Analyze The Financial Statements Income Statement Income Statement Analysis Balance Sheet Cash Flow Statement Cash Flow Statement Analysis Working Capital The Buy / Sell Process The Basics of Buying a Business Evaluating The Purchase of a Business The Business Case The Financial Case Comparable Business Valuation Analysis Discounted Cash Flow Combined Business Value Due Diligence Final Valuation Estimates Overview of Legal and Tax Issues Assets vs. Stock Purchase Practice Marketing Using Piggy-Backing to sign-up clients Use The Neighborhood Walk Technique to get listings Signing-up Sellers With Traditional Marketing Tracking Seller Leads Meeting with the owner How To Prepare The Business To Quickly Attract The Right Potential Buyers How To Identify And Land Your Fist Qualified Buyer Tracking Buyer Leads How To Help Negotiate The Sale During Due Diligence, Site Visits, Etc. Note On The Offer How To Handle The Offer How To Close And Get Paid Businesses That Tend To Sell Quickly Broker s Guide To Wealth Building With Business Brokerage 8 Practical and Quick Ways To Finance A Purchase With Little or no Money Down Commission Investment Small Business Management For Business Brokers Maximize Your Equity (& Wealth) Through Growth How Much is Your Business (And Wealth) Growing Build An Empire Through Acquisition Selling The Business And Cashing Out Appendix I: Managing Your Practice Appendix II Practice Management Forms; Practice Marketing Documents Glossary

4 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

5 Introduction to the Business Brokerage Profession 5 The Business Brokerage Profession Who are Business Brokers and what do they do? Business brokers are intermediaries between owners who want to sell their business (or businesses) and potential buyers who have expressed interest in buying those businesses. Typical duties of a Business Broker Finding business owners who want to sell their business RGL Publishing Finding potential buyers to purchase a business from a client Valuing the business Preparing an offering document to attract qualified buyers Helping a buyer raise financing to purchase a client s business Helping with Due Diligence activities Being the intermediary between the buyer s lawyer and the seller s lawyer Helping with closing activities What make this profession a critical piece of the Small to Mid-size Business Market? The U.S. Department of Commerce estimates that there are sixteen to eighteen million businesses in this country and that 20 percent (or 3.2 million to 3.6 million) are for sale every year. Of those businesses that are for sale, about 250,000 of them are actually sold each year! In addition, research has shown that for each business listed for sale, there is approximately 20 buyers who have expressed an interest in purchasing it. This, of course, is due to the fact that it is far less risky to buy an on-going business than to start one. Furthermore, baby-boomers (a lot of them former company executives) are skipping retirement and going right into a business of their own. The easiest entry point, as we know, is through the purchase of an existing and profitable business.

6 As one can see, the drivers cited above make the profession a must for busy owners who want to sell and the multitude of buyers who are trying to buy a business of their own. The more experienced a broker is, the more value he or she adds for both buyer and seller, which will translate into a higher level of success. Of all the constituencies, the conclusion is that Business Brokers are most valuable to sellers, as can be seen from the list below: Sellers usually does even know how to correctly value their business. Contrary to what one may think, sellers often can t present the business to buyers in terms that would make their proposition the most attractive to buyers. Seller don t have the time to attract qualified buyers. Because they can t focus on selling the business, a seller can waste a lot of time with unqualified buyers who can not even afford to buy the business. And the list goes on In other words, sellers can t sell their own business and will need your help. Selected Industry Statistics The average percent commission is 8% to 12% 47% of Business Brokers are Sole Practitioners 53% of Sole Practitioners reported gross commissions in 2005 in excess of $ 100,000 Ranked by in the Highest Income Potential Category "10 Best Small Business Opportunities for Business Brokerage: Article Link How a Broker earns money RGL Publishing There are many ways that a Business Broker can earn money. The following is a list of lucrative activities in which a broker can engage to earn substantial amounts of money: 6

7 7 Brokering the sales of small businesses. Charge commissions between 5% and 12% of the sales price and set a minimum fee of $6,500 to $12,000, depending of the sale price. Co-Brokering sales with other business brokers. Expand your sales potential through co-brokering arrangements. Establishing solid relationships with Repeat and/or Corporate buyers. With businesses changing hands every five years on average, you can have a great relationship with many past buyers and sellers assisting them in future transactions. Earn fees by helping to Finance the purchases you broker. A broker is obligated to help the seller in any way possible and one of those is to help qualified buyers secure necessary financing and in the process earn a fee for facilitating the financing. Earn fees by providing Valuation services to owners before they sell. Some valuation experts charge $5,000 or more for this service and there is a need for it. Earn fees by writing business plans for owners who want to raise financing. Anyone looking to raise money from banks or investors have to have a business plan. 99% of business owners either don t have the time, or do not know how to write business plans. Skyrocket your fees with Commission Investment. One of the sweetest rewards of business brokerage is that you can own a piece of a never ending variety of businesses, without investing any of your own money. This is the easiest way to build substantial assets even if you have no money to start. Trade Organizations

8 Licensing Requirements States With Requirements AK, AZ, CA, FL, GA, ID, MI, MN, NE, NV, OR, SD, UT, WA, WI, WY: Real Estate License Required IL: Only a Registration Process is required States With No Requirements There are no requirements for all other states As the law changes from time to time, be sure to check with your local County Clerk s office or the Trade Associations listed above

9 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

10 QuickStart Guide: How To Jump-Start Your Practice And Get Your First Sale Fast Quick Start Steps Although a detailed, step-by-step approach to selling your first business is covered in this course, those who are totally impatient and want to jump right ahead, the numbered paragraphs below will give you a fast head start: 1. Become thoroughly familiar with buy/sell process by reading A Five-Step Approach To Buying A Small Business (3 5 days) 2. Reflect on how you want to build your practice. Do you want to grow it fast or slow? Do you want to be among the top earners in the field and earn a minimum of $150,000 a year. Just think about what you desire to accomplish, taking your time commitment and family obligations into consideration (1 3 hours) 3. Fill out Overall Personal Income Goal Commitment For First 30 Days and My Commitments For The First 30 Days goal sheets based on step 2 above (1 hour) 4. Make a list of no more than 25 businesses in your area, which you feel would be fun for you to work for. Or, businesses you would personally be interested in buying (use the sheet on the included in this guide). You may have to walk around and get an inventory of businesses operating in your vicinity (5 10 days) 5. Use the list above and simply call or visit the owner (do not send mail, it will probably be a waste of money). The best way to approach them is to simply tell them that you have a client who is seriously looking to buy such a business and you were wondering if he/she would be interested in a sale. That the door opener! Your next move will depend on the response you get. By the way, once you get your first seller, just focus on getting that one business sold. You can work on more than one deal once you become comfortable with the process (2 3 weeks) 10

11 11 6. If the answer is positive, put the assignment in writing by asking the owner to sign a Fee Agreement. Make sure he/she understand your fee structure that you will not get paid until the business is sold> In addition you have to let the owner know that this is not an exclusive agreement (you can request exclusive agreements once you become experienced). Finally get preliminary financials (e.g. total sales and expenses for the past three years) 7. Using the templates you received with your package, create a business profile sheet based on the financial data you got from the owner (1 day) 8. Once you have your template, do the following (90 days or more): a) Call every single lawyer s and accounting office in your area and ask them if they know of someone interested in buying the business b) Go on bizbuysell.com, find brokers in you area and ask them if any of their clients is interested in buying the business c) Find all similar businesses in neighboring areas (make sure you do not contact businesses that near the one you re selling!) and ask them if they are interested in buying the business If you do this daily, I can almost guarantee that you will soon find one more people interested in buying that business. Be sure to have interested buyers sign a Confidentiality Agreement before you give them any details or introduce them to the owner. If you have more than one buyer, they will filter out as the process progresses. You will need to manage to process flow and schedule meetings with the owner and site visits. You should also communicate regularly with the owner in order to keep him/her informed of your progress. Important: Remember that the owner is under the impression you already have a buyer. So be mindful of your words when discussing your progress about the transaction.

12 Start Your Practice The Right Way & Sell Your First Business Fast What You Should Do First 1. Assemble your package as follows: - Seller sign-up documents - Buyer sign-up docs - Practice marketing kit - Practice management kit - Business financing kit - Business valuation Excel Workbook 2. Read Buying a Business With Little or No Capital How To Sell Your First Business in 6 Months or Less Introduction This program assumes that you are starting from the very bottom, with absolutely no money to invest in marketing, no equity in your house which you can use to rent office, no 401K or savings. The only requirements to making it big as a Business Broker are: 1. Patience (it normally takes from 3 to 6 months to sell your first business) 2. Perseverance (consistently applying what you will learn here) That s all. If you can commit to the above, we can guarantee that you will be extremely successful as an independent Business Broker. Your Business Brokerage Plan The plan outlined here calls for you to receive your first success fee paid to you in 6 months or less. Therefore, you need to stay totally (200%) focused on accomplishing the tasks at hand, which is to: Sign-up your first qualified seller (2 to 4 weeks) Prepare the business to quickly attract the right potential buyers (2 to 3 weeks) 12

13 Identify and land your fist qualified buyer (4 to 13 weeks) Help negotiate the sale during due diligence, site visits, etc. (2 to 4 weeks) Get the transaction to close and get paid your first check (1 day) 13

14 How To Sign-Up Your First Qualified Seller (2 to 4 weeks) Here is a simple fact: Things are not as complicated as other people have you believe. In other words, things are as complicated and as difficult as you believe they are. What is the point of sayings these things? Well, landing your first business to sell is not, and should not be, difficult and complicated. A client will not come to you and ask you (at least at the beginning), but there is one very simple technique you can use to land your first business in a week or less. First, pull out your Listing Agreement Form, put it in a folder and take it with you everywhere you go. At that point, you need to decide what fee you will be charging for helping a seller to sell a business. You don t need to write it anywhere, Just make a mental note so that when the seller signs the Listing Agreement you can write it on there. I personally recommend charging between 4% and 7% depending on the type of business, with a minimum payment between $5,500 and $7,500 due to you when the business is sold. That percentage and minimum payment must be clearly presented on the Listing Agreement and disclosed to the seller during your sign-up meeting. Never hide this requirement as you will get in trouble. Always be upfront and honest with all your clients. Second, as you go about your business every day, every time you pass by a business, just walk in and courteously ask to speak to the owner. For now, don t worry about the size of the business. In the future, you may become selective and not deal with businesses unless they are of a certain size, that is they have a minimum revenue and/or profit margin. 14

15 15 When you walk in and ask for the owner, some people may be suspicious about why you want to speak to the owner. But re-assure them by being very frank. Just say that you want to know if the owner wants to sell the business and that you may be able to help because you have contacts that have expressed an interest in buying the very type of business that they own. Sometimes you will find out that you were actually speaking to the owner who just didn t want you to know that he/she is the owner. If the owner is there and is interested in selling, just introduce yourself as a business broker with a possible interested party to buy the business. Then, ask him/her what is a good time for you to come back and spend about 30 minutes to go over the details and collect some information that your potential buyer might want to know. When you go back take the following forms with you: Listing Agreement Form Business Profile Form Broker Confidentiality Agreement The section below titled Meeting with owner will go over the details of what you need to do during that meeting with the owner. If the business owner is not there, find out when would be a good time to call or stop by again. Be sure to get a number so you can call back and leave your name and a phone number. You don t need to worry about business card. No need to spend money on things that will not bring in money. Business cards are no needed to get your first deal and there is no need to spend money you may not have. If the owner is not interested, simply thank him or her and go on the next business. However, do not

16 leave without giving him or her your phone number. Often, owners do not want to discuss these things in front of employees, but will call you later when they re alone and can ask you questions. As you can see, getting your first seller is very simple. I guarantee that you WILL get your first listing in a week or less if you do that. By the way, this is exactly how I landed my first business to sell. 16

17 17 Meeting with the owner During your second meeting, you are going to do the following: 1. Explain to the owner that you have a prospective buyer and that you may be able to help him or her to sell the business. You re not lying because there are in fact numerous prospective buyers out there. You will just need to find one of them. However, you will need his/her commitment so that if you find someone who buys the business you will be paid a fee based on the sale price of the business. To solidify that commitment, you will ask the seller to sign the Listing Agreement Form. 2. In return for the trust that the seller will place in your ability to bring in a buyer, and for all the confidential information you will be gathering about the business, you will sign the Broker Confidentiality Form and give it to the seller guaranteeing that any information you obtain from him or her for the purpose of selling the business, will be kept strictly confidential and will not be given to anyone but qualified buyers that you have screened. 3. Fill out the Business Profile Form by interviewing the seller and asking all the relevant questions required to fill the blanks on that form. You need to get as much information as possible in order to avoid having to call the seller for more information when you find your buyers. The only time you want to call the seller after this meeting is to make an appointment to bring a prospective buyer. Note: The forms provided to you with this program are all self-explanatory. They are the backbone of your practice and all you need to do is carefully read them and become familiar with them. During the interview if you ask all the necessary questions to allow you to fill out the forms in their entirety, you will come out with everything you need to

18 move to the next step without having to call the seller. 18

19 19 How To Prepare The Business To Quickly Attract The Right Potential Buyers (2 to 3 weeks) Once your meeting is over, it is time to create a nice profile sheet, which you can hand out to your prospective buyers. Using the information you read from Buying A Business With Little Or No Capital, you should be able to value the business for yourself and determine whether the owner s asking price matches your valuation. If there is a big gap, you need to resolve it with the owner and come to a consensus on the price before even approaching potential buyers. You will not be able to efficiently sell a business unless you believe the price is right. If the price is too low, you can feel free to increase the asking price you present to buyers. Take a neat Business Profile Form and transcribe the information you collected from the seller. That is what you will use to make a copy for each buyer you get. Normally you would do this with a computer if you had one. You can also use the public library if you like. But again, that s not important. What is important is for you to have accurate information you can provide to the buyers. Once you have a neatly prepared Business Profile Form you are ready to find a buyer. Remember that the most important step at this point is your interview with the seller to collect the necessary information. If you had a productive meeting with the seller, you have your Listing Agreement Form signed, you basically become a shareholder in the business. If you think about it, this is a fascinating part of the Business Brokerage industry. Your share in the business if you sold it for the owner is equal to your commission percentage. This is the only way in the world you can become part owner in a business without having to invest money in it. All

20 you have to do now to cash out your share is to find a buyer. Looking at it this way, it is in your best interest to get the best deal you can get for both the seller and yourself. Think of yourself as part-owner and your motivation level will go up to the roof. 20

21 21 How To Identify And Land Your Fist Qualified Buyer (4 to 13 weeks) Here again, I have to say that things are as difficult and/or complicated as we believe they are. Finding a buyer for your client is not much different. Here is an easy way to find a buyer. Walk around the neighborhoods bordering the business you are selling. Note that it is not recommended to do this in the same neighborhood, unless the seller has given you clear authorization to do so. Due to competition, confidentiality issues, the owner may not want his neighbors to know that that he or she is selling the business. And, there may be various reasons for this. My recommendation is to go to the next town or several blocks away from the seller s business address. Every time you see the same type of business that you re selling, ask that owner whether he/she would be interested in expanding by buying another location. Personally, this is what I do first. Although I normally go a few miles away from the neighborhood where the business I am selling is located. Usually the seller will let you know if he or she does not want to sell the business to a particular competitor. In addition to speaking to owners of the same business, owners of businesses that complement the one you re selling will also be very interested. For example, if you re selling dry cleaning, Laundromat owners may be interested. This gives you a larger population of potential buyers. So here is my strategy when looking for a buyer: I speak to every single owner of the same business within a wide radius. I usually find at least two or more interested parties, depending on the business that s being sold. Laundromats are good candidates for this approach.

22 I then speak to all owners of ancillary businesses. These are businesses that would fit as a part, or extension, or additional locations of the business I am selling. For example, if I am selling a Car Rental business, I would approach all car rental operators in a radius spanning about 1 to 5 miles around the business I am selling. In addition to that, I would also talk to all gas station owners. If that didn t work, I would speak to all car wash owners. This approach never fails. Here is why I do this. Advertising the business for sale, or speaking to everyone about buying the business is bound to waste a lot of your time. Some people would need to learn the business before they even think about making an offer. You do not have time for that. When you approach an owner of the same type of business you re selling, he/she already understands the business, will know what to look for and will know pretty quickly whether that business will make sense to buy. You want quick decisions and the best way to get that is to deal with knowledgeable people. And the most knowledgeable people I know are current owners of the same type of business, or businesses that complement theirs. That, my friend is how you will get a solid buyer for your client in a very short time. One more note about my approach: at the beginning, I am asking that you only deal with one seller and one buyer at the time. That is, once you get your seller, stay with the business by dealing with only one buyer at the time. If that buyer des not work out, you will simply move on to find the next one. However, if you follow my advice above, you will normally be dealing with the best candidates to buy the business from your seller. 22

23 23 How To Help Negotiate The Sale During Due Diligence, Site Visits, Etc. (2 to 4 weeks) Once you have a qualified buyer (and another owner of the same business IS qualified) you re ready to start getting an offer you can present to the seller. Once you have that offer you can help with the negotiations. Usually those who understand the business will have a pretty good idea of how much it is worth and will make a sensible offer that your seller will certainly consider. Here is how I do it: 1) I do not push for a sale, but simply present facts (which you gathered from your first meeting with the seller) 2) I ask the buyer to sign a confidentiality agreement. Use the Buyer Confidentiality Form for that. You can do that either in person or by fax. I like doing it in person because someone may be a broker trying to get an easy listing. And if you do not have an exclusive listing, you ll have no recourse to stop him or her from stealing your listing. And giving that this would be your first listing, it is most probable that you will not have an exclusive. Once you become experienced at it and you have fee money coming in, you should only work on exclusive deals. In those cases, the seller is bound to pay you a fee whether or not you sell the business. 3) Once you have a signed confidentiality agreement, you provide the prospect with a neatly completed Business Profile Form. 4) At this point, you may feel like making a case by telling the buyer why it makes sense to make an offer and buy the business. DON T! Just wait. You will be meeting with the buyer and will be able to get visual clues from him or her. Buying a business is a big undertaking and persuasion does not work. Business people only work with financial numbers that

24 make sense. A broker s opinion is not going to change that. A good business is one that generates a profit and the only thing you can do is to present a profitable business. The numbers will sell themselves. The questions will start coming. Answer in all honesty the questions you can answer. Don t push or prove anything. Simply answer the questions. The buyer relies on you for accurate information and will not make an offer if everything is not absolutely clear. Just be totally sincere. If you don t have the answer to a question, write it down and tell the buyer you will contact the seller to get and answer as quickly as possible. At that point, if there are so many questions to which you do not have an answers, suggest a meeting with the seller. That always work for me. Don t expect to get an offer the same day the seller meet with your prospective buyer. What you want to happen is that the buyer thoroughly analyzes the information you provided. My experience has been that the more questions you get, the more interested the potential buyer is. As mentioned before, you will never get an offer in one day. Setting up a meeting between the two parties is what you re aiming for. I can assure you that an offer, if there is going to be one, will immediately follow the meeting and sometimes happens during the meeting. You can also expect the buyer to request additional information, such as a copy of income tax, income statement, possibly copy of the seller s current lease agreement. As the requests come in after the offer, simply provide them to the buyer. If you do not have the documents requested, consult with the owner. At that point, you want to make sure that all required documents are promptly delivered as the buyer s accountant may be conducting due 24

25 25 diligence. In addition, you should ask the buyer to feel free to contact the seller directly if he/she need something urgently and you re not readily available. If you do your job properly, you will instill trust and confidence in both buyer and seller and no one will try to do a transaction behind your back. That occasionally happens to pushy intermediaries. Don t be a pusher as mentioned before. Let the financial status of the business sell itself and let the transaction flow. Note On The Offer There are two ways that the offer may be presented. a) The buyer may make a preliminary offer contingent upon satisfactory due diligence. (You should by now be familiar with all these terms as I am assuming that your read Buying A Business With Little or No Capital, which was the first thing you were asked to do when you received your package. That would most likely be followed by an adjustment in offer and/or asking prices based on the buyer s findings. Possible price adjustments also come from the fact that the seller has debt and the buyer may accept to assume them. There are many reasons why the buyer may want to adjust the price. Handle them as you receive them. However, always remember that both buyer and seller look to you for advice. You can help by providing light on recent sales of similar businesses in the area, if you know that information (Warning: Don t make these up!). Using your valuation workbook, you may want to create a free valuation analysis for both the seller and buyer. The Excel Valuation Workbook that comes with your package should make this an easy task for you and will add value to the services that you are providing to your clients. This program uses criteria based on IRS rules and is a solid foundation

26 for valuing any business. Be creative. However, above all circumstances, be honest, clean and straightforward about your opinion of the business. Remember, do not push the sale. You are not selling anything. You are simply being an important intermediary providing a valuable service to both sides. b) The offer may also come after the buyer conducts Due Diligence. If Due Diligence and valuation prove the business viable, the offer will certainly come in. Both possibilities can result in a closing. Some sellers may want a signed offer before allowing the due diligence. However, at any point before the closing, both parties can walk away. So it is up to you to manage the transaction flow in a way that will encourage the seller to provide as much accurate information as possible, while keeping the seller moving through the Due Diligence and valuation process. How To Handle The Offer Offers are easy to handle. All offers are usually accompanied with a good faith deposit check from the buyer (normally $1,000, although that amount does not represent a commitment). You should deposit this check in your business account, or if you prefer, with an escrow company. But for your first deal, keep things simple and simply deposit the check in either you business or personal account, depending on whether you had setup a business when you started this. (WARNING: That money is not yours and is not to be spent under any circumstances. If the transaction fails to close, return the money to the buyer. If the transaction closes, however, that amount will simply be deducted from your fee.) 26

27 27 In addition, the offer will formulate the amount of the down payment and an expected closing date. It will also invariably note that the closing will be contingent upon satisfactory Due Diligence and a final agreement between buyer and seller and their lawyers and accountants (if any). The offer will also point that the broker fee is due by the seller at closing. Finally, if not included in the offer, get the buyer s attorney s name, phone number and address, which you will provide to the seller s attorney. A good attorney will know to copy you on all correspondence that takes place between his or her client and the buyer. So be sure to provide him or her with your contact information (phone number, fax and address) so that you can be reached very easily. Immediately upon receiving the signed offer from the buyer, sign it yourself as the witness and forward to the seller attorney (or directly to the seller if the seller has not attorney). Once the offer has been presented and the lawyers are introduced in the picture, you will need to stay on the sideline until the closing. You will be informed by the seller s attorney and/or the buyer and seller. Be sure to touch base with the seller at least once a week so that you are kept informed of the status of the transaction. Note that some brokers hire a lawyer who steps in a that point. However, I am assuming that you will not be doing that until you have had earned enough money to hire your own lawyer to protect your rights to be paid.

28 How To Close And Get Paid (1 day) Closing day is the day you walk into the final meeting between buyer and seller and walk out with a check. The amount of the check will be based on the fee agreed upon with the seller. The fee you get paid will be coming directly from money held in escrow by the seller s attorney when the buyer and seller went into an official contract for the sale of the business. You will not be receiving a check from the seller after the transaction closes. Per your Listing Agreement, the funds paid to you are disbursed at the closing. Your check should be in the form of an attorney s account or right out of the transaction s an escrow account. You should not accept personal check from the seller. Once you walk out of that room, that should be the end of it for this transaction. So be sure that your check is drawn either out of an attorney s or escrow account. Besides getting paid, you really do not have to do anything special during the closing. This will be a learning experience for you and will help you shape the way you conduct your practice. It will also be the day when you really realize that you can indeed make a lot of money by simply being a knowledgeable intermediary providing an extremely important service to your clients. Finally, it will be proof that you do not really need money to make money. What you really need is to provide a service (or sell a product) that people need. From that point on, the rest will be much easier as you will gain more and more experience by selling more and more businesses. You will reach a point when you will probably no longer actively broker transactions, but will hire other people to work in your office. You will also probably take on more ownership stake in the businesses that you sell, building more and more on your wealth. 28

29 Businesses That Tend To Sell Quickly Laundromats Dry cleanings Gas stations 29 Grocery stores Cleaning services Training centers and/or proprietary schools Beauty salons Limousine businesses Route and Wholesale Distribution and Delivery businesses

30 Overall Personal Income Goal Commitment For First 30 Days I, (insert your name here), shall: (outline goal details here) on or before (date you intend to complete goal). 30 Upon completion of this/these goal(s), I shall: (Outline the reward for achieving this goal here include something that will be a personal motivator for you). In the event that I do not meet my target as outlined by the date set forth, I shall: (include any negative consequences you wish to include here). Signature Date

31 31 My Commitments For The First 30 Days Month of, 2 (Things you intend to do to reach you income goal on previous page)

32 Weekly Goals Worksheet My Weekly Goals For the Week Beginning and Ending Sunday Monday Tuesday Wednesday

33 Weekly Goals Worksheet My Weekly Goals For the Week Beginning and Ending 33 Thursday Friday Saturday

34 List of Businesses To Contact Month of, 2 (Area business owners you will contact and ask them if their business is for sale. Simply tell them that you have a client who is looking for such a business to buying)

35 RGL Publishing 35 Your Daily Agenda Day Date: Progress Sheet (make 30 copies of this page for each day) Why is this important? (thinking through all the benefits why you should do something motivates you What you will accomplish today even more to get it done) Pros Cons Action steps to get this done _ 1. _ 2. _ 3. _ 4. End of day assessment (What could you have done better and how could you have done it better?)

36 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

37 How To Analyze The Financial Statements 37 Introduction Before embarking into the details of buying and selling businesses, anyone interested in starting and operating a Business Brokerage practice must be totally familiar with financial statements. These statements hold information that can instantly tell you a business strength, weakness and financial position. This section of the course covers all the key elements the student will need to be able to read and understand the three main financial statements: The Income Statement The Balance Sheet and The Cash Flow Statement Following that, we will go into the details of the actual buy/sell process. To ensure that key concepts are fully understood we will use case studies and analyze a transaction from beginning to end. The Income Statement Introduction To The Income Statement Description This section introduces the income statement and explains what it comprises and how it affects the balance sheet. Duration 25 minutes Definition of the Income Statement An Income Statement is a summary of sales and expenses over a period of time. The difference

38 between revenue and cost is equal to a company s net income. Sections of the Income Statement The Income Statement has several sections, which list a company s revenue and expenses. These numbers are then added and subtracted to produce the Net Income, as shown in the example below Tuition Revenues $ 2,676,690 Other Income/(Refund) $ 376,439 Cost of Sales $ (306,094) Operating Expenses $ (2,555,850) Other Expenses $ (31,742) Net Income $ 159,443 Growth Rate (%) How Retained Earning is Affected by Net Income Net Income, which is a summary of the Income Statement, is added to the Retained Earning line item on the Balance Sheet. That means the Retained Earnings of a company fluctuate with the Net Income. This, in turn, un-balances the Balance Sheet (the Balance Sheet is covered later in this course). Revenues And The Income Statement Sales Does Not Equal Cash Flow A business cash inlay is never equal to its sales, as recorded on the Income Statement because when a sale occur, it can be for cash or credit. When a customer pays with cash, that amount is immediately recorded as cash flowing into the 38

39 39 business registers. However, when the customer pays with a credit card, it may be weeks, and sometimes months, before cash is actually received. Sales & Account Receivable As sales are recorded, a company s Net Income rises, which causes an increase to retained earnings and requires changes to the Balance Sheet (we will cover Balance Sheet in more details later). But when revenues increase, the resulting income may be cash or credit. In this case, credit is also called account receivable, because the cash has yet to be received (or is owed to the business), even though the sales was recorded. So an increase in sales will result in either an increase in cash or account receivable. When To Record Sales Revenue is made up of income coming from all of a company s revenue sources, including sales, fees and residuals. These items are all displayed on the Income Statement. As we ve seen before, due to the fact that revenues can be received as cash or credit, sales entered on the Income Statement will often not equal actual cash receipts. Expenses And The Income Statement Expense Analysis Money spent by a company usually fall in one of the two expense buckets below. COGS: Cost of Goods Sold This is what a company actually pays to either produce or acquire the products SGA: Sales, General & Administrative Costs

40 These are a company s expenses not related to the production or acquisition of the products the company sells. These expenses tend to be fixed, whereas the cost of goods sold will increase as more products are produced or procured. Note that revenues and expenses are usually paired when listed on the Income Statement. That is, when an income line is listed, an expense line follows it, so that reconciliation and analysis of the Income Statement can be conducted in an easy way Tuition Revenues $ 2,676,690 Cost of Sales $ (306,094) Operating Expenses $ (2,555,850) Other Income/(Refund) $ 376,439 Other Expenses $ (31,742) Net Income Before Taxes $ 159,443 It is also important to note that not all expenses (insurance expense being one of them) will be paired with a revenue line item. These are funds that need to be spent whether or not a company makes money. Expenses Does Not Necessarily Equal Cash Paid Out Expenses on a company s Income Statement do not always equal the amount of cash that actually leaves the company s coffers. That is because a company can either use credit or cash for business expenses and insert these expenses on the Income Statement even though actual cash has not been paid out. More About The Income Statement 40

41 When the Cost of Goods Sold (COGS) is subtracted from a company total revenue, its Net Income on the Income Statement goes down, which causes a decrease in Retained Earning. encompasses one-time income, interest income from money invested, income from the sale of an assets, etc. 41 That, in turn, un-balances the Balance Sheet because the Assets and Liabilities sections are no longer equal. Normally, updating the Assets portion of the Balance Sheet will solve this problem. In most cases, the line item that needs to be updated in the Assets section of the Balance Sheet is Inventory. To understand this, the reader has to realize that every time COGS changes, inventory changes as well. When COGS goes up (i.e. the company is buying more goods), Inventory goes up and when COGS goes down (i.e. the company is buying less goods), Inventory goes down. Often the Income Statement includes a section or line entry labeled Other Income. This normally

42 Income Statement Analysis Description This course will take you further into the income statement and its various accounts. You will learn about the difference between accounting for taxes and for shareholders. You will also be introduced to using ratios to analyze and compare companies. Length 20 min Analyzing The Income Statement Someone buying a business will look at cost of goods sold COGS, administrative costs SG&A and revenues on a company's income statement and use multiples and ratios to compare a company s performance with respect to similar businesses. The following financial elements are usually reviewed: Gross Profit, Operating Profit, Gross Margin & Operating Margin, all of which we briefly discuss below. Element Gross Profit Operating Profit Gross Margin Definition This is a company revenue less what it spends to produces the goods that it sells it sells or COGS (see sample Income Statement below) Operating profit (or Operating Income), is what is left after administrative expensive are taken out of the Gross Profit (see below) Unlike Gross Profit and Operating Profit, gross margin is a ratio derived 42

43 43 Element Definition from dividing gross profit by total sales (i.e. Gross Margin = Gross Profit / Sales). The higher the Gross Margin, the more efficiently a company is operating. Income Statement 1998 Tuition Revenues $ 2,676,690 Cost of Sales $ (306,094) Gross Profit $ 2,370,596 Operating Expenses $ (2,555,850) Operating Income $ (185,254) Operating Margin Operating, which is also a ratio is derived by dividing Operating Profit by total sales (i.e. Operating Margin = Operating Income / Revenues). This ratio shows whether administrative costs increase or decrease when production costs (or COGS) increase. Other Income/(Refund) $ 376,439 Other Expenses $ (31,742) Net Income Before Taxes $ 159,443 Interest Income and/or Expense Businesses are obligated to report all expense and income sources. Often a company may have money in CDs or interest bearing checking

44 accounts. These have to be reported as income. In addition, when a company borrows money, it pays interests on the loans. The interest payments are considered expenses and are subtracted from total revenues. This section of the Income Statement list the details of all interest expense and income. Income Statement 1998 Tuition Revenues $ 2,676,690 Cost of Sales $ (306,094) Gross Profit $ 2,370,596 Operating Expenses $ (2,555,850) Operating Income $ (185,254) Interest Income $ 10,000 Interests Paid On Loans $ (10,000) Income Statement 1998 Other Income/(Refund) $ 376,439 Other Expenses $ (31,742) Net Income Before Taxes $ 159,443 Other Income and/or Expense This section of the Income Statement is where unusual income and expenses are listed. Unusual income may be related to the income from the sale of an assets (e.g. a truck). An unusual expense may be related to money spent to buy out a partner. Income Statement 1998 Tuition Revenues $ 2,676,690 Cost of Sales $ (306,094) Gross Profit $ 2,370,596 44

45 45 Income Statement 1998 Operating Expenses $ (2,555,850) Operating Income $ (185,254) Interest Income $ 10,000 Interests Paid On Loans $ (10,000) Other Income/(Refund) $ 376,439 Other Expenses $ (31,742) Net Income Before Taxes $ 159,443 EBIT When analyzing a business with the intent of purchasing it, a buyer normally needs to make certain adjustment to the Income Statement in order to get a true sense of the business level of profitability. One of the most important financial item which is often reviewed is a company s income before interest and taxes are paid or EBIT (or Earning Before Interest and Taxes). This number show the real bottom line on the Income Statement and reveals how much money is left to pay any debt that a business may have. That is important because the interest payments do not go on forever and when the loan is paid off, the payments are added into the company s net profit. So, the educated business buyer will place great importance in this financial data because it depicts a better picture of the financial stability of the business being analyzed.

46 Description The Balance Sheet This course will introduce you to one of accounting's fundamental documents, the balance sheet. You will learn how to read, create and maintain a balance sheet. You will also learn how a balance sheet works with other financial statements and how it fits into the annual report. Length 25 min While the Income Statement depicts a picture a company s revenues and expenses, the Balance Sheet is a timed picture of its assets and liabilities. It is timed, because it represent the company s position, more specifically what it owns and owes, at a very specific moment in time. Sample Balance Sheet End of Year 2000 ASSETS Checking/Savings/Employ ee Advances/Cash $ 131,860.2 Accounts Receivable $ 665,316 Inventories & Prepaid Expenses $ 17,039 Less Allowance for bad debts $ - Total Current Assests $ 814,215 Fixed Assests $ 187,578 Other Assets $ 182,770 Total Assets $ 1,184,563 LIABILITIES Current Liabilities $ 595,173 Long-Term Liabilities $ 372,456 Stockholders' Equity $ 216,935 Total Liabilities and Stockholders Equity $ 1,184,563 46

47 47 Parts of the Balance Sheet The balance sheet consists of two sections. The Assets portion lists a company's assets, which represent all of a company s possessions. The Liabilities section is where all company s loans and debts (what is owed) are listed. Both section of the Balance Sheet must always be equal, or the Balance Sheet has to be balanced by adjusting specific line items from either section. Note that Retained Earnings is listed under the Assets section and represent a company s profit after it has paid its taxes. Dividends, when they are paid out to investors as owners of a company, are paid from Retained Earnings. Balancing the Balance Sheet To balance the Balance Sheet, simply follow the formula below and make sure that the value of Assets section is equal to that of the Liabilities section. ASSETS = LIABILITIES + EQUITY If you increase or decrease one side, you must make the necessary change so that both sections are equal again. Sample Balance Sheet End of Year 2000 ASSETS Checking/Savings/Employe e Advances/Cash $ 131,860.2 Accounts Receivable $ 665,316 Inventories & Prepaid Expenses $ 17,039 Less Allowance for bad debts $ - Total Current Assests $ 814,215 Fixed Assests $ 187,578 Other Assets $ 182,770 Total Assets $ 1,184,563 LIABILITIES

48 Sample Balance Sheet End of Year 2000 Current Liabilities $ 595,173 Long-Term Liabilities $ 372,456 Stockholders' Equity $ 216,935 Total Liabilities and Stockholders Equity $ 1,184,563 Building a Balance Sheet To build a Balance Sheet, simply list all assets that a company owns on one piece of paper (your Assets section). On another piece of paper, list all of the company s debts and the value of the money invested by its owners or Stockholder s Equity (your Liabilities section). Simply place the two sections side by side, with the Assets section on the left. You can also place them one above the other (as in the Balance Sheet sample above), with the Assets section placed on top. If all items have been listed under both Assets and Liabilities, the value both sections should be equal. Each time an amount is added or subtracted in one section of the balance sheet, the Balance Sheet must be rebalanced. This rebalancing may take place on either the asset side or the liability side. For example, in the Balance Sheet below, if you increase the Current Liabilities by $100,000, you can increase Fixed Assets by $100,000, decrease StockHolders Equity by $100,000. Sample Balance Sheet End of Year 2000 ASSETS Checking/Savings/Employe e Advances/Cash $ 131,860.2 Accounts Receivable $ 665,316 Inventories & Prepaid Expenses $ 17,039 Less Allowance for bad $ - 48

49 49 Sample Balance Sheet End of Year 2000 debts Total Current Assests $ 814,215 Fixed Assests $ 187,578 Other Assets $ 182,770 Total Assets $ 1,184,563 LIABILITIES Current Liabilities $ 595,173 Long-Term Liabilities $ 372,456 Stockholders' Equity $ 216,935 Total Liabilities and Stockholders Equity $ 1,184,563 Reading the Balance Sheet When reading a Balance Sheet, you will notice that the two major sections (Assets and Liabilities) are divided into sub-sections. The main sub-sections used when creating a Balance Sheet are: 1. Current Assets 2. Long-Term Assets 3. Current Liabilities 4. Long-Term Liabilities Here is a brief definition of each: Balance Sheet Item Current Assets Long-Term Assets Current Liabilities Definition Current or short-term assets are expected to be used up or turned into cash within one year and may include cash and receivables Long-term assets will be used for more than one year and may include real estate, equipment, etc. Current or short-term liabilities are expected to be paid within one year and may include payables and short-term loans

50 Balance Sheet Item Long-Term Liabilities Definition These liabilities will be made up of all loans and debts for which the pay-off time is longer than one year 50

51 51 Description Cash Flow Statement This course will introduce you to the different sections of the cash flow statement. You will learn why financial analysts are interested in the cash flow statement and how to compile a cash flow statement. In addition, we will introduce you to projected financial statements and calculations based on those. Length 10 min Introduction Cash Flow can be summarized as follows: The amount of actual cash that can be found in a company s register (e.g. checking account) at the end of a period, which could a day, a week or a month. So Cash Flow is extremely important (many times more important than Net Income, because it determines whether or not a company is solvent. That is, it can pay all its bills and still have money left to continue to operate. In addition, from a buyer s perspective, a seller can manipulate the Income Statement to make the business look good to the buyer. However, it is not possible to manipulate cash flow, because the amount of actual cash a company has can be verified by reviewing a company s bank statements to analyze deposits and withdrawals. Sample Cash Flow Statement Cash Flows From Operating Activities New York Recast Net Income $ 513,665 Account Receivable Increase Inventory Increase Prepaid Expenses Decrease Depreciation Expense $ 114,474.00

52 Cash Flows From Operating Activities New York Accounts Payable Increase Accrued Expenses Increase Income Tax Payable Decrease Cash Flow from Operating Activities $ 628, Cash Flows From Investing Activities Purchases of Property, Plant & Equipment Cash Flows from Financing Activities Short-Term Debt Borrowing $ - $ - $ Long-Term Debt Borrowing - Capital Stock Issue $ Cash Flows From Operating Activities New York - Dividends Paid to Shareholders Cash Flow from Financing Activities Increase (Decrease) in Cash during Year $ 628, $ - $ - The Cash Account Cash flow can be explained by referring back to the cash account on the balance sheet. Most items on the balance sheet are linked to cash. When making changes to the balance sheet, we are either adding or subtracting (or using) cash. 52

53 53 Balance Sheet End of Year 2000 ASSETS Cash (Checking, Savings, Employee Advances, etc.) $ 131,860.2 Accounts Receivable $ 665,316 Inventories & Prepaid Expenses $ 17,039 Less Allowance for bad debts $ - Total Current Assests $ 814,215 Fixed Assests $ 187,578 Other Assets $ 182,770 Total Assets $ 1,184,563 LIABILITIES Current Liabilities $ 595,173 Long-Term Liabilities $ 372,456 Stockholders' Equity $ 216,935 Total Liabilities and Stockholders Equity $ 1,184,563 For example, if you pay $1,500 to buy inventory or make a monthly loan payment, your cash decreases. On the other hand, if you make a sale for $2,000, your cash increases by $2,000. Creating The Cash Flow Statement Since Cash Flow is the actual amount of money (or cash) left in a company s register at the end of a period, to create a cash flow statement you simply need the company's balance sheets from the beginning and the end of the period being analyzed. You will take the difference between all Balance Sheet items affected by cash (whether an increase in cash or a decrease of it) to calculate cash flow. End of Year 2000 End of Year 2001 Balance Sheet Assets Cash (Checking, Savings, $ 70 $ 90

54 End of Year 2000 End of Year 2001 Balance Sheet Employee Advances, etc.) Pre-paid Expense $ 10 $ 20 Securities $ 30 $ 20 Total Assets $ 110 $ 130 Liabilities Loans $ 110 $ 110 Total Liabilities and Stockholders Equity $ 110 $ 110 Cash Flows Statement End of Year 2001 Change in Pre-paid Exp ($10) Change in Securities $10 Change in Loans $20 Change in Cash (or Cash Flow) $20 To verify that your number is accurate, simply take the difference the two Cash (Checking, Savings, Employee Advances, etc.) for 2000 and That amount should be equal to the line labeled Change in Cash (or Cash Flow) in the example above, in our case $90 - $70 = $20. Our numbers mach, so we conclude that cash flow during the year 2001 was $20. 54

55 55 Cash From Operating Activities And Investing Activities Cash From Operating Activities This section of the Cash Flow Statement tells us about a company s cash position from its day-today business operations and may include money paid by clients, as well as cash paid to suppliers and employees, for example. A profitable company should have a positive cash flow from operations. How To Calculate Cash Flow From Operating Activities To calculate Cash Flow From Operating Activities, follow the directions below: Use the Balance Sheet to find all entries that are related to operating activities as show in the example below. Balance Sheet 12/00 12/01 Change Assets Account Receivables $ 200 $ 250 ($50) Inventory $ 400 $ 425 ($25) Pre-paid Expense $ 100 $ 80 $20 Other $ 60 $ 40 $20 Total Assets $ 760 $ 790 ($35) Liabilities Accounts Payable $ 100 $ 200 $100) Short-Term Loans $ 600 $ 550 ($50) Deferred Taxes $ 10 $ 50 $40 Long Term Liabilities $ 60 $ 40 ($20) Total Liabilities and Stockholders Equity $ 770 $ 840 $70

56 Balance Sheet 12/00 12/01 Change Total Change in Cash From Operating Activities -$35 + $70 = $35 These activities produce (and increase) cash that a company can use for other purposes. We illustrate how to calculate Cash Flow From Investing Activities with a simple Balance Sheet in the example below. Cash From Investing Activities Part of the cash flow statement records the sources and uses of cash from a company's investing activities, which are activities for the purpose of purchasing assets (also known as Capital Expenditure or CAPEX) that a company will need produce the products that it sells to its customers. These activities consume cash and normally reduce a company s cash. Cash Flow From Investing Activities also include activities related to the sale of assets that a company no longer need. The start and ending balances are as follows: Balance Sheet Item 12/ /2002 Land $ 80,000 $ 60,000 Buildings and equipment 240, ,000 Accumulated depreciationbuildings and equipment 60,000 58,000 Bonds payable 50,000 45,000 Dividends payable 10,000 12,000 Common stock 30,000 40,000 Retained earnings 90, ,000 Investing Activities During the fiscal year: 56

57 57 (1) Land worth $20,000 was sold for $47,000 (2) Equipment with a cost of $40,000 and accumulated depreciation of $12,000 was sold for a gain of $7,000 (3) A new building was bought To calculate Cash Flow From Investing Activities proceed as follows: Details for transaction (1): Cash inflow from sale of land = $47,000 Details for transaction (2): Net value of equipment sold = $40,000 - $12,000 = $28,000. Gain on sale of equipment = $7,000. Cash inflow from sale of equipment = $35,000 ($28,000 + $7,000) Details for transaction (3): Beginning balance of building and equipment + Cost of buildings and equipment purchased = Ending balance of buildings and equipment + Cost of building and equipment sold. We calculate this value as follows: Cost of new building bought = Ending balance of buildings and equipment + Cost of items sold - Beginning balance of buildings and equipment = $260,000 + $40,000 - $240,000 = $60,000 Therefore, flow of cash from investing activities is: Cash inflow from sale of land $47,000 Plus: cash inflow from sale of equipment 35,000 Less: Cash payments for new building (60,000) Cash flow from investing activities $22,000 Cash From Financing Activities And Projected Financial Statements Cash From Financing Activities

58 Finally, a prospective buyer or broker analyzing a business must also include Cash Flow From Financing Activities to get a complete picture of a company s cash position. Balance Sheet Items Dec-01 Dec-02 Common stock 30,000 40,000 Retained earnings 90, ,000 Elements of financing cash flows include new loans and the issuance of stock (cash inflows), the payment of existing debt and dividend payouts (cash outflows). The following example uses a simple Balance Sheet to illustrate how to calculate Cash Flow From Financing Activities. Balance Sheet Items Dec-01 Dec-02 Land $ 80,000 $ 60,000 Buildings and equipment 240, ,000 Accumulated depreciationbuildings and equipment 60,000 58,000 Bonds payable 50,000 45,000 Dividends payable 10,000 12,000 Financing activities during the fiscal year. Details for transaction (1): Bonds payable have decreased from $50,000 to $45,000. Hence, cash outflow to buyback bonds = $5,000 ($50,000 - $45,000) Details for transaction (2): Common stock has increased from $30,000 to $40,000. Hence, cash inflow from sale of common stock = $10,000 Dividends declared = Beginning retained earnings + Net income - Ending retained earnings = $90,000 + $45,000 - $120,000 = $15,

59 Dividends paid = Beginning dividends payable + Dividends declared - Ending dividends payable = $10,000 + $15,000 - $12,000 = $13,000 To calculate Cash Flow From Investing Activities proceed as follows: 59 Cash collected from sale of common stock $10,000 Less: Cash paid to buy back bonds (5,000) Less: Cash payments for dividends (13,000) Cash flow from financing activities $(8,000) Once you have calculated cash flows from operation, investment and financing activities, just add them up. The result is the company ending cash balance.

60 Description Cash Flow Analysis This course will introduce you to free cash flow and net internal cash flow, methods of cash flow analysis which give a better indication of a company's financial health than simply looking at earnings, the cash flow statement, or EBITDA. Length 25 min Why Should A Buyer Analyze Cash Flow? Cash flow is scrutinized for the following reasons: To ensure that a business can repay its debts To determine the amount of cash flow coming from outside financing To compare a company s business and financial priorities Just reviewing the standard Cash Flow Statement has serious drawbacks. Therefore, a more indepth analysis is required. Operating Cash Flow To calculate free cash flow we first calculate operating cash flow, which is a company s cash flow from its earnings before changes in working capital (we cover working capital later in the course).. The components of operating cash flow are net income, depreciation, amortization and all other non-cash items, which may be deferred taxes, gains or losses from the sale of assets, etc. Operating Working Capital 60

61 61 After calculating operating cash flow, we now calculate the change in operating working capital, which is the change in operating assets and liabilities, or the sum of all the cash flows in the operating activities section of the cash flow statement related to receivables, inventories, other current assets, accounts payable, accrued liabilities, and other current liabilities. Scrutinizing this number is important because it shows increase in accounts receivable and inventories, which can mean that a company might run into a short-term cash crunch. Cash Flow from Operations The next step in calculating free cash flow is to get cash flow from operations, which measure a company s cash from earnings. This is done by adding the change in operating working capital to operating cash flow. Capital Expenditures Next, we subtract capital expenditures, which come from the investing activities section of the cash flow statement Dividends The final step is to deduct the cash outflow for regular dividends that the company pays to its investors. Free Cash Flow Summary Free Cash Flow is an important measure for the business buyer. This is the cash that is left over after the payment of all cash expenses and operating investment required by a business. It is cash left in the register. To simplify the above discussion, you can calculate free cash flow using the following formula:

62 FCF = Net Income Taxes Net Investment Net Change in Working Capital (We cover Working Capital later in the course) EBITDA EBITDA or Earnings before Interest, Taxes, Depreciation, and Amortization is an approximate measure of the cash flow produced by a company s operating activities. It is a number that many buyers review when analyzing a company s profitability level. To calculate EBITDA, use the following formula: EBITDA = Net Income + Interest Paid + Taxes + Depreciation + Amortization The reasoning is that when the business is purchased, these expenses will no longer be on the Income Statement, which will make the business more profitable for the buyer. Working Capital Working Capital is important because it helps to: Know whether or not a company is capable of paying its bills Estimate how much money a business needs for its operations Compare operating performance of different businesses Using data on the Balance Sheet, the formula for Working Capital is as follows: Working Capital = Current Assets Current Liabilities If a business Working Capital is positive, current assets are greater than current liabilities, which means that the business can cover all current 62

63 obligations (including debts, payroll, inventory, etc.). A positive Working Capital means that the company is in good health and can continue to operate in the immediate future without any problems. 63 Operating Working Capital Operating Working Capital, which provides a better picture of the company's actual operations, is equal to Working Capital less short-term loans, investments and cash. In order to use Operating Working Capital to compare companies of different sizes, we normally express it as a percentage of total sales as in the formula below: % of Sale = Operating Working Capital / Total Revenues

64 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

65 The Buy / Sell Process 65 Description This section of the course provides an overview of the process of buying and selling businesses. It is intended to provide the student with all the ammunitions needed to clearly understand the implications of buying and selling businesses. After reading this course, the student should feel ready to help both buyers and sellers to sell and/or buy businesses. The reader will learn about making the business case, performing valuation (both standalone and combined), due diligence, and negotiating the deal. The course is will be extremely helpful for accounting and financial professionals who want to launch their own business brokerage practice. There are various ways that individuals and existing businesses can buy an operating business. The table below provides a concise summary of how an individual or other business entity can purchase a business: Acquisition / Purchase Asset Purchase Applies if the Purchaser is An Individual Another Buyer Business X X Merger X Consolidation X X X The Basics of Buying a Business Acquisition / Purchase Definitions An acquisition is simply a term used when an entire business is

66 Definitions purchased by another business or an individual Definitions call the transaction a consolidation Asset Purchase Merger Consolidation An asset purchase is a special purchase where the buyer (either an individual or business) simply purchases the assets of another business. These assets may include inventory, equipment, client list, technology. The company selling these assets may still remain in existence, unless dissolved. A merger is the purchase of an entire business where the company that is sold is absorbed into the acquirer If the entity buying and the entity being bought are both dissolved and a new entity is created, we Opportunity to buy attractive assets Greater economies of scale Reasons for an Acquisition Applies if the Purchaser is An Individual Another Buyer Business X X Faster growth X Chance to diversify product lines, businesses & X X X 66

67 67 investments Increased power in the marketplace Increased control Applies if the Purchaser is An Individual Another Buyer Business X X X We all know when the merger of two public companies goes wrong, because these cases are extensively covered by the financial papers. Purchasing a private business has even more risk associated with it, because a private company is not regulated and may not have well-documented financials for the purchaser to review. In addition, because the business has no obligation to report its performance to regulators, a seller may attempt to embellish income and profits to make the business more attractive to buyers. Evaluating the Purchase of a Business Buying a business is simply another form of investment. Therefore, business valuation principles should be applied in order to determine whether the investment makes sense. Buying a Business Has Its Risks and Things Can Go Wrong In this course, we teach a comprehensive and systematic approach to due diligence and business valuation, which will ensure that you or your client will stay away from purchasing businesses that are bad investments. Our Fictitious Buyer For The Course NoNameBuyer is the owner of a temporary employment business that he is selling. He is scheduled to close on the sale of his business and

68 is already looking for another business to buy in order to avoid retirement. Nonamebuyer has made it clear to his broker that he is only interested in a training business or a proprietary school, which is profitable and has at least $1 million in annual revenue. In addition, Nonamebuyer is very familiar with the school business because he worked with several school placement directors who used his placement services to get their students a job. Based on the fact cited above, we know that Nonamebuyer is a sophisticated business person who has ample cash to purchase a new business. We have clear specifications of the type and size of business that he want s to purchase. Our Fictitious Business For Sale Nonameschool is small proprietary school with about $3.5 million in annual sale. The school has been operating for the past 13 years. The owner, Nonameschoolowner, has decided to sell and focus on her personal coaching business where she has an office closer to her suburban home. She is asking $1.1 million, which she says is justified because the school has several licenses to sponsor foreign students plus the owner just got approval to accept student loans, federal and state student grants. That, she says can dramatically increase the company s revenue and profit. She made it clear that she is only selling because she can continue with the long daily train commute from the suburbs. The Business Case The Process of Evaluating a Purchase The purchase of a business often represents one of the most important moments in the life of both the buyer and sell. And this is true even if the buying entity is another business. 68

69 69 It may be that the buyer (whether an independent buyer or an existing business), is purchasing a business for the first time. Unfortunately, in the majority of cases, the transactions fail because: The economy may change, The market may change and the demand for the entity s product fade Nonetheless, the educated buyer (or a smart buyer working with an educated broker) can, through an extensive due diligence process, uncover and forecast the circumstances that can make a purchase unsuccessful. Except under special circumstances, in such cases, the transaction should not pursued. To ensure that the purchase is successful, a systematic plan should be followed to thoroughly evaluate the target and ensure that the investment is a viable one. The Business Case The elements that Nonamebuyer must analyze when making the business case for the purchase are discussed below. Business Outlook From a strategic viewpoint, Nonamebuyer must consider Nonameschool s current strategy and its impact on the long-term outlook of the school. Nonamebuyer must determine if Nonameschool can sustain its students enrollment ratio and an increase (or at least the same level) of Government contracts that it has serviced in the past. Losing government contracts can result in a substantial drop in revenue. Ultimately, even though Nonamebuyer understands the challenges of a successful purchase, he decides that from a strategic perspective, buying Nonameschool makes sense given the current momentum in the business.

70 Starting a New School vs. Buying One Furthermore, Nonamebuyer must decide whether it will make more sense to start a school from scratch, given the regulatory hurdles that he will have to face. Some of the roadblocks one must overcome when starting a new school include the following: 1. securing a proprietary school license, 2. applying and waiting for immigration department approval so that foreign students can take courses at the school (foreign students currently make up a large portion of Nonameschool s student body with approximate revenue of $1 million) 3. Being approved to bid for government contracts, which make up a large portion of Nonameschool s annual revenue 4. Apply for Title IV status, which allows a school to accept student loan, state and federal student grants as payments (Nonameschool has received approval. It normally takes several years to even be able to apply for this right) Starting a new school is certainly not less risky than a purchase. In addition, to start a new school will probably cost more than Nonamebuyer s initial out of pocket to purchase the business (Nonameschool s owner is asking for $200,000 at the closing). Furthermore, there is no guarantee that in the current environment, Nonamebuyer can build a startup school that is a successful as Nonameschool. By purchasing Nonameschool, Nonamebuyer inherit an existing profitable business. With the time it would take to get the school up and running, secure all necessary licenses and get licensed to bid for government contracts, it makes more sense to purchase the school. 70

71 71 Can Nonamebuyer leverage knowledge from current or past business experiences to add more value to the purchase? The placement business, which Nonamebuyer owned, is in an industry somewhat complementary to that of proprietary schools. In addition, Nonamebuyer has quite a bit of insight into the school industry because he has worked with numerous schools to help them place students into temporary and permanent jobs. Nonamebuyer is launching into a business with a substantial knowledge of the field and can use that knowledge to continue to build the business. In fact, Nonamebuyer intend to contact his former clients to offer training and placement services. As can be seen from the paragraph above, Nonamebuyer certainly has leverage capability and intends to take advantage of his knowledge and experience to make the acquisition work. Making the Business Case From our discussion above, it can be seen that the rewards for this purchase outweigh the risks. Nonamebuyer therefore concludes that it makes business sense to buy Nonameschool, although he needs to ensure that it also makes financial sense, which we cover in the valuation sections of the course. The Financial Case The previous analysis of the business case convinces Nonamebuyer that the purchase of Nonameschool makes sense. However, we must advance to the next step and analyze the purchase from a financial stand point. More specifically, we must determine how much

72 Nonameschool is worth in order to get an initial value for the purchase. This initial value may change later during or after due Diligence if anything is uncovered that can make the business less attractive. For example, we may find out that Nonameschool has high level of debt. If the seller wants Nonamebuyer to assume the debt, the total purchase price may be lowered to take those debts into account. We normally use a two-step process to make the financial case. First we value the business. Valuation itself may be a two-step process, depending on the status of the buyer. If the buyer is an individual buying a business (such as in the case of Nonamebuyer), we simply value the business as a stand alone operation. If however, the buyer is another business which is making the acquisition for the purpose of expanding its operation, we must also value what will be the combined entity if/when the transaction closes. Valuing The Purchase The starting point for Nonamebuyer s initial valuation analysis is a standalone valuation of Nonameschool, which is an estimate of the business by itself as an operating business. In our case study for this course, we will not need to value a final combined entity, because at stated above, Nonamebuyer is an individual buying a single business. However, if Nonamebuyer were another school doing the transaction for the purpose of expanding the business, once completed, the standalone value of Nonameschool would have to be adjusted to take into account all appropriate synergies of the combination of the two businesses. 72

73 73 Typically, the combination of the business being purchased and the business doing the purchase results in a combined entity that is worth more than the sum of the two standalone businesses. Comparable Businesses Valuation Analysis Nonamebuyer uses a comparable businesses valuation analysis to determine the standalone value of Nonameschool. This method of analysis is appropriate for the following reasons: It is a sound method for estimating value, is easy to derive and is very applicable to this case Nonamebuyer can take advantage of information available on publicly traded schools when doing the analysis Before going into the actual analysis phase, it is worth mentioning that before jumping into complicated analysis, it is extremely important to think about the context of a purchase. The overall timing of a potential business purchase has to be thought through. Even if the business is a great one, a purchase at the peak of an economic down cycle may not be the right thing to do. A good business in a bad industry is definitely not recommended. Finally an analysis of the market in which a business participates needs to be performed to uncover what really drives the business. The following is a list of issues that have to be considered while the valuation analysis is being performed: Table 1 Business Analysis Table Issue to Consider Business environment & Resulting Notes

74 Issue to Consider government regulations Business cycle impact Geographical risk Cost structure (including material and labor) Ease of financing (for internal growth or acquisition) State of facilities and equipment Resulting Notes Issue to Consider Customer needs and their characteristics Flexibility in pricing your product or service (e.g. can you increase the number of coins needed to use a washing machine in a Laundromat without changing the machine itself?) Your strength as the new owner, including your age and experience Resulting Notes 74 Competitors & potential entrants Channels of distribution Technology needs Advertising and promotion needs

75 75 Issue to Consider Legal issues and potential liabilities Expansion opportunities (or lack thereof) First: Document Collection Resulting Notes To analyze a business, we begin by collecting and reorganizing its accounting and financial statements. Below is a list of essential documents that need to be gathered and analyzed. To make this analysis worthwhile, financials statements for at least the past three years must be available, preferably on a monthly basis. We recommend buying a business that has been operating (and has been profitable) for at least three full years: Table 2 Valuation Document Collection Item No. Document Description 1. Income statement (Profit and Loss) 2. Balance sheet (Assets and Liabilities) 3. Cash flow statement 4. Monthly bank statements 5. Equipment list with replacement value 6. List of customers and contracts (with length of time left on contracts) 7. Employee roster with description of responsibility and salary information 8. Owners percentage interest along with salary and benefits information (health, insurance, company car, etc) 9. Copy of lease agreement Date Collected

76 Item No. Document Description 10. Lines of credit, if applicable Date Collected Note that most brokers and owners will require the buyer to sign a confidentiality agreement and put down a good-faith (different from a down payment) deposit before you are given access to such confidential information. That is normal procedure and a serious buyer will not object to deposit at least 0.50% of the offer price (not the owner s asking price) to a broker. This money is usually put in escrow. Some brokers use a fixed amount (e.g. $1,000). That amount is used as proof that the buyer is serious about buying the business and will either be: - Deducted from the final sale price if you buy the business, or - Refunded if the acquisition the transaction does not close Second: Reconstructing The Financials Owners of privately held businesses are very motivated to pay the least amount of taxes possible. To achieve that goal, and to the extent permitted by accounting standards, they manipulate their expense accounts in order to show on paper that the business is making the least amount of profit possible. That, in turn, lowers their tax liability on the business net income. To objectively value a business, its financials have to be reconstructed and re-calculated. That is, adjustments have to be made to reflect the true profit potential of that business. Such adjustments are sometimes called add backs. 76

77 77 Examples of such abnormal expense items by business owners include extremely large bonuses or salaries to themselves, above-market rent space from a building that is family-owned, and company cars that are leased for personal use. Sometimes such expenses may include illegitimate items such as salaries for non-working family members, family vacations marked as business trips, and personal expenses charged to the company. This leads us to conclude that some of these expenses have to be adjusted or re-calculated in context. This adjustment will result in a noticeable increase in net profit, or a decrease in net loss, from the Income Statement. As can be seen in the case below, there is a sizable gap between the Net Income on the left and the Adjusted Earnings on the right. That adjusted number reflects a more likely income from the business operations if the owner did not have to minimize income in order to reduce payment of business taxes. The adjusted financials represent more objectively what the new owner (in our case Nonamebuyer) will inherit. Table 3 Nonameschool Re-Constructed Financials Re-Constructed Financials New York Addbacks Salary/Compensation $ 250,000 Tuition Revenues $ 3,053,129 $ 3,839,729 $ 4,026,519 Repairs/Maint. $ 11,730 Other Income/(Refund) $ - $ - $ - Office Expenses $ 75,000 Cost of Sales $ (306,094) $ (239,838) $ (139,064) T&E $ 50,000 Operating Expenses $ (2,555,850) $ (3,506,446) $ (3,615,476) Automobile $ 15,000 Other Expenses $ (31,742) $ (30,869) $ (120,044) Personal Insurance $ 15,000 Net Income $ 159,443 $ 62,576 $ 151,935 Family Relations $ 25,000 Misc. Expenses $ 70,000 Adjusted Earnings $ 513,665 New Jersey Addbacks Salary/Compensation $ 155,000 Revenues $ 522,790 $ 1,524,381 $ 1,768,876 Repairs/Maint. $ 1,000 Other Income $ 995 $ 94,472 $ (168,259) Office Expenses $ 25,000 Cost of Sales $ (58,003) $ (84,267) $ (32,744) T&E $ 368 Operating Expenses $ (465,383) $ (1,435,575) $ (1,382,834) Automobile $ 1,308 Other Expenses $ - $ - $ (33,335) Personal Insurance $ 1,500

78 Re-Constructed Financials Net Income $ 399 $ 99,011 $ 151,704 Family Relations $ 15,000 Misc. Expenses $ 10,000 Adjusted Earnings $ 305,881 New York & New Jersey Total Addbacks Salary/Compensation $ 405,000 Revenues $ 3,575,919 $ 5,364,110 $ 5,795,395 Repairs/Maint. $ 12,730 Other Income $ 995 $ 94,472 $ (168,259) Office Expenses $ 100,000 Cost of Sales $ (364,097) $ (324,105) $ (171,808) T&E $ 50,368 Operating Expenses $ (3,021,233) $ (4,942,021) $ (4,998,310) Automobile $ 16,308 Other Expenses $ (31,742) $ (30,869) $ (153,379) Personal Insurance $ 16,500 Net Income $ 159,842 $ 161,587 $ 303,640 Family Relations $ 40,000 Misc. Expenses $ 80,000 Adjusted Earnings $ 819,546 Once Nonamebuyer has constructed Nonameschool s adjusted earning, he can go to the next step of the valuation analysis. Side Note The reader might be asking why such emphasis on the Net Income of a business as opposed to just valuing its assets. The truth is that, in addition to the fact that some businesses, such as certain service businesses, do not have any hard assets, Side Note assets do not produce cash flow, revenue and income do. Although the assets of a business are important, if they are not generating enough cash flow, they can not help the buyer cover business expenses. In addition, a business can generally find ways to generate revenues that its assets are not capable of producing. For example, a computer manufacturer may, in addition to selling computers, decide to provide computer maintenance services to its clients. Another example might be a Laundromat owner who decides to provide Dry Cleaning services by contracting out the work to a Dry Cleaning Plant. In both cases, the assets of the businesses (e.g. computers, washers and dryers) do not produce the income received. Because the buyer is acquiring the right to receive the future earnings of the business, its ability to produce cash is really what is important. 78

79 As we can see, having your offer price dependent upon the true income (or income potential) of the Third: Build The Comparable Table of Publicly Traded Companies in The Same Industry Financial Ratios of Comparables Companies in the Training & Education Industry (Data as of 12/2000) 79 Computer Learning Center Learning Tree Inter Devry New Horizons Prosoft Training ITT Edu. Sylvan Apolo Grp. Franklyn Covey University of Phoenix Whitman Education Group Concorde Career Colleges Sales (million) EBITDA (million) (16.60) K Return on assets (%) (8.56) (0.17) (2.46) (1.24) (1.09) Return on equity (%) (22.49) (0.28) (7.52) (3.60) (8.84) Market Value(million) 372.0K , , , EBITDA multiple n/a Sales multiple business is essential. If your value is too low and you are unable to negotiate with the seller, you may be missing on a great opportunity. On the other hand, if your analysis results in overpricing the business, you will be paying too much for a business that may fail after you have invested possibly all of your life savings into it. Nonamebuyer then creates the comparable table listed below and populates it with sales, net income and market value information obtained freely from the Internet. The purpose of this table is to help Nonamebuyer establish a baseline for comparison. It is impossible to compare companies based on sales and net income, because some companies

80 may have revenues in the billions, while others will be million-dollar revenue companies. To set the stage for proper comparison, Nonamebuyer creates financial ratios for 12 publicly traded school companies to construct his table. To create the ratios Nonamebuyer use Sales, Net Income and Market Value (based on share price). From looking at the Financial Ratios table, you will see that Nonamebuyer uses the following ratios to perform the comparison: Return on assets (%) (from Yahoo!Finance) Return on equity (%) (from Yahoo!Finance) EBITDA multiple = Market Value / EBITDA Sales multiple = Market Value / Sales Fourth: Build Ratio Table For Nonameschool Nonamebuyer then goes on to create a table in which the he derives the same ratios used in the previous table for the 12 publicly traded companies he has chosen to use in the analysis. (Note that the EBITDA number used below is from the adjusted financials) Nonamebuyer uses EBITDA multiple to arrive at a final price estimate for Nonameschool. From the formula below, you will notice that we are missing one piece of information to derive the EBITDA Multiple. Since Nonameschool is not a public company and there is no Market Value. Therefore, Nonamebuyer use the asking price for Nonameschool as his Market Value. The formula for EBITDA Multiple is: EBITDA multiple = Asking Price / EBITDA For Nonameschool, this ratio is equal to (see table below in the Total column). 80

81 81 As of December 2000 Nonameschool Ratios NY NJ Total Sales $ 4,190,131 $1,768,876 $ 5,959,008 EBITDA $ 675,172 $ 357,218 $ 1,032,390 Profit margin (%) Return on equity (%) Asking Price $12,000,000 $800,000 $12,800,000 EBITDA multiple Sales multiple Fifth: Perform Ratios Comparison Tor perform the comparison, Nonamebuyer takes the average EBITDA Multiple of all 12 companies used in the comparison table. In this case the Average EBITDA Multiple is As can be seen, Nonameschool s EBITDA Multiple is below the average, which means that the asking price is within reason (and could even be increased if needed). However, Nonamebuyer needs to take one more step, which is to Adjust Nonameschool s valuation for lack of liquidity. Sixth: Adjust Nonameschool Value For Lack of Liquidity Before Nonamebuyer can arrive at a final estimated valuation for Nonameschool, he must take into account that Nonameschool is not a publicly-traded business and its shares can not be easily bought and sold as is the case with for companies with shares traded on an exchange. For that reason, Nonamebuyer must discount the price for Nonameschool to make up for the illiquidity, which is a drawback for all private businesses. It is not easy to sell them and any buyer takes a chance when purchasing them. Because of the risk associated with this illiquidity, Nonamebuyer

82 must get a small amount discounted from the price. The discounted amount varies and will depend on how much a buyer wants to buy a business. In Nonamebuyer s case, 10% is subtracted from Nonameschool s asking price of $12MM for a final offer of $10.8MM. Discounted Cash Flow (DCF) In certain cases, it may be difficult, if not impossible to use the Comparable Businesses Valuation Analysis method because it may not be possible to find publicly traded company to which we can compare the entity being purchased. For example, if one were to buy a chain of Laundromats, it would probably be very difficult to find publicly-traded Laundromats. Using publicly traded service businesses would not be accurate because a service business may have several entities providing services in various sectors. In such cases, it may be more appropriate to use the Discounted Cash Flow method of analysis. We will not go into all the details involved in using this method, but will simply list all the step necessary to conduct effective valuation. Projection Horizon The first step of the DCF analysis is to choose a time horizon for projecting the cash flows of the business being valued. Although the horizon should be short enough so the cash flow estimates are reasonable, it should also be long enough to reach the point where the business is stable. A five-year time horizon is usually appropriate Calculating Free Cash Flows or FCF The second stage in conducting the Discounted Cash Flow analysis, is to calculate projected cash flows. 82

83 83 In order to get an objective operational value of a business being purchased, a buyer should use the free cash flow (FCF) projections of the target. Free cash flows, as we ve learnt, are the cash flows from operations, before any financing activities. a) Calculate EBIT as shown in the example below: Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $104,911 Less Cost of 62,822 goods sold Gross Profit 52,089 Operating Expenses Depreciation 12,400 Amortization 10,498 Rsrch & Dev 11,245 Selling, Gen 33,780 & Admin Total Op. 37,923 Exp Earnings 24,166 Before Interest & Taxes (EBIT) b) Calculate Projected Free Cash Flows as shown below Earnings Before Interest & Taxes (EBIT) Less Year 1 Year 2 Year 3 Year 4 Year 5 $24,166 Taxes 15,666 Net Operating Profit After Tax (NOPAT) Plus Non- Cash Expenses 18,500 Depreciation 12,400 Amortization 10,498 Chg in Differed Taxes Cash Flow After Non- Cash Expenses Less Net Working Capital investment 10,000 21,398 10,150 Projected 10,000

84 Capital Expenditures Projected Free Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 21,248 c) Calculate Present Value of Free Cash Flow as in the example below: Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $104,911 $27072 $134,035 $142,208 $149,606 Gross Profit (Revenue COGS) 52, ,424 71,584 74,805 Total Operating Expenses Earnings Before Interest & Taxes 37, ,127 46,277 47,916 24, ,297 35,307 36,889 - Taxes 15,666 17,800 18,919 20,123 20,756 Net Operating Profit After Tax (NOPAT) 18, ,378 25,184 26,134 + Non-Cash Expense - Net Working Capital Investment - Projected Capital Expenditures Projected Free Cash Flows Present Value of Free Cash Flow Year 1 Year 2 Year 3 Year 4 Year 5 $12,898 13,918 14,118 14,118 14,418 10,150 9,021 11,234 11,458 21,329 10,000 12,000 11,500 13,500 12,000 21,248 24,596 11,762 24,344 27,223 19,781 21,037 19,706 18,201 18,563 d) Calculate The Target s Terminal Value as shown below: Terminal Value (in Terminal year T or year 5) (000s): TV = FCF T+1 / r or 17,223 / 0.15 or 114,820 Present Value (PV) of Terminal Value (000s): PV = TV / (1+rate) 5 or 114,820 / ( ) 5 or 57,086 84

85 85 e) Finally Derive The Target Business Value (000s) Sum of PV of FCF = $37,288 Plus: PV of Terminal Value = 47,066 Enterprise Value = 94,374 Less: Outstanding Debt = 4,000 Equity Value = 80,374 Additional Valuation Tips Using the method discussed above presents a very simple way to extract the value of any business after its financials have been analyzed and re-constructed. However, sometimes, it may be necessary to adjust that technique into a more specialized form of valuation, as briefly discussed below, depending on the type of business that is being purchased. To address that issue, the following sections will briefly introduce some of the details that may be involved in valuing certain types of businesses or assets. A buyer involved in any one of those businesses may first want to apply the multiple of earnings method and then apply necessary adjustments. Valuing Intangible Assets When buying a business it is very important to recognize that there may be several factors and things that contribute to the business income and profit. Among the most common items that must be taking into the analysis are: Software system Patents Trademark Copyrights Subscriptions Customers

86 Contracts (both government and corporate) Brand names The above items make up a company s Intangible Assets and must be factored into the valuation analysis because they often play an important role in revenue generation. Although there are no rules-of-thumb when valuing intangible assets, it may be pointed to the reader that these assets are usually analyzed using one of the following methods: Determining what it would cost another business to duplicate a given asset today Measuring the benefits intangible assets will bring to a business, and how long those benefits will last Predicting the life span and future financial benefits of an intangible asset Professional Practice Valuation Professional practices such as accounting, consulting, law and medical practice firms, are usually assets light. But strong relationships with their customers and highly trained employees are extremely valuable. A firm s customers must be reviewed closely to determine how much value can be attributed to those customers. Usually the length of the relationships will be a key point as stability and longevity are two signs of lower risk, and hence higher value. Final Note about Valuation and Premiums Payments Even though this book is targeted at buyers of privately held businesses (a premium is almost always required with the acquisition of a publicly held company), we would like to mention that many times, there might be a need to add a premium to the resulting asking price from a 86

87 87 valuation analysis. That is, a buyer may have to pay the seller an amount above the fair value of the business to make up for certain factors such as: Contracts (especially government contracts), Goodwill (an intrinsic value attached to the business as a running entity), Hard assets (except for real estate which is normally valued separately from the business), Patents, and Exclusivity (applicable normally to transportation or distribution businesses) In such cases, the premium to be paid will be based on industry standard, the buyer s judgment, and his/her level of interest in the business. In addition, if the business is a really great business and the Intermediary or broker had done a good job at promoting it for the buyer, there may be more than one buyer interested in buying that business. In that case, an auction may result with the best price and most qualified buyer closing on a transaction with the seller. Combined Business Value (The Buying Entity is another Business) In our scenario for this course, we have one individual, Nonamebuyer, purchasing a business, Nonameschool. Therefore, our valuation analysis ends once we have derived a value for Nonameschool as a standalone business. However, when an existing business is buying another business, there is usually another step in the due diligence process, which is to do a pro forma analysis of the potential combined businesses. This section of the course discusses that analysis.

88 Pro Forma Analysis The next step when a buyer executes the valuation analysis is a pro forma valuation. This analysis is a combined financial statement that represent the combined businesses. Acquisition Synergies Definition Table Synergy Type Revenue Synergies Cost Synergies Effect When there are revenue-related synergies, the revenues for the combined entities is greater than the sum of the revenues for each individual business. These synergies are triggered by complimentary product mixes, cross-selling opportunities, more efficient channels of distribution, and improved marketing. When there are cost-related synergies, total expense for the Synergy Type Tax Synergies Effect merged entities are less than the sum of the expenses each business as a separate company. These synergies may include a more streamlined operations, economies of scale and staff reduction. If there are tax synergies the merged businesses will pay less taxes than the sum of the amounts they would normally paid as separate businesses. The first step in deriving the pro format value is to calculate the value for revenue, cost and tax synergies. To do that, you simply analyze the financials (more specifically the Income Statements) of both businesses to determine where these synergies could be realized. Once your analysis is done, you should have a table that looks like the following: 88

89 89 Synergy Revenue Synergies Estimated Amount To be Realized ($) Realized in Percent $75,000 Total Revenue / Realized Revenue Synergy Amount Cost Synergies $150,000 Total Expenses / Realized Expense Synergy Amount Tax Synergies $50,000 Total Taxes / Realized Tax Synergy Amount The next step in calculating the pro format value is to update revenue, total expense and tax, using the increase and decrease resulting from the realized synergies. Total Revised Revenue Total Revised Expenses Total Revised Taxes Initial Amount (From Income Statement) Total Revenue From Income Statement Total Expenses From Income Statement Total Taxes From Income Statement +/ Estimated Realized Synergy Amount ($) Realized Revenue Synergy Realized Expense Synergy Realized Tax Synergy

90 The percentage values are used to estimate these synergies in projected financials used in a discounted cash flow method of valuation. Due Diligence Letter of Intent Upon completing the preliminary valuation, Nonamebuyer submits a letter of intent (see your Business Brokerage Kit for a complete set of forms and documents needed to run your practice) to purchase Nonameschool. This letter establishes Nonamebuyer s intent to buy the business, present an offer that Nonamebuyer is willing to pay, and officially set a time period to perform due diligence and close on the transaction. Nonamebuyer is asking for a 45- day due diligence period, which Nonameschool has accepted. Sample Letter of Intent SAMPLE LETTER OF INTENT HERE Dated October 23, 2006 Outline of Business Terms for the Acquisition of [Target Business] - collectively hereinafter referred to as Target - (including any interests held by [Seller s name] or other shareholders collectively hereinafter referred to as Seller ) by [Buyer s Name] or its designated representative(s) (hereinafter referred to as Buyer ). Both parties hereby specifically agree that the subject purchase of [Target] does not include its [Excluded Part of Business], which shall be duly separated and retained as by Seller under [Other Entity of Target]. 1. Seller agrees that, at the Closing, it will sell, assign, transfer, and deliver One Hundred Percent (100%) of its interests in [Target Business], and Buyer agrees that it will purchase such interests. 2. Buyer and Seller agree that the business is valued at $[Sale Price] and that the Buyer will purchase 100% of the business 90

91 91 Sample Letter of Intent for an amount equal to $[Sale Price]. 3. The Seller hereby agrees that the Purchase Price shall be paid and satisfied by the Buyer as follows: A. Down Payment of $[Down Pay Amount] in cash or cashier s check due at closing B. The remaining balance of $[Balance] is to be paid over a period of [No months/years] in the amount of $[Payout Amount] each month. Such balance is to be secured by a note, mortgage/stock, pledge/security agreement. There will a two-month grace period granted to the Buyer after the closing, and such grace period will not include the month of the closing. For example, if the closing takes place on August 21 st, the first monthly payment will not be due to the Seller until November 1 st. 4. The Closing is to take place on, or around [Closing Day, Year] (a definitive date will be set upon completion of the due diligence) 5. All governmental and regulatory approvals and all consents of third parties (including for example certification agencies and landlords), and compliance with any conditions thereof, required in connection with the completion of any of the Sample Letter of Intent transactions contemplated by the definitive Agreement, the closing or the performance of any of the terms and conditions set forth in the definitive Agreement shall have been obtained and complied with on or before the Closing. 6. The definitive agreement shall incorporate an appropriate noncompete section prohibiting Seller from engaging in, directly or indirectly, any company which in any way is competing with [Target Business], in the tri-state area, within a 100-mile radius of [Target] or any of its branches or extensions wherever located, for a period of 5 years. 7. The parties shall do all things and provide all reasonable assurances as may be required to consummate the transactions contemplated by this term sheet and each party shall provide such further documents or instruments required by any other party as may be reasonably necessary or desirable to effect the purposes of this Term Sheet. 8. Expenses: Buyer and Seller will each pay their own expenses, including legal expenses, up to the time of the closing. 9. This letter of intent is non-binding and may not be construed as an agreement on the part of any party. In the event that the parties are unable to agree on a mutually satisfactory definitive agreement providing for the

92 Sample Letter of Intent transactions contemplated by this letter of intent, none of the parties shall be liable to any other party or to any other person. The conclusion of any definitive agreement will be subject to the following: FINAL DUE DILIGENCE BY BUYER OF BUYER S DESIGNEE Approval of all matters relating thereto by the Seller s and Buyer s lawyers Review of all business, legal, and auditing matters related to the business, the results of which are acceptable to Buyer 10. LEASE OF BUILDING SPACE: Seller has agreed to transfer the current lease to the Buyer and that all security deposit money will remain with the Landlord. 11. General and Specific Liabilities: Seller will assume all existing lines of credit. 12. Continuing Obligations: Until termination of this letter of intent, the Seller should not entertain negotiations with or make disclosures to any other party, without prior consent of Buyer. 13. Confidentiality: Both the Buyer and the Seller agree to maintain complete confidentiality regarding this transaction. Sample Letter of Intent 14. Buyer Training: In order to efficiently transition the school, Seller agrees to assist Buyer as follows: -- On a full-time basis during the first 2 weeks after the closing -- On a part-time basis (1 hour per day), during the 3 rd and 4 th weeks after the closing -- for a period of 5 months, thereafter, on an as-needed basis either by phone or in person. 15. All documents in respect to this transaction will be prepared by Buyer s attorney, subject to such documents being reviewed by and being acceptable to the Seller s legal counsel. 16. This Agreement shall be governed and construed in accordance with the laws of the State of [Name of State]. In witness whereof the parties have hereunto duly executed this Agreement on the date first above written. Goals of Due Diligence With the period of due diligence agreed upon, Nonamebuyer s lawyer, banker and accountant begin to seriously work on the transaction. During the due diligence process Nonamebuyer s team 92

93 93 may find reasons to change their initial valuation of the business and reduce their offer. After due diligence, if Nonamebuyer is convinced that the purchase makes financial sense, the offer price will probably remain the same and the transaction consummated. Key Areas Examined During Due Diligence Although all of Nonameschool s operations and financials can be inspected, Nonamebuyer will focus on the areas of the business that matter the most. These areas include the company s foreign students recruitment efforts, government contract history and projections, and the company s expenses, Title IV, and healthcare expansion opportunities. Further, Nonamebuyer will apply quality tests, such as quality of earnings, and expense reporting accuracy to attempt to verify how solid the numbers reported on Nonameschool s financial statements are. Other Areas Subject to Review Nonamebuyer's review will include employee contracts (if any) and employee policies. Nonamebuyer will also take the opportunity to meet Nonameschool s key people and begin to decide which ones of these people will efficiently contribute to the business once the transaction closes. Nonameschool s courses and student body will be reviewed and analyzed. This review will include student drop-out rate, student placement ratio, number of students per class and instructors tenure. Furthermore, Nonameschool s marketing strategy will be investigated. Finally, Nonamebuyer will complete a thorough background check of the school to uncover any legal issues that may be in progress.

94 Review of Revenue Projections As Nonamebuyer s CPA conducts a thorough review of Nonameschool s accounting system, an important question arises. In the current year, Nonameschool has $1.9MM worth of government contracts. The question is, what guarantees that Nonameschool will receive the same amount in contracts revenue. It turns out that government contracts are never guaranteed. However, a positive performance review from the government agency that awarded the contract is the equivalent of a guarantee that if the government spends any money on education (which we know it will), Nonameschool will be awarded a portion of the available funding. Nonamebuyer needs to determine at that point whether to lower the offer price to reflect the possibility that revenue may be reduced by at least $1.9MM if Nonameschool is not awarded any contract. However, Nonamebuyer verifies that Nonameschool has performed very well on its previous year contract as attested by a letter from the state agency which awarded the contract. Furthermore, Nonamebuyer is convinced of the following: Nonameschool has been in business for over 13 years and for the past 10 years has been awarded government contracts every year. Finally, Nonameschool was just granted Tittle IV status, which the school can use t o increase revenue by accepting students payment in the form of student grants and student loans, which can increase revenue exponentially and offset the possible loss of revenue from government contracts. Given these assertions, Nonamebuyer concludes that the offer is still a fair one and the purchase still makes financial sense. Having analyzed the revenue numbers and spoken to Riverside sales managers, the team makes it decisions. 94

95 95 For the non-digital revenue, the team decides that the sales manager has a sound explanation for a revenue growth rate higher than the industry rate. Therefore, those projections are left at 2.5% compound annual growth rate. However, for the new digital press product line, the team is concerned that the base case of 41% compounded annual growth is overly optimistic. The team revises this projection back to the sales team's worst-case scenario of 34% growth. Review of Expenses In addition to revising Nonameschool s revenues, Nonamebuyer also does a thorough review of the company s expenses. After lengthy conversations with Nonameschool s owner, Nonamebuyer s CPA determines that several employees will be leaving with the owner to operate a new business that the owner has been running from within Nonameschool. This will reduce the headcount and payroll and increase the bottom line by several thousand dollars monthly. After a careful analysis, Nonamebuyer s CPA concludes that the offer need not be revised and and no revision of the financials is necessary. Both Nonamebuyer s CPA and lawyer give the green light to proceed with a formal Purchase Contract towards closing.

96 Additional Due Diligence Resources Table 4 Due Diligence Table I Due Diligence Item Item to Investigate Target Date Financials Balance Sheet, Income & Cash Flow Statements. These will be analyzed in depth in the special Valuation Analysis section, later in this book. They are the most important documents of your Due Diligence package as they will tell you whether or not the business is growing, stagnant or failing. Usually 3 to 5 years are required in order to make a good analysis of the business. Never buy a business that is loosing money, unless you have the financial muscles and resources, as well as the expertise to turn it around. Undisclosed debts and liens against business assets by running a UCC (Uniform Commercial Code) search General Company Overview of founding and evolution of the Company History Significant events since the date of founding (e.g. previous acquisitions or subsidiary/location sale) Done (Y/N) 96

97 97 Due Diligence Item Item to Investigate Target Date Rationale for selling Company (why is the owner selling?) Special aspects of the business (is it a regional or cyclical business?) Business Structure/General Legal Documents Basic legal structure (Sole proprietorship, Corporation, etc.). That will affect whether the transaction is executed as a stock or assets sale. See Legal Issues section Organization charts (if applicable) Certificates of incorporation Industry Growth Trends (you do not want to buy a business in a dying industry) Cyclicality of business or products (overall economy, seasonal) Future outlook Market analysis (size, trends, etc.) Barriers to entry (how easy is it for a competitor to get into this business?) Review available market research or industry analysis Competition Main competitors (by product segments, geographic, Done (Y/N)

98 Due Diligence Item Item to Investigate Target Date regions, etc.) Prospective competitors Profiles of competitors Sales approach (how do your prospective competitors market their products or services compared to your seller?) Product positioning (price, technology) Competitive Advantages Source of uniqueness Market share Brand name Economies of scale Changing technologies Products Review existing products or services List major customers for each product List of major competitors for each product/service Profile potential new entrants and their new products/services Analyze nature of competition (efficacy, price, etc.) Suppliers What method is used to purchase principal items How far ahead does the company purchase inventories Done (Y/N) 98

99 99 Due Diligence Item Item to Investigate Target Date Who are the major suppliers (top 10)? What is your source of materials, including contracts, any minimum purchase contracts, purchase orders for significant items of purchase and sole source suppliers? Are there any special discounts? Sales organization Structure Size Compensation (salaried vs. commission, incentives, etc.) Training Marketing strategy Types of advertising/promotional activity Pricing Trends of expenditures How does this strategy differ (or not) from competitors? Distribution Distribution mechanics Areas served Significant agreements/arrangements Outlets Types and % of volume distributed through each Done (Y/N)

100 Due Diligence Item Item to Investigate Target Date (by county or region if applicable) Facilities (location and % of volume shipped from each) How does this distribution differ (or not) from competitors? Done (Y/N) 100

101 101 This might look somewhat overwhelming to someone buying a business for the first time. But the prospective buyer should not proceed until satisfactory Due Diligence has been completed. And that process can take from 1 week to 3 months or more, depending on the size and complexity of the business being acquired. Even though we do not want to paralyze ourselves with analysis, reviewing the most relevant items on this list for your particular industry is highly recommended and will virtually guarantee that the business you buy is worth your invested capital. For example, if you were going to purchase a wholesale business, you would need to make sure that the following Due Diligence Items are totally investigated before finalizing your offer: Item To Investigate Financials Table 5 Due Diligence Table II Notes See Valuation Analysis in the Item To Investigate Industry Notes following section. You do not want to buy a business where technological advance or a better product is replacing the product that the target business distributes, unless you can plan to distribute or sell that new product. As discussed previously, the industry you are buying into is critical, as its prospects will determine whether you are making a long- or short-term investment. You need to be in a sector where your services will be needed for a least the next five to seven years without major industry shakeout. Although it is difficult to predict, basic research can provide the data necessary to figure out if there are any major changes under way in a particular industry. If that is the

102 Item To Investigate Competition Notes case, unless you believe that you will have the required funds to weather out the storm and make necessary changes to your operations, it is recommended that the buyer get into a business that will be more stable within the next few years, You never want to buy a business without a thorough analysis of your current and possible future competitors strategy. Among the most important points you will need to be aware of are your competitors pricing levels, advertising medium, marketing channels, vendors and special promotions. You want to be able to match what they do with either a variation of what they offer, or a new and improved product or service. Item To Investigate Suppliers Sales Notes You want to make sure that you will continue to get the products you sell from the suppliers. The worst thing that can happen to a buyer is to find out after an acquisition that the acquired business major supplier will no longer sell its products to the business after the new buyer take over. No one should buy a business if they can not establish a solid relationship with their future suppliers. They are part of the lifeblood of the business as they provide the owner with what the customers need. The prospective buyer must confirm sales data from a seller. That can be accomplished in many ways, but can usually be verified by inspecting purchase orders and receipts from suppliers. The more 102

103 103 Item To Investigate Notes products are purchased from suppliers, and the more often they are purchased, the more they are being sold. A business that has a high level of sales is always ordering new merchandise to restock its inventory reserves. This will be your clue as to whether sales have been stagnant, increasing, or decreasing. Of course if there is a lot of buying activities in the immediate months preceding the sale of the business, there could be ground for further investigation as the owner might have been preparing the business financials for the sale. The other important clue that can help a buyer gauge sales level is the activities in the business bank account. The prospective buyer Item To Investigate Distribution Notes should inspect frequency and size of deposits for several weeks prior to the Due Diligence period. Please note that it is even more important to inspect bank statements of service businesses where no inventory has to be purchased. (Dry Cleaning businesses are a good example of a service business that does not have to buy any inventory for re-sale.) Distribution is one of the most important factors that can make or break a small business, especially a small business in the wholesale industry. Items to inspect will vary from increasing distribution cost (a red flag) to actual distribution channel, like postal mail, the Internet, independent distributors, etc.

104 Item To Investigate Notes If a buyer is reluctant to conduct a thorough Due Diligence, there are software packages that can help to analyze an acquisition (see the Appendix for additional resources for prospective business buyers). Or, you can simply hire the services of an expert if you have the funds to do so. However, most prospective small business buyers do not have the financial resources to do that. So, simply studying the material covered in this section and following the advice and steps outlined in this book will almost guarantee that you will not be buying a failing business. Final Valuation Estimates Final Standalone Valuation In our case study for this course (the purchase of Nonameschool by Nonamebuyer) the conclusions that came from the due diligence were that the transaction as structured is fair and there were no need for changes. However, in most transactions, things are uncovered by the buyer that result in substantial changes in valuation and final offer for the acquisition. In a case where there are changes to the valuation of the target, the standalone valuation of the target must be revised. This revised standalone valuation results to a combined valuation that always forces the buyer to reduce the price that he/she is willing to pay to close on the transaction. The buyer s valuation team does this by modifying the appropriate sections of the valuation analysis and re-formulating the offer. 104

105 105 The revision depends on the valuation methodology used. Here, we will briefly cover the Comparable Businesses. Comparable Businesses Valuation Method The table from the previous standalone valuation section must be adjusted to account for any revisions in the numbers. In this case, let us say that revenue decreases by $250K in both NNY and NJ, for a total reduction of $500K. That in turn will change EBITDA and the EBITDA multiple as shown in the original and revised tables below. Initial Table As of December 2000 Nonameschool Ratios NY NJ Total Sales $ 4,190,131 $ 1,768,876 $ 5,959,008 EBITDA $ 675,172 $ 357,218 $ 1,032,390 Profit margin (%) Return on equity (%) Asking Price 12,000, ,000 12,800,000 EBITDA multiple Sales multiple Revised Table (Interim) As of December 2000 Client's Ratios NY NJ Total Sales $ 3,940,131 $ 1,518,876 $ 5,459,008 EBITDA $ 425,172 $ 107,218 $ 532,390 Profit margin (%) Return on equity (%) Asking Price 12,000, ,000 12,800,000 EBITDA multiple Sales multiple Obviously, the EBIDTA multiple is totally distorted and far away from the average we concluded from our publicly traded company we used for our comparison. Remember that our market value, in the case of a private business, is essentially the seller s asking price. We must therefore adjust the asking price until our EBITDA multiple falls within acceptable value. The final revised table below shows that we ve adjusted the asking price to $7,200,000.

106 Side Note Note: In addition to you BizVal Business Valuation software, your package includes an Excel Valuation workbook with spreadsheets and formulas you need to conduct more advanced valuation analysis and scenarios. keep the flow of documents and information moving. Revised Table (Final) As of December 2000 Client's Ratios NY NJ Total Sales $ 3,940,131 $ 1,518,876 $ 5,459,008 EBITDA $ 425,172 $ 107,218 $ 532,390 Profit margin (%) Return on equity (%) Asking Price 12,000, ,000 7,200,000 EBITDA multiple Sales multiple At this point, when due diligence has been completed and all the necessary adjustments to the projections and statements made, if the final valuation estimates is accepted by the seller, the transaction can go into contract and proceed to a closing. At that point, the lawyers on both sides will take over and the intermediary s job simply to

107 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

108 Overview of Legal and Tax Issues What A Broker Needs To Know To Efficiently Advise A Client Acquisition Options Although many legal and tax issues are at play when a business is being purchased, we will not go into the details of all that can be involved. This is only because the author assumes that the reader will be engaged in a simple transaction in which the tax and legal implications are not so complex that they make these issues ground for concerns. We are also assuming that the buyer will use the services of a lawyer to effectively complete the purchase and close on the transaction. No one would think of buying real estate without a lawyer. The same should apply to buying a business, where transfer of real estate assets may be involved. Assets vs. Stock Purchase The most important aspect of an acquisition when small businesses are concerned, is whether the buyer will be acquiring the stock of the business, or its assets. To make this clear, let us define a business (which we will assume is a small corporation) as a collection of assets and liabilities. Assets can be real estate, cash, contracts, receivables, equipment and machinery. Liabilities, of course, are what the business owes to its creditors, shareholders and stakeholders (such as employees). Those can be bank loans, back taxes, payroll, etc. When a buyer completes an acquisition through a stock purchase, that buyer inherits everything that makes up the business, both assets and liabilities. If a buyer simply wants to take over the assets, it has to be specified in the Letter of Intent that the transaction will be structured as an asset 108

109 109 purchase, instead of a stock purchase, which means that the buyer will not be responsible for the company s liabilities once the business has been acquired. Those liabilities not assumed, and which may include bank loans, among other debts, will continue to be the responsibility of the seller, even after the business has been sold. Stock sales are often used when the seller is financing the transaction under such conditions that the buyer will assume the company s debts. However, if a buyer has some portion of the down payment and has obtained bank financing, there is no need to assume company debt, unless the asking price is reduced to reflect the assumed liability. However, if a buyer has agreed to acquire the liabilities of a business as well as its assets in a stock purchase, the Due Diligence process should be even more extensive in order to ensure that the new owner totally understands what is involved in the transaction and the extent of the debt that s/he is assuming. Diagram For Assets Purchase Transaction Buyer s Assets Buyer s Assets + Some or All of Seller s Assets Trucks Contracts Clients The Buyer s business is now made of the buyer s original assets, PLUS the assets purchased from the seller Seller s Assets Building Factory Trucks Trucks Contracts Clients

110 Diagram For Stock Purchase Transaction Buyer s Company Seller s Company 110 All of Buyer s Company + All of Seller s Company With a stock purchase, a new company is created, which holds both original businesses as they were before they combined

111 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

112 Practice Marketing Now that we ve covered the Buy/Sell process, you are ready to help business owners value and sell their business. If you decide to work with buyers instead of sellers, you are now in a position to help those buyers to value a target, conduct due diligence and formulate an offer that based on an objective valuation of the business that is being considered for purchase. The table below depicts the various possible approaches that a broker can use to position a business brokerage practice. Type of Buyer Individual Private Business Public Company By Size (e.g. Revenue > $1,000,000) Type of Seller By Industry or Type of Business (e.g. Proprietary Schools) By Location Whichever way you decide to position yourself, the simple practice marketing techniques outlined below will help you launch your practice and acquire new clients. 112 Piggy-Backing Don t Overlook This Strategy New brokers might benefit from this simple technique. There are various web sites that have

113 113 been in business for a while and have accumulated an enormous number of businesses for sale. One technique that may help a broker who is new to the business is the following: Go on one or all of the various websites that advertise businesses for sale Do a search for businesses in your area. For example you may search for all businesses for sale in your zip code Isolate the ones that meet your practice positioning statement. That is select the ones that you have decided you will work with (e.g. all Laundromats) Because business owners normally have no exclusive arrangements with business brokers, if you can identify those businesses that you have selected, it will be very easy for you to sign them up as clients. This is a profession that is based on merit. The broker who works the smartest and sells the business first gets the fee. The trick is to pinpoint those businesses from the list you ve collected and speak to the owners of those that are for sale. To do that, you will have to do a bit of legwork and call all those businesses in the area of focus and offer to help them sell their business. Note that you are not calling the broker who posted the listing the online. The online ads normally have a contact number for the brokers who place those ads. You do not want to contact the brokers at all, because once you ve spoken to a broker, he/she will ask you to sign a confidentiality agreement, which will prevent you from doing business with the seller. For example, let us say you go to a business-forsale Internet listing site and run a search for all Drug Stores in your zip code. Let us say that your search delivered 10 businesses under that particular zip code. What you would do next is to

114 take your yellow page book (online or offline), go to the Drug Store or Pharmacy section and write down the phone numbers for all the drug stores within your selected zip code. Then, you would call all those businesses and ask to speak to the owners. When you finally get the owner on the phone, you will simply tell them that you are a broker and your inquiry is about possibly helping him/her to sell the business. Once someone agrees to enlist you as a broker, you would simply arrange to meet with them in person to discuss the engagement in details (we discuss this later on in this section). Once you What you need to do is simply to call al. You are almost guaranteed to lend your first client, because sellers normally work with more than one broker, because they know that the more brokers they have the faster their business will sell. The Neighborhood Walk Technique (Excellent Technique For New Brokers) Landing your first business to sell is not, and should not be, difficult and complicated. A client will not come to you and ask you (at least at the beginning), but there is another very simple technique you can use to land your first business in a week or less. First, pull out your Listing Agreement Form, put it in a folder and take it with you everywhere you go. At that point, you need to decide what fee you will be charging for helping a seller to sell a business. You don t need to write it anywhere, Just make a mental note so that when the seller signs the Listing Agreement you can write it on there. I personally recommend charging between 4% and 7% depending on the type of business, with a minimum payment between $5,500 and $7,500 due to you when the business is sold. That percentage and minimum payment must be clearly 114

115 115 presented on the Listing Agreement and disclosed to the seller during your sign-up meeting. Never hide this requirement as you will get in trouble. Always be upfront and honest with all your clients. Second, as you go about your business every day, every time you pass by a business, just walk in and courteously ask to speak to the owner. For now, don t worry about the size of the business. In the future, you may become selective and not deal with businesses unless they are of a certain size, that is they have a minimum revenue and/or profit margin. When you walk in and ask for the owner, some people may be suspicious about why you want to speak to the owner. But re-assure them by being very frank. Just say that you want to know if the owner wants to sell the business and that you may be able to help because you have contacts that have expressed an interest in buying the very type of business that they own. Sometimes you will find out that you were actually speaking to the owner who just didn t want you to know that he/she is the owner. If the owner is there and is interested in selling, just introduce yourself as a business broker with a possible interested party to buy the business. Then, ask him/her what is a good time for you to come back and spend about 30 minutes to go over the details and collect some information that your potential buyer might want to know. When you go back take the following forms with you: Listing Agreement Form Business Profile Form Broker Confidentiality Agreement The section below titled Meeting with owner will go over the details of what you need to do during that meeting with the owner.

116 If the business owner is not there, find out when would be a good time to call or stop by again. Be sure to get a number so you can call back and leave your name and a phone number. You don t need to worry about business card. No need to spend money on things that will not bring in money. Business cards are no needed to get your first deal and there is no need to spend money you may not have. If the owner is not interested, simply thank him or her and go on the next business. However, do not leave without giving him or her your phone number. Often, owners do not want to discuss these things in front of employees, but will call you later when they re alone and can ask you questions. As you can see, getting your first seller is very simple. I guarantee that you WILL get your first listing in a week or less if you do that. By the way, this is exactly how I landed my first business to sell. Signing-up Sellers With Traditional Marketing (Requires Some Upfront Capital) The two methods discussed above are, from personal experience, the fastest way for a new business broker to build a list of sellers very quickly. I would recommend, especially for those who have limited capital for advertising, to simply focus on these two methods until they ve closed at least on two transactions, which will create the money needed to promote their practice with traditional advertising. Traditional advertising, which we will not cover in this course, is made up of various strategies which use numerous types of media to reach a market. Below is a list of advertising techniques in order of effectiveness and cost. Once the new broker has closed on a transaction or two, these traditional marketing techniques can be used. Otherwise, I would suggest just using the two simple methods 116

117 117 outlined previously until several sellers have been acquired and one transaction or two have closed. Newspaper Advertising Magazine Advertising Advantages New advertisement can be inserted on short notice Ad sizes vary and allows someone with a small budget to place smaller, less expensive ads Extremely good for advertising to niche markets, because most magazines subscribers are very interested in the type of products related to the content of the magazine Disadvantages Newspapers are usually used for just one day and your ad may miss on its full exposure Because of the variety of ad sizes, smaller ads can disappear on a page with large ads Your ad competes with other ads on the same page No guaranty that everyone who receives or buys the paper will read your ad It may take several weeks, or even months before your ads appears in the magazine. So magazine ads can be used for fast response Radio It is fairly easy to Radio broadcasting is Advertising Advantages change how you want your ad to be broadcast Can have the radio show host read your message for more credibility You can use radio ad to refer people to printed ads or websites for more details Yellow Pages One ad works all year long Good for new businesses in town Can help you describe the differences between you and your competition Direct Mail With Postcards Can pinpoint your target market by buying consumer or business Disadvantages not a targeted medium due to its nature Radio ads may prove to be more expensive than more targeted media. Which means that at times, you may have to buy ads in several radio stations to reach your full target market Your target market may not be listening to the radio station which airs your ad at the time the ad is played Ads are placed for and entire year Because of the variety of ad sizes, smaller ads can disappear on a page with large ads Can be wasteful. Usually a response rate of 2% is considered exceptional. That is, if you mail 2,000 postcards

118 Advantages leads from a list broker. CONCLUSION Disadvantages and 40 people respond to your ad, you have done extremely well. However, as can notice, 1,960 threw away your cards because there were not interested. There is no one best way to advertise. It is important to explore and test the various advertising media. Once you ve tested an advertising medium, you will know whether or not to continue using it, because the results will be evident in terms of money spent and new customers the medium brings. Just remember that advertising is an investment in the future of your practice. Tracking Seller Leads It is very important to keep good track of your leads. You don t want to ask sellers for the same information twice. The following is a simple example of how you might track your sellers, please adapt it to reflect your specific needs for keeping track of information you gather about the sellers that you contact or have signed-up to represent. Table 6 Sample Seller Lead Tracking Sheet Lead Tracking Sheet Lead No.: Date: Lead Source: General Business Information Owner s Name: Bus. Phone: Business Address: Due Diligence Details: 118 Valuation & Financials Details:

119 119 Offer & Negotiations Details: Lead Tracking Sheet Meeting with the owner During your second meeting, you are going to do the following: 1) Explain to the owner that you have a prospective buyer and that you may be able to help him or her to sell the business. You re not lying because there are in fact numerous prospective buyers out there. You will just need to find one of them. However, you will need his/her commitment so that if you find someone who buys the business you will be paid a fee based on the sale price of the business. To solidify that commitment, you will ask the seller to sign the Listing Agreement Form. (which you will find in your practice management kit) 2) In return for the trust that the seller will place in your ability to bring in a buyer, and for all the confidential information you will be gathering about the business, you will sign the Broker Confidentiality Form (included in your practice management kit) and give it to the seller guaranteeing that any information you obtain from him or her for the purpose of selling the business, will be kept strictly confidential and will not be given to anyone but qualified buyers that you have screened. 3) Fill out the Business Profile Form (which you will find in your practice kit) by interviewing the seller and asking all the relevant questions required to fill the blanks on that form. You need to get as much information as possible in order to avoid having to call the seller for more information when you find your buyers. The only time you

120 want to call the seller after this meeting is to make an appointment to bring a prospective buyer. Side Note The forms provided to you with this program are all self-explanatory. They are the backbone of your practice and all you need to do is carefully read them and become familiar with them. During the interview if you ask all the necessary questions to allow you to fill out the forms in their entirety, you will come out with everything you need to move to the next step without having to call the seller. How To Prepare The Business To Quickly Attract The Right Potential Buyers Once your meeting is over, it is time to create a nice profile sheet (sample of Profile Sheets are included in you practice management kit), which you can hand out to your prospective buyers. Using the information you learnt from the Buy/Sell Process section of the course, you should be able to value the business for yourself and determine whether the owner s asking price matches your valuation. If there is a big gap, you need to resolve it with the owner and come to a consensus on the price before even approaching potential buyers. You will not be able to efficiently sell a business unless you believe the price is right. If the price is too low, you can feel free to increase the asking price you present to buyers. Take a neat Business Profile Form and transcribe the information you collected from the seller. That is what you will use to make a copy for each buyer you get. Normally you would do this with a computer if you had one. You can also use the public library if you like. But again, that s not important. What is important is for you to have accurate information you can provide to the buyers. 120

121 121 Once you have a neatly prepared Business Profile Form you are ready to find a buyer. Remember that the most important step at this point is your interview with the seller to collect the necessary information. If you had a productive meeting with the seller, you have your Listing Agreement Form signed, you basically become a shareholder in the business. If you think about it, this is a fascinating part of the Business Brokerage industry. Your share in the business if you sold it for the owner is equal to your commission percentage. This is the only way in the world you can become part owner in a business without having to invest money in it. All you have to do now to cash out your share is to find a buyer. Looking at it this way, it is in your best interest to get the best deal you can get for both the seller and yourself. Think of yourself as part-owner and your motivation level will go up to the roof. How To Identify And Land Your Fist Qualified Buyer Here again, I have to say that things are as difficult and/or complicated as we believe they are. Finding a buyer for your client is not much different. Here is an easy way to find a buyer. Walk around the neighborhoods bordering the business you are selling. Note that it is not recommended to do this in the same neighborhood, unless the seller has given you clear authorization to do so. Due to competition, confidentiality issues, the owner may not want his neighbors to know that that he or she is selling the business. And, there may be various reasons for this. My recommendation is to go to the next town or several blocks away from the seller s business address. Every time you see the same type of business that you re selling, ask that owner

122 whether he/she would be interested in expanding by buying another location. Personally, this is what I do first. Although I normally go a few miles away from the neighborhood where the business I am selling is located. Usually the seller will let you know if he or she does not want to sell the business to a particular competitor. In addition to speaking to owners of the same business, owners of businesses that complement the one you re selling will also be very interested. For example, if you re selling dry cleaning, Laundromat owners may be interested. This gives you a larger population of potential buyers. So here is my strategy when looking for a buyer: I speak to every single owner of the same business within a wide radius. I usually find at least two or more interested parties, depending on the business that s being sold. Laundromats are good candidates for this approach. I then speak to all owners of ancillary businesses. These are businesses that would fit as a part, or extension, or additional locations of the business I am selling. For example, if I am selling a Car Rental business, I would approach all car rental operators in a radius spanning about 1 to 5 miles around the business I am selling. In addition to that, I would also talk to all gas station owners. If that didn t work, I would speak to all car wash owners. This approach never fails. Here is why I do this. Advertising the business for sale, or speaking to everyone about buying the business is bound to waste a lot of your time. Some people would need to learn the business before they even think about making an offer. You do not have time for that. When you approach an owner of the same type of business you re selling, he/she already understands the business, will know what to look for and will know pretty quickly whether that business will make sense to buy. 122

123 123 You want quick decisions and the best way to get that is to deal with knowledgeable people. And the most knowledgeable people I know are current owners of the same type of business, or businesses that complement theirs. That, my friend is how you will get a solid buyer for your client in a very short time. One more note about my approach: at the beginning, I am asking that you only deal with one seller and one buyer at the time. That is, once you get your seller, stay with the business by dealing with only one buyer at the time. If that buyer des not work out, you will simply move on to find the next one. However, if you follow my advice above, you will normally be dealing with the best candidates to buy the business from your seller. Tracking Buyer Leads It is very important to keep good track of your buyers leads. You don t want to ask them for the same information twice. The following is a simple example of how you might keep track of your buyers. Please adapt it to reflect your preferences for keeping track of information you gather about your potential buyers. Table 7 Sample Buyer Lead Tracking Sheet Lead Tracking Sheet Lead No.: Date: Lead Source: General Buyer Information Buyer s Name: Phone: Address: Details of Business of Interest (or Seller Lead

124 No.): Lead Tracking Sheet How To Help Negotiate The Sale During Due Diligence, Site Visits, Etc. Buyer Financial Info (e.g. size of business buyer can afford, amount of money on hand for purchase: Specific Buyer Info Regarding Lead of Interest: Make copies of this form and use it to keep track of your progress Once you have a qualified buyer (and another owner of the same business IS qualified) you re ready to start getting an offer you can present to the seller. Once you have that offer you can help with the negotiations. Usually those who understand the business will have a pretty good idea of how much it is worth and will make a sensible offer that your seller will certainly consider. Here is how I do it: 1) I do not push for a sale, but simply present facts (which you gathered from your first meeting with the seller) 124

125 125 2) I ask the buyer to sign a confidentiality agreement. Use the Buyer Confidentiality Form for that. You can do that either in person or by fax. I like doing it in person because someone may be a broker trying to get an easy listing. And if you do not have an exclusive listing, you ll have no recourse to stop him or her from stealing your listing. And giving that this would be your first listing, it is most probable that you will not have an exclusive. Once you become experienced at it and you have fee money coming in, you should only work on exclusive deals. In those cases, the seller is bound to pay you a fee whether or not you sell the business. 3) Once you have a signed confidentiality agreement, you provide the prospect with a neatly completed Business Profile Form. 4) At this point, you may feel like making a case by telling the buyer why it makes sense to make an offer and buy the business. DON T! Just wait. You will be meeting with the buyer and will be able to get visual clues from him or her. Buying a business is a big undertaking and persuasion does not work. Business people only work with financial numbers that make sense. A broker s opinion is not going to change that. A good business is one that generates a profit and the only thing you can do is to present a profitable business. The numbers will sell themselves. The questions will start coming. Answer in all honesty the questions you can answer. Don t push or prove anything. Simply answer the questions. The buyer relies on you for accurate information and will not make an offer if everything is not absolutely clear. Just be totally sincere. If you don t have the answer to a question, write it down and tell the buyer you will contact the seller to get and answer as quickly as possible. At that point, if there are so many questions to which you do not have an answers, suggest a meeting with the seller. That always work for me.

126 Don t expect to get an offer the same day the seller meet with your prospective buyer. What you want to happen is that the buyer thoroughly analyzes the information you provided. My experience has been that the more questions you get, the more interested the potential buyer is. As mentioned before, you will never get an offer in one day. Setting up a meeting between the two parties is what you re aiming for. I can assure you that an offer, if there is going to be one, will immediately follow the meeting and sometimes happens during the meeting. You can also expect the buyer to request additional information, such as a copy of income tax, income statement, possibly copy of the seller s current lease agreement. As the requests come in after the offer, simply provide them to the buyer. If you do not have the documents requested, consult with the owner. At that point, you want to make sure that all required documents are promptly delivered as the buyer s accountant may be conducting due diligence. In addition, you should ask the buyer to feel free to contact the seller directly if he/she need something urgently and you re not readily available. If you do your job properly, you will instill trust and confidence in both buyer and seller and no one will try to do a transaction behind your back. That occasionally happens to pushy intermediaries. Don t be a pusher as mentioned before. Let the financial status of the business sell itself and let the transaction flow. Note On The Offer There are two ways that the offer may be presented. a) The buyer may make a preliminary offer contingent upon satisfactory due diligence. (You should by now be familiar with all these terms as I am assuming that your read Buying 126

127 127 A Business With Little or No Capital, which was the first thing you were asked to do when you received your package. That would most likely be followed by an adjustment in offer and/or asking prices based on the buyer s findings. Possible price adjustments also come from the fact that the seller has debt and the buyer may accept to assume them. There are many reasons why the buyer may want to adjust the price. Handle them as you receive them. However, always remember that both buyer and seller look to you for advice. You can help by providing light on recent sales of similar businesses in the area, if you know that information (Warning: Don t make these up!). Using your valuation workbook, you may want to create a free valuation analysis for both the seller and buyer. The Excel Valuation Workbook that comes with your package should make this an easy task for you and will add value to the services that you are providing to your clients. This program uses criteria based on IRS rules and is a solid foundation for valuing any business. Be creative. However, above all circumstances, be honest, clean and straightforward about your opinion of the business. Remember, do not push the sale. You are not selling anything. You are simply being an important intermediary providing a valuable service to both sides. b) The offer may also come after the buyer conducts Due Diligence. If Due Diligence and valuation prove the business viable, the offer will certainly come in. Both possibilities can result in a closing. Some sellers may want a signed offer before allowing the due diligence. However, at any point before the closing, both parties can walk away. So it is up to you to manage the transaction flow in a way that

128 will encourage the seller to provide as much accurate information as possible, while keeping the seller moving through the Due Diligence and valuation process. How To Handle The Offer Offers are easy to handle. All offers are usually accompanied with a good faith deposit check from the buyer (normally $1,000, although that amount does not represent a commitment). You should deposit this check in your business account, or if you prefer, with an escrow company. But for your first deal, keep things simple and simply deposit the check in either you business or personal account, depending on whether you had setup a business when you started this. (WARNING: That money is not yours and is not to be spent under any circumstances. If the transaction fails to close, return the money to the buyer. If the transaction closes, however, that amount will simply be deducted from your fee.) In addition, the offer will formulate the amount of the down payment and an expected closing date. It will also invariably note that the closing will be contingent upon satisfactory Due Diligence and a final agreement between buyer and seller and their lawyers and accountants (if any). The offer will also point that the broker fee is due by the seller at closing. Finally, if not included in the offer, get the buyer s attorney s name, phone number and address, which you will provide to the seller s attorney. A good attorney will know to copy you on all correspondence that takes place between his or her client and the buyer. So be sure to provide him or her with your contact information (phone number, fax and address) so that you can be reached very easily. Immediately upon receiving the signed offer from the buyer, sign it yourself as the witness and 128

129 129 forward to the seller attorney (or directly to the seller if the seller has not attorney). Once the offer has been presented and the lawyers are introduced in the picture, you will need to stay on the sideline until the closing. You will be informed by the seller s attorney and/or the buyer and seller. Be sure to touch base with the seller at least once a week so that you are kept informed of the status of the transaction. Note that some brokers hire a lawyer who steps in a that point. However, I am assuming that you will not be doing that until you have had earned enough money to hire your own lawyer to protect your rights to be paid. How To Close And Get Paid Closing day is the day you walk into the final meeting between buyer and seller and walk out with a check. The amount of the check will be based on the fee agreed upon with the seller. The fee you get paid will be coming directly from money held in escrow by the seller s attorney when the buyer and seller went into an official contract for the sale of the business. You will not be receiving a check from the seller after the transaction closes. Per your Listing Agreement, the funds paid to you are disbursed at the closing. Your check should be in the form of an attorney s account or right out of the transaction s an escrow account. You should not accept personal check from the seller. Once you walk out of that room, that should be the end of it for this transaction. So be sure that your check is drawn either out of an attorney s or escrow account. Besides getting paid, you really do not have to do anything special during the closing. This will be a learning experience for you and will help you shape the way you conduct your practice.

130 It will also be the day when you really realize that you can indeed make a lot of money by simply being a knowledgeable intermediary providing an extremely important service to your clients. Finally, it will be proof that you do not really need money to make money. What you really need is to provide a service (or sell a product) that people need. From that point on, the rest will be much easier as you will gain more and more experience by selling more and more businesses. You will reach a point when you will probably no longer actively broker transactions, but will hire other people to work in your office. You will also probably take on more ownership stake in the businesses that you sell, building more and more on your wealth. Businesses That Tend To Sell Quickly Laundromats Dry cleanings Gas stations Grocery stores Cleaning services Training centers and/or proprietary schools Beauty salons Limousine businesses Route and Wholesale Distribution and Delivery businesses 130

131 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

132 Broker s Guide To Wealth Building With Business Brokerage The Broker s Guide To Buying Businesses With Little Or No Money Down Financing The Purchase With Little Or No Money Introduction No one should allow a lack of personal funds to stop them from purchasing a business. One does not need money to make money (examples of this fact abound). The majority of the wealthy who did not inherit what they possess, started with virtually nothing. Money is an idea, and therefore one only needs good ideas and solid planning to create wealth. Actually, there is so much money available for businesses that the investment firms, whose sole purpose is to finance new ventures, regularly return funds to investors because of a lack of good investment opportunities. General Overview The task of raising money for a business is not as difficult as most people seem to think. This is especially true when you have an idea that can make you and your investors rich. Actually, there's more money available for new business ventures than there are good business ideas. A very important rule of the game to learn: Anytime you want to raise money, your first move should be to put together a proper business plan or prospectus. This prospectus should include a resume of your background, your education, training, experience and any other personal qualities that might be counted as an asset to your potential success. It's also a good idea to list the various loans you've 132

133 133 had in the past, what they were for, and your history in paying them off. You'll have to explain in detail how the money you want is going to be used. If it's for an existing business, you'll need a profit and loss record for at least the proceeding six months, and a plan showing how this additional money will produce greater profits. If it's a new business, you'll have to show your proposed business plan. Your marketing research and projected cost, as well as anticipated income figure, with a summary for each year, over at least a three-year period. It will be advantageous to you to base your cost estimates high, and your income projections on minimal returns. This will enable you to "ride through" those extreme "ups and downs" inherent in any beginning business. You should also describe what makes your business unique-how it differs from your competition, and the opportunities for expansion or secondary products. This prospectus will have to state precisely what you are offering the investor in return for the use of his money. He will want to know the percentage of interest you're willing to pay, and whether monthly, quarterly or on an annual basis. Are you offering a certain percentage of the profits? A percentage of the business - A seat on your board of directors? An investor uses his money to make more money. He wants to make as mush as he can, regardless whether it is a short term or long term deal. In order to attract him, interest him, and persuade him to "put up" the money you need, you'll not only have to spell it out in detail, and further, back up your claims with proof from your marketing research. Venture investors are usually quite familiar with "high risk" proposals, yet they all want to minimize that risk as much as possible. Therefore, your prospectus should include a listing of your business and personal assets with documentation

134 usually copies of your tax returns for the past three years or more. Your prospective investor may not know anything about you or your business, but if he wants to know, he can pick up his telephone and know everything there is to know within 24 hours. The point here is to never try to "con" a potential investor. Be honest with him. Lay all the facts on the table for him in most cases, if you've got a good idea and you've done your homework properly, an "interested investor" will understand your position and offer more help than you dared to ask. When you have your prospectus prepared, know how much money you want, exactly how it will be used, and how you intend to repay it. You're ready to start looking for investors. As simple as it seems, one of the easiest ways of raising money is by advertising in a newspaper of a national publication featuring such ads. Your ad should state the amount of money you wantalways for more money than you need so you have room for negotiating. Your ad should also state the type of business involved (to separate the curious from the truly interested), and the kind of return you're promising on the investment. Take a page from the party plan merchandisers. Set up a party and invite your friends over. Explain your business plan, the profit potentials, and how much you need. Give them each a copy of your prospectus and ask that they pledge a thousand dollars as a non-participating partner in your business. Check with the current tax regulations. You may be allowed up to 25 partners in Sub Chapter S enterprises, opening the door for anyone to gather a group of friend around himself with something to offer them in return for their assistance in capitalizing his business. You can also issue and sell up to $ worth of stock in your company without going through the SEC. You'll need the help of an attorney to do 134

135 135 this, however, and of course a good tax accountant as well wouldn't hurt. It's always a good idea to have an attorney and an accountant help you make up your business prospectus. As you explain your plan to them, and ask for their advice, casually ask them if they'd mind letting you know of, or steer your way any potential investors they might happen to meet. Do the same with your banker. Give him a copy of your prospectus and ask him if he'd look it over and offer any suggestion for improving it, and of course, let you know of any potential investors. In either case, it's always a good idea to let them know you're willing to pay a "finder 's fee" if you can be directed to the right investor. Professional people such as doctors and dentists are known to have a tendency to join occupational investment groups. The next time you talk with your doctor or dentist, give him a prospectus and explain your plan. He may want to invest on his own or perhaps set up an appointment for you to talk with the manager of his investment group. Either way, you win because when you're looking for money, it's essential that you get the word out to as many potential investors as possible. Don't overlook the possibilities of the Small Business Investment Companies in your area. Look them up in your telephone book under "Investment Services." These companies exist solely to lend money to businesses that they feel have a good chance of making money. In many instances, they trade their help for a small interest in your company. Many states have Business Development Commissions whose goal is to assist in the establishment and growth of new businesses. Not only do they offer favorable taxes and businesses expertise, most also offer money or facilities to help a new business get started. Your Chamber of Commerce is the place to check for further information on this idea.

136 Industrial banks are usually much more amenable to making business loans than regular banks, so be sure to check out these institutions in your area. Insurance companies are prime sources of long term business capital, but each company varies its policies regarding the type of business it will consider. Check your local agent for the name and directors of another company to invest in your business. Look for a company that can benefit from your product or service. Also, be sure to check at you public library for available foundation grants. These can bet he final answer to all your needs if your business is perceived to the related to the objectives and activities of the foundation. Finally, there's the Money Broker or Finder. These are the people who take your prospectus and circulate it with various known lenders or investors. They always require an up-front or retainer fee, and there's no way they can guarantee to get you the loan or the money you want. There are many very good money brokers, and there are some that are not so good. They all take a percentage of the gross amount that's finally procured for your needs. The important thing is to check them out fully; find out about the successful loans or investment plans they've arranged, and what kind of investor contacts they have all of this before you put up any front money or pay any retainer fees. There are many ways to raise money-from staging garage sales to selling stocks. Don't make the mistake of thinking that the only place you can find the money you need is through the bank or finance company. Start thinking about the idea of inviting investors to share in your business as silent partners. Think about the idea of obtaining financing for a primary business by arranging financing for another business that will support the start-up, establishment and development of the primary business. Consider the feasibility of merging with 136

137 137 a company that's already organized, and with facilities that are compatible or related to your needs. Give some thought to the possibilities of getting the people supplying your production equipment to co-sign the loan you need for startup capital. This is truly the age of creative financing. Disregard the stories you hear of "tight money," and start making phone calls, talking to people, and making appointments to discuss your plans with the people who have money to invest. There's more money now than there's ever been for new business investment. The problem is that most beginning "business builders" don't know what to believe or which way to turn for help. They tend to believe the stories of "tight money," and they set aside their plans for a business of their own until a time when start-up money might be easier to find. The truth is this: Now is the time to make your move. Now is the time to act. The person with a truly viable business plan, and determination to succeed, will make use of every possible idea that can be imagined. And the ideas I've suggested here should serve as just a few of the unlimited sources of monetary help available and waiting for you! 8 Practical and Quick Ways To Finance A Purchase With Little or no Money Down Taking control of a business usually requires capital for two major activities: Closing cost, and Working capital Closing Cost Closing cost covers expenses such as lawyer and other professional fees, lease deposits for both

138 utilities and rent, as well as various other expense items that will be encountered as the buyer goes through the process of buying the business. Remember that when the new owner takes control of the business, s/he will also have an obligation to assume utility bills and rent payments. Lease and utility deposits will be required and can add up to a considerable amount of money depending on the type of business being purchased. If the buyer s credit is not in excellent shape, there may be additional funds required by the utility companies and/or landlord before the transaction can close. Those expenses can amount to about 1% to 3% of the asking price of the business. Working Capital In addition to the closing-related expenses mentioned above, there will be a need for working capital. When you transfer the assets of the business, there is generally no transfer of business funds from the company s coffers to the buyer. You take over the business with no capital in its bank account. The buyer needs to supply these funds to ensure that the business can meet its short-term operating expenses. The new owner needs to open a new checking account that will be used to deposit funds needed to pay employees and cover bills that will be due immediately after the closing. Depending on when the employees get paid, the buyer may be in need of several thousand dollars right after the closing. A buyer can use anyone of the following techniques to solve their working capital and closing cost issues. I. Transfer Working Capital at Closing The buyer may be able (or try) to negotiate a price for the business that will help conserve some of the business working capital as of a specified date. That is, the buyer might be able to convince the seller to transfer working capital as part of the business assets transferred starting on an agreed-upon date. For example, it might be 138

139 139 possible to negotiate with the seller to transfer all funds generated by the business as of the date you sign a Letter of Intent. Of course that may mean the seller will want you to pay a little bit more for the business. But that will definitely help you solve an immediate cash crunch problem, which is usually created by the need of working capital after the purchase. II. Decrease The Down Payment Amount Another way to solve (or partially solve) such working capital and closing cost concerns is to negotiate a lower down payment with the seller. by negotiating a split down payment. That is the buyer may ask the seller to partially finance the down payment and receive a portion at the closing and the other portion within a specified amount of time after the closing. That would be in addition to any other amount the owner may have financed (e.g. the balance of the purchase price). Note, however, that this financing technique will drain the business operating cash flow. Any time the buyer adds to the amount of leverage (or debt) that s/he uses in the purchase, there will be a need to somehow cut business expenses in order to make provisions to cover the additional debt payments. Do not overextend yourself! Sometimes it may be wiser to simply not purchase a business, than to put a down payment and loose it because you can not meet your note payment. Remember that when you buy the business using debt (that is, you are leveraging the cash flow of the acquired business), the owner s attorney will make sure there is a guarantee of payment somewhere in the purchase contract. It might be your home if you own one, or it might be a lien on the business assets themselves, such that if you are unable to make your payments, the business can be re-possessed.

140 III. Keeping The Seller s Security Deposits at Closing In certain circumstances, the seller may agree to lend his/her security deposits to the buyer while s/he recovers from the acquisition. That is you may be able to take control of the business with no up-front cash to your new landlord and utility companies. It all depends on how convincing your proposal to the owner is, how well you negotiate your acquisition, and how motivated the seller is. Usually the seller will be more than happy to do that if there was a large enough down payment and you have the qualifications to run the business so that it will generate the additional cash to repay the deposits. IV. Be Your Own Business Broker The buyer can approach the seller as a broker and use the finder s fee as a down-payment. An example will better illustrate this approach. My first opportunity to buy a business came with a small local Laundromat. However, I did not have the funds to finance the purchase as was required by the owner who wanted a good portion of the purchase price as a down payment, and agreed to finance the balance with a fixed monthly payment over 6 years. I soon found out that the owner was also looking to sell a small dry cleaning he owned on the outskirt of town. I made a deal with him. I would be his broker (you do not need a license to be a business broker) to sell the dry cleaning business and my finder s fee would be his down payment. He agreed. Within six months, I was the owner of the Laundromat, which I took over with none of my own money. You can use the same technique even if the owner is only selling one business. Simply tell the owner that you can find a buyer as long as he/she is willing to pay you a finder s fee. Collect all the 140

141 141 financial information necessary to create your business plan (business brokers normally sign a confidentiality agreement, which entitles them to get the financials of the business from the owner for prospective buyers). Use that business plan to secure the funds you will need which will not be covered by your finders fee (usually 5% - 7% of the purchase price). Use those funds to close on the purchase. Your down-payment will therefore be the amount requested by the owner, less your finder s fee. I m sure the owner will be more than happy to sell the business to you if you can come up with the additional funds. V. Sell/Borrow Against the Assets of the Business You re Buying This approach can only be used if the business has enough assets that you can dispose of some, and still produce enough cash to keep the business running without problems. These methods can also be used to finance the entire purchase. Among the many ways to do so, the following ones have been used by the author s clients: - Sell or lease one location of a multi-location business. For example sell one location of a two-location gas station business, immediately after the acquisition, to retire some of the debt - Finance the business receivables, if applicable. Business owners can factor their receivables and receive reduced cash up front, instead of waiting for payment from their clients. The factoring company, basically buys your receivables for less than they are worth and collects from those who owe you, pocketing the difference - Borrow against the assets of the business through an assets-based lender. If your business is asset-rich (e.g. a Laundromat), you can take a loan against these assets hopefully

142 at a favorable rate (asset-based lenders usually charge very high interest rates on their loans), pay down some of your debt, and keep some of the cash to operate the new business. Some owners will even allow you to borrow against the machinery and equipment of the business in order to finance the purchase. This, of course, assumes that there is no prior loan outstanding against those assets. VI. Using Owner Financing Owner financing must always be used in combination with the above strategies. It is one of the easiest ways to finance the acquisition of a business whether or not the buyer has some cash for a down payment. In a seller-financed purchase, the seller in essence becomes the bank. You may or may not have to pay him or her a down payment. However, you will always sign a promissory note to pay the balance of that loan from the business cash flow at an agreed upon interest rate and length of time. Usually the down payment (if any) is due at closing and the first payment on the note, one month after the closing. However, you may be able to negotiate with the seller on a different starting date for debt re-payment. If you had a large enough initial down payment, you may be able to negotiate a grace period like in a real estate purchase. To secure the debt, the owner will most likely put a lien against the assets of the business. Some owners may require the buyer to put a lien on their personal residence, depending on the type and profitability of the business. The key here is the buyer s negotiation skills and experience in the field. A schedule of payments is shown below based on a $100,000 asking price with a 20% down payment to the owner. The balance is due over 5 years at a rate of 5%. 142

143 Table 8 Sample Owner Financing Business Loan Analysis 69, , , , , , , , , , Amount financed 80, Annual interest (e.g., 8.25) Duration of loan (in years) 5 Start date of loan Monthly payments 1, Total number of payments 60 Yearly principal + interest 18, Principal amount 80, Finance charges 10, Total cost 90, PAYMENT BEGINNING DATE BALANCE INTEREST PRINCIPALBALANCEINTERESTPRINCIPAL 80, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , VII. Lease-To-Own with Owner Financing The circumstances of such a sale will be the key points in closing on this transaction. Furthermore, the seller should not be selling because there is an immediate need for cash. Basically in this case, you are simply purchasing the business under the same scenario discussed above. However, you are adding a leasing period to it prior to the closing, before actually transferring the assets. In addition, the down payment is not due to the owner until the closing (after the leasing period), although payments to the owner are scheduled on a monthly basis, as if the down payment had been paid at the beginning of the leasing period.

144 However, there has to be something for the seller in the transaction as s/he is giving you the right to operate and manage the business for the entire agreed-upon leasing period. During that period, you are basically benefiting from the operating cash flow without actually owning the business. In the process, the potential buyer is also building a cash reserve. The only way to make this offer valuable to the seller, if s/he is even willing to consider it (the author actually worked on such a transaction), is to guarantee that if you do not purchase the business after the leasing period, any money gained during that leasing period will be fully reimbursed. This means that if during the leasing period, after all business operating expenses and note payments to the seller, any funds were retained as profits, such funds should be returned to the seller. A more attractive approach might be to park the additional funds in an escrow account to be returned to the seller, in the event that the transaction does not go through. This scenario can also be used by someone who actually has the down payment, but wishes to test-drive the business before buying it. In that case, the down payment can be put in escrow for the entire leasing period. A sample payment structure follows for such a purchase. Note that the closing happens after the leasing period, when the down payment is disbursed to the seller, although monthly note payments to the seller are paid out as if the down payment had already been received. It is also important to realize that this leasing period can be used by a buyer who has a portion of the down payment and wants to raise the balance by actually working for the seller before the closing. 144

145 145 A schedule of payments is shown below based on a $100,000 asking price and a 20% post-leasing down payment to the owner. The balance is due over five years at a rate of 5%. In such a case, the first monthly payment is paid at the beginning of the leasing period. In this scenario, the leasing period is to last for 3 months. (Note the $20,000 balloon Principal payment that is added to the regular monthly payment on the 4th month, after the leasing period) Table 9 Sample Owner Financing Business Loan Analysis Lease To Own Amount financed 80, Annual interest (e.g., 8.25) Duration of loan (in years) 5 Start date of loan Monthly payments 1, Total number of payments 60 Yearly principal + interest 18, Principal amount 80, Finance charges 10, Total cost 90, PAYMENT BEGINNING DATE BALANCE INTERESTPRINCIPALBALANCEINTERESTPRINCIPAL 80, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , VIII. The Pooling Group: An Unconventional Source of Capital We now would like to introduce a very unusual approach often used to raise short-term capital in the Caribbean. This is a method mostly used to save money for special events, such as the

146 purchase of a car. It has become so popular in the US now, that banks use it as an acceptable way to finance the down payment for the purchase of a home. We believe that in certain circumstances, it might be a great capital formation strategy for a small business buyer. The following are the most important characteristics of this technique: It is initiated by a Group of five (5) or more people Each member of the Group is employed or is a business owner The Group is supervised by a manager (usually the organizing member) There is a solid commitment by all members to carry out the entire round (to be discussed shortly) Group members are required to contribute an affordable monthly (or whatever contribution frequency they agree upon) amount, usually $500 or more To carry out the task of helping its members raise needed capital, a Group can be defined by the following: Number of members Group head: the person in charge of collecting contributions and disbursements to members. This person is also responsible for keeping track of the logistics of the Group. That is, s/he keeps track of members that have received their round, those that are missing contributions, etc. Contribution amount Frequency of contribution (usually monthly) 146

147 147 Such a Group is basically a twisted version of an investment club. Members, usually friends and/or family, unless there is an independent Group Manager, agree to pool money by contributing monthly to the fund. Each month, one member gets the entire amount contributed by all members in a round robin fashion. The cycle continues until everyone has received a pay-out, also called a take or hand. (See table below). In addition, money contributed by the Group s members is never deposited in a bank account, hence earns no interest. To illustrate, let us create a fictitious Group of three members (Member 1, Member 2, and Member 3). Let s assume that each member contributes $100 weekly. There are as many cycles (or rounds) as there are members, in this case three cycles (Week 1, Week 2, Week 3). Note that this is simply a way to get a lump sum at a specific time based on your position in the queue. For a business buyer, the best position in the queue is probably the first one, because the first person in the queue receives the first take. This would then allow for his/her future contributions to be drawn from the operations of the acquired business. Please note that this is not a savings account. In the end, contributions and pay-outs cancel each other, such that members do not gain or loose any money at the end of a round. The total amount of each member s take when his/her turn arrives is $300, which is also equal to the total amount of money contributed. Table 10 Sample Pooling Group Contribution & Pay-out Table Contrib. Week 1 Week 2 Week 3 Pay Out Contrib. Pay Out Contrib. Pay Out Member 1 $100 $300 $100 $100 Member 2 $100 $100 $300 $100 Member 3 $100 $100 $100 $300

148 So, if a buyer can manage to create one of these Pooling Groups around the time that the closing is scheduled to take place, s/he can use this very simple technique to raise the necessary funds to close on an acquisition. 148

149 149 Financing A Business With Investors Money The strategies outlined in the previous section are for those who prefer to avoid the equity financing route. These techniques assume that all the funding needed to close on the transaction will come from the buyer, seller, and the business itself. However, it is also possible to finance the purchase of a business using funding from equity and venture firms. These firms sole purpose is to finance business transactions, either for acquisition, or for expansion. Therefore, they are always looking for ways to invest their funds, and often have to return investors money due to a lack of investment opportunities. Finding equity funding is much more time consuming and requires more work, because the equity firms usually drive the transaction and normally require a controlling interest in the businesses in which they invest. They will normally want to own 51% of the business, while the entrepreneur(s) owns the remaining 49%. Anyone raising equity financing either through an intermediary, or by directly contacting investors should: i. have a signed Letter of Intent from a seller ii. be very qualified to run the business that is being acquired, or partner with someone who is highly qualified to do so; (this is very important especially for someone who is looking to raise 100% of the needed funds) iii. have a completed Executive Summary to submit to funding sources for review iv. have good presentation skills and be able to effectively sell the business to the investors v. be very patient and have good follow-up skills

150 Once the buyer has, or is in control of, the above five items, the process is to simply submit requests for funding to targeted lists of equity firms and follow-up. These lists can be purchased or compiled and are available free of charge on the Internet at the SBA s web site ( It is important to send funding requests to firms that specialize in financing businesses that are in the same industry as the one that you are trying to buy. In addition, it is good to address the (or mail) to the contact person listed and to followup within two weeks of sending your query. The task of submitting business plans and establishing contacts with investors is one that is easy and straightforward. Therefore, the focus in this section will be on developing an effective Executive Summary that investors can use to evaluate the opportunity that you are presenting. The next few pages contain a sample Executive Summary, which the author used to successfully finance the acquisition of a for-profit healthcarerelated school. Writing an Effective Executive Summary To ensure that your business get the highest possible chance of getting funded, your request for financing should be accompanied by a professionally written Executive Summary (not a business plan) that conveys to the prospective investor your entire business strategy and future plans for the business. This summary should include the following sections and be no more than ten to fifteen pages long: Vision Mission Products and Services (current and planned) Market Competitive Advantages Management Team 150

151 151 Objective Valuation of the Acquisition Capital Requirements Summary of Historical and Projected Financials Adjusted Income Statement For Two Years Prior to The Acquisition Exit Strategy The sample Executive Summary included at the end of this book will help to better understand the items above and give the buyer a better idea of what goes into each section. Please feel free to adapt it to fit your particular business. When/if prospective investors request a full-fledge business plan, that business plan should be created by simply expanding on each of the sections above, by including all the details of your strategy that could not be included in a 10-page summary. (Please be sure to review the sample executive summary included in your Practice Kit) In addition to the Executive Summary, the following business profile can be used with your cover page to summarize the Executive Summary and give investors an easy way to reference your business when they need to do so.

152 Table 19 Sample Business Profile For Acquisition Financing Sample Business Profile For Acquisition Financing (Present to lender or Venture Capital Firm with Audited Financials) Business Highlights Food (grocery) Delivery and trucking company, servicing major accounts. This company is a private corporation with an established clientele and relationships, some of which in place since 1961 Key Delivery Points include the following: Waldbaums, Key Foods, Krasdale, Shop Rite, Path Mark, A+P, White Rose Highly Profitable Business established in 1984 with Offices in New Jersey & Pennsylvania. Great growth potential Machinery & Equipment include: autos, tractors, shop equipment s and parts valued at $350,600 Property Description (Not included in Asking Price): Truck parking for 25 trucks, Refueling capacity of 8,000 gallons, 5,000 sq. ft. of repair shop and 3,500 sq. ft. of office space Location Description Excellent location with own parking lot. Location is in a Business Park on a major highway in metro area of New Jersey with 200 ft of road frontage Management & Employees. Business is 100% owned by company President and has 13 Non-Union fulltime employees. Owner is selling in order to help facilitate company growth and will be available to help with a smooth transition. In addition current employees will remain on board after the sale. Employee breakdown: 13 (all) drivers, 4 sales support/office staff and 5 repair shop attendants Major Nearby Attractions: Teterboro Airport, Newark Airport, Kennedy Airport, and Conrail. In addition, 152

153 153 Sample Business Profile For Acquisition Financing (Present to lender or Venture Capital Firm with Audited Financials) the George Washington Bridge is 6 miles away Large, currently un-used Warehouse can also be part of this transaction. The warehouse is not being used at this time because the company lost the account when it became part of the Clorox Company through a recent merger PA New York MA CT Rhode Island Locations Served: Northeast U.S. Three-Year Revenue Table Year Total Revenue ($) (000) , , ,450 Summary Financials ($) Major Expenses Payroll (excluding owner s) $572,000 Payroll taxes 72,000 Insurance 75,000 Yearly Amount

154 Sample Business Profile For Acquisition Financing (Present to lender or Venture Capital Firm with Audited Financials) Rent 54,000 Real Estate Taxes 8,000 Utilities 7,200 Equipment Lease 662 Total Yearly Expense $788,862 Equipment & Assets (included in Price) Value Autos & Tractors $300,800 Shop Equipment 15,000 Parts 34,800 Total $350,600 Transaction Summary Asking Price: $1.1 million Asking price includes inventory, machinery & equipment. Real estate is not included in the Asking Price. Seller will negotiate leasing of the facility with the buyer 154

155 155 Where to Find Equity and Venture Funding on The Internet No-Money-Down Acquisition Case Study What follows is the Term Sheet (another name used to refer to a Letter of Intent) of an actual acquisition in which the author was involved. This was a transaction in which a publicly traded school holding company was buying a small chain of technology training schools with locations in New Jersey, New York, Canada and China. Due diligence followed immediately after the Term Sheet was signed by the seller. Names and addresses have been omitted for confidentiality purposes. Definitive Term Sheet Dated July 10, 2001 Outline of Business Terms for the Acquisition of [Company Division I] (NY); [Company Division II] (New Jersey) Inc.; [Company Division III] (Canada), Inc. (Operating as [Company Name] Computer Institute); and [Company Division IV], Inc. China (including any interests held by [Owner s Name] or other shareholders collectively hereinafter referred to as [Company Name] ) by [Buyer s Company Name], Inc. or its designated subsidiary (hereinafter referred to as Buyer) 1. Seller agrees that, at the Closing, it will sell, assign, transfer, and deliver all of its interests in [Seller] including without limitation any [Seller Name] common or preferred shares, options, warrants, and any debt instruments and all other interests held by Sellers, free and clear of any Encumbrance, and Buyer agrees that it will purchase such interests. 2. The Buyer hereby agrees that the Purchase

156 Definitive Term Sheet Dated July 10, 2001 Price shall be paid and satisfied by the Buyer as follows: A. Warrants to purchase 350,000 shares of [Buying Company] Common Stock at a strike price of 110% of the 10 day average closing offer price for the ten days prior to the closing, but in no event less than $1.00 per share. B. [Selling Company s Owner s Name] shall receive a contract entitling him to receive $300,000 per year for 4 years or until he receives a total of $1 million within the same four year period. Of the yearly amount specified herein, $100,000 shall be paid for consulting services and up to $200,000 per year shall be paid from an amount equal to 20% of the free cash flow of [Selling Company Name]. In addition, Mr. [Selling Company s Owner s Name] may act as a nonexclusive recruitment and Definitive Term Sheet Dated July 10, 2001 referral agent for Asian students wishing to study at any [Buyer] subsidiary postsecondary institution. Such subsidiary, after collecting all tuition and fees for foreign students referred to an [Buyer] subsidiary and recruited by Mr. [Selling Company s Owner s Name] and admitted to such [Buyer] subsidiary, shall pay to Mr. [Selling Company s Owner s Name] 20% of all tuition and fees generated and collected from such students. 3. Seller s key Executive I and Seller s key Executive II shall each sign an employment contract with [Selling Company] at the date of closing for a term of 1 year with renewal options thereafter. 4. [Selling Company] must provide 3 years of Audited Financial Statements for each school for the years ending December 31, 2000 in accordance with US GAAP and shall provide a 156

157 157 Definitive Term Sheet Dated July 10, 2001 stub audit for that part of the year 2001 that is appropriate under SEC requirements, given the targeted closing date. 5. Present management may designate one board member to the [Selling Company] Board of Directors 6. All governmental and regulatory approvals and all consents of third parties (including for example certification agencies and landlords), and compliance with any conditions thereof, required in connection with the completion of any of the transactions contemplated by the definitive Agreement, the closing or the performance of any of the terms and conditions set forth in the definitive Agreement shall have been obtained and complied with on or before the Closing. 7. [Selling Company s Owner s Name] has represented that a $500,000 line of credit is available to [Selling Company] and that he has Definitive Term Sheet Dated July 10, 2001 personally guaranteed such credit facility. As a condition of the closing, [Selling Company s Owner s Name] shall keep such line of credit in place. In return, [Buying Company] shall provide to [Selling Company s Owner s Name] a full and unconditional indemnity, with a right of subrogation in favor of [Buying Company], and in form and substance reasonably satisfactory to [Selling Company s Owner s Name], to hold harmless [Selling Company s Owner s Name] against any claim, demand, action, cause of action, damages, loss, cost, liability or expense which may be made or brought against [Selling Company s Owner s Name] as a result of or arising out of such line of credit. Such obligation to indemnify [Selling Company s Owner s Name] shall be limited to the aggregate amount of $500, The definitive agreement shall incorporate an appropriate non-compete section prohibiting [Selling Company s Owner s Name] from

158 Definitive Term Sheet Dated July 10, 2001 engaging in, directly or indirectly, any company which in any way is competing with [Selling Company] within a 100-mile radius of [Selling Company] or any of its branches or extensions wherever located. 9. The parties shall do all things and provide all reasonable assurances as may be required to consummate the transactions contemplated by this term sheet and each party shall provide such further documents or instruments required by any other party as may be reasonably necessary or desirable to effect the purposes of this Term Sheet. 10. Parties recognize that Finder s Fees for introducing the parties are due by [Selling Company] to [Broker] and by [Buying Company] to [Selling Company s Advisor] Each party shall have the responsibility to compensate their own Finders. 11. This Agreement shall be governed and Definitive Term Sheet Dated July 10, 2001 construed in accordance with the laws of the State of New York. In witness whereof the parties have hereunto duly executed this Agreement on the date first above written. [Buying Company Name] By Separately list each [Selling Company s Division] Corporation shown above 158

159 159 Commission Investments Putting Your Business Brokerage Wealth Building on Overdrive Commission investment is the act of using your commission to own equity stake (essentially becoming a partner) in a business that you represent as a broker. In a transaction where the broker decides to use commission investment as an investment strategy, the broker agrees to use his/her fee as a portion of the down payment in a partnership with the buyer. Because of the structure of such transactions, the broker must be careful in dealings with the seller in order to avoid situations that might create conflict of interests. However, if used wisely, commission investment can propel a broker s wealth very rapidly. The following table is list of advantages and disadvantages of using commission investment Advantages Helps the transaction to close quickly because the broker is basically positioning him/herself as a financing source for the buyer. In addition, because of the broker s insight into the business and a close relationship with the seller, the broker, if he/she agrees to invest his/her commission, will help the seller secure a more desirable deal Disadvantages Can raise conflicts of interest issue with the seller Can propel the broker s Broker does not receive

160 Advantages wealth exponentially by giving him/her an ownership share in several businesses that he/she does not have to worry about managing. Although the broker invests his/her commission in the business, the buyer is the one who will be running the business Disadvantages any cash for the services rendered. The cash is applied at the closing toward any down payment that the seller is requesting the buyer to pay. In addition, if the business fails, the broker looses the investment business brokerage practice, right from his kitchen table. Nonamebroker decided to take our advice and will be starting his practice with no initial money. His salary is modest, so he does not have the cash to do any marketing. To promote his new business, he will use the Neighborhood Walk Technique described earlier in the course. In addition, Nonamebroker has also decided that, as we recommended, he will refrain from spending money to print business cards and register his business. He will sell his first business first and use the money he receives from the sale to pay an attorney to help him do things the right way. 160 Commission Investment Case Study Nonamebroker, our fictitious new broker, just finished this course. With the knowledge gained from the information he studied, he feels totally confident that he can start his own lucrative He will also use the cash to print business cards and launch a small marketing campaign using postcards mailing.

161 161 The table below shows what happened to Nonamebroker s practice 12 months after he purchased the course and started his practice. Nonamebroker s 12-month Practice Progress Months in Business No. of Listings Deals Closed Cash earn ($) Commission Invested ($) 1 1 None None None , None ,000 15, ,000 18, , ,000 0 Total Cash Earned 73,000 Total Invested Commission 78,000 Key points regarding the table above: Nonamebroker didn t sell his first business until the 4 th month First commission check was for $15,000 Nonamebroker started invested a portion of his commission when he closed on his second sale during the 6 th month During the 9 th month, Nonamebroker did not take any of the commission. He invested it all with the buyer because the business had good prospects and he did not want to miss out on a great opportunity Although all of Nonamebroker s cash commission might have been spent, his net worth kept on growing because he invested most of his commission with his buyers. That was a smart approach given that Nonamebroker still has his day job. In addition, Nonamebroker s goal is to build his networth and cash flow so that he can become financially independ within 5 five years.

162 Additional Ways To Generate Income From Your Practice Broker the sales of small businesses and MAKE LOTS of money. Charge commissions between 5% and 12% of the sales price and set a minimum fee of $6,500 to $12,000, depending of the sale price. Co-Broker sales with other business brokers. Expand your sales potential through co-brokering arrangements. Each year, 2.5 million businesses change hands, giving us a $360 billion market to earn big fees! Establish solid relationships with Repeat and/or Corporate buyers. With businesses changing hands every five years on average, you can have a great relationship with many past buyers and sellers assisting them in future transactions. (I have used this one many times!) Earn fees by helping to Finance the purchases you broker. To illustrate the earning potential of this profit center, let's use the example of a trade school which wanted $1.5 million to expand overseas. The business had been operating for 15 years and had a solid track record. We identified an investor and earned a $70,000 fee! Earn fees by providing Valuation services to owners before they sell. Some valuation experts charge $5,000 or more for this service and there is a need for it. You ll learn all about valuation in this program. You even get a FREE software to do the valuation for you. Earn fees by writing business plans for owners who want to raise financing. Anyone looking to raise money from banks or investors have to have a business plan. 99% of business owners either don t have the time, or do not know how to write business plans. That s where you come in. You will learn about writing business plan in this program. 162

163 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

164 Small Business Management For Business Brokers Introduction The information contained in this section discusses the essence (and most important aspects) of small business management. Unless the new broker is a current or former business, the information presented in this section is extremely important. As a trusted adviser to small business owners, the broker must understand all aspects of running and growing a business. This information will be beneficial in two way: On one hand, as you meet with owners and buyers who want to buy and sell businesses, you must be able to understand the dynamics of running a business, plus you must be in a position to advise on minor strategic issues. This will build credibility. On the other hand, as you start to invest your own commissions in businesses, you must become an expert in operational strategies in order to efficiently run the businesses you invest in. Of course you can hire a manager, however, during the earlier part of your practice building, you may have to conserve cash and run the businesses your self. 164

165 165 Maximize Your Equity (& Wealth) Through Growth Growing The Business Internally To grow your business internally you must: Manage the operations in a way that promotes customer loyalty and repeat purchases, while increasing your customer base, Continuously reduce you expenses through a systematic expense management practice, Relentlessly increase your net earnings by both reducing your cost of goods sold and increasing the value of your product or service to warrant a higher than normal price. The following sections provides guidelines that any business owner can follow to distinguish their business from competitors, increase sales and earnings, while keeping an increasing list of satisfied customers. Managing For Growth As mentioned above, a business owner should remain totally focused on having total control of the three (3) items listed below, because they are the foundation on which a healthy and profitable business is built: Hiring and keeping good employees, while firing the bad ones, Efficiently managing the business finances, and Keeping a growing customer base happy Hiring And Keeping Good Employees Buying a business helps alleviate the human resources problems of a new owner. The business is normally purchased as a running

166 concern with employees, unless the seller was the only employee. Keeping employees is not an easy task as problems arise constantly and personalities clash. The key driver in nurturing good relationships with employees is to treat them fairly. To do that, it is important to do some research. The most important one, we believe, is at least to find out how much your competitors are paying their employees for similar jobs and work conditions. Then, it is in the new owner s best interest to match that salary. Of course, a small business owner may not be able to afford to pay its employees what a larger competitor is paying. However, the difference in salary can be made up with special rewards (for example paid lunch one or two days of the week), added responsibility, a small bonus when jobs are performed exceptionally well, etc. There are many ways to make employees happy and it is up to the owner to be as creative as necessary. The bottom line is that employees can only be happy with their job if they: Like what they do, Are paid well for what they do, Are challenged and respected, Have a sense that they own (or partially own) the business However, it is important to note that it will be impossible to please everyone. Many (if not most) employees hired by a small business are simply killing time until the ideal job is found somewhere else. So do not take it personally when things do not work out with an employee, even after you have spent time and money to accommodate that employee s needs. 166

167 167 In addition, at times it will be necessary to let an employee go. That makes an Employee Procedures Manual a must. That will help avoid the legal complications that may arise when an employee is fired. This manual will have to be written in a very clear manner. It will also need to outline you business Rules and Regulations, which if broken, will be ground for letting an employee go. Finally, keep a log of everything that happens in your business. Document every conversation you have had with an employee who was not meeting your performance quota, or was not behaving properly. The bottom line is, unless you are a 1-person business, your employees are essential to your success and add tremendous value to your enterprise. Instilling a sense of ownership goes a long way if you are serious about your employees treating your customers well and staying with you long-term. If your employees are not happy and do not feel a sense of involvement, your customers will not be cared for and your business may fail. Managing Business Finances If you have a good crew on board, you can better focus on managing the most important aspect of your business: your finances. No buyer is thinking about meeting payroll at the closing on a newly acquired business. The excitement of being one s own boss can certainly be a blinding experience. However, especially, in the case of a small business, which was bought using all kinds of credit cards and owner financing strategies, there is often challenging times waiting ahead. A business that is purchased using a lot of debt can become a great burden if the owner is not prepared. There will be lots of bills to pay at the beginning of the month following the closing. Until

168 then, employees have to be paid and operating expenses have to be funded. In order to avoid the embarrassment of having checks of your employees and creditors bounce, not to mention the bank fees associated with that, we would recommend taking the following steps: Immediately (within the first 2 days) upon taking possession of the business, run a complete analysis of current expenses. Without impairing the operations, cut all unnecessary outlays of cash. Hopefully, that was done when you were purchasing the business and as a new owner, you simply need to carry out your cost reduction plan Do a thorough due diligence on how to increase your sales. From flyer distribution to hiring commissioned sales people, by any means, increase your revenue stream, even if that means selling a new product or service (hopefully, this was also planned during negotiation time) Delay or cancel all big purchases, unless it is critical to business operations If not already in place, start paying your employees every other week, instead of once a week, in order to improve your operating cash flow. If you have contracts that pay you on a set day of the month, re-schedule your payroll to closely match that day. This will help to improve your cash flow tremendously Do a complete review of your staff, if applicable. Let go of anyone whose workload could be spread among other employees without too much damage to your service level. This is an unfortunate step, but necessary at times. Try your best to re-negotiate with your landlord. Is it possible to pay no rent for a month or two? If not, would your landlord accept half of your rent payment for a month or two? Some 168

169 169 landlords will give as much as six months worth of free rent to a new tenant, depending on the tenant s credit, line of business, and length of lease for which the new owner is willing to sign-up For as long as possible, the new owner should not withdraw any salary from the business until it is clear that there will be enough cash from the operations to support the business and pay the bills. This is the reason why I always prospective buyers to buy a small business that can run itself, while they keep their current day job My advice is never to wait until the last minute to start finding ways to increase your cash flow. Increasing cash multiplies the value of your business, makes it easier to efficiently run the business and allows you to be able to take advantage of new opportunities as they come across your way. Keeping Customers Happy Satisfied customers increase the value of your business in the eyes of a prospective buyer because satisfied customers become repeat customers, which in turn levels your income flow, making your business a stable one. Remember that your ultimate goal is to continue to increase the value of your business so that you can sell it for much more than you bought it. One sure way to do so is to keep your customers coming back, while they refer even more customers to you. The best way to keep customers happy is to keep employees happy, assuming that the employees have been trained properly to meet the customers needs. Having said that, we believe there are still ways, independent of employee satisfaction, to keep your customers coming back while sending their friends and family to you.

170 Some franchisors actually charge their franchisees a fee for not keeping their clients happy, because customers are the lifeblood of a business and the entire organization s goal should be to satisfy those customers needs. What follows should simply be used as food for thoughts. They have proven very useful in running the author s own businesses. A. Hours of Operations and Convenience Convenience is what customers are looking for, and a business can certainly use it to differentiate itself from its competitors. To take an example from our car rental business, most small neighborhood car renal businesses require that on Fridays, a customer rent a car for the entire weekend. That makes sense for the business owner, but most of the time doesn t make any sense at all for the customer who may simply need the car for a Saturday morning meeting or Sunday shopping. Why pay for three days when you only need the car for half a day? Our car rental business opens seven days a week and does not require customers who rent on Friday to keep the car for three days. This has resulted in a flux of clients from neighboring boroughs, hence a noticeable increase in sales and profit. A business owner s job is to pay attention to all the details that can help make life more convenient for the customers. B. Pricing and Discounts Although most customers would choose convenience and service quality over price, the majority of customers will mention price if they believe, or have found out, that a business is charging more than its surrounding competitors. Or they will simply go where they can get the better price. 170

171 171 For that reason, we suggest that business owners periodically survey their competitors prices and adjust theirs accordingly. This does not mean a business should always sell its products or services at the lowest prices. Usually customers will be willing to pay more when outstanding customer service accompanies a good product or service. Putting your price in line with that of your competitors simply guarantees that your customers will come back to you instead of going to your competitor. C. Product Knowledge Whatever you sell, be sure to know more about it than your customers. This will guarantee that your services are looked after by people willing to pay you handsomely for your knowledge. Nothing is more frustrating than getting the wrong answers from someone who should know the right answers. Giving your customers false or incorrect information may cost you money. It is basically unacceptable to provide inaccurate information to someone who does business with you and your employees. Your customers would prefer that you honestly admit that you do not know the answer, with a promise to research it and get back to them. The key remedy for such a problem is training. The new owner has to ensure that all new (and current) employees have a thorough knowledge of all products and services that the business provide to its customers. Product knowledge will bring customers back because customers always have questions and problems (which is why they come to you in the first place). Being an expert at what you do will convey confidence to your customers who will simply not even think of going anywhere else.

172 This, in fact, is why several large retail companies are now offering free classes to their clients. Knowledgeable customers are less expensive to keep because they know exactly what they want and why they want it, and therefore make your job providing that product or service very easy. In addition, this helps to prevent returns and dramatically lowers the rate of customer complaints, which in turns lowers your overhead and increases your profit per customer. As you can clearly see, employee training and extensive knowledge of your products or services is extremely good for business and can really an increase the value of your business. How Much is Your Business (And Wealth) Growing You may wondering what all the above discussion has to do with building wealth through small business ownership. Well, a lot! You wealth grows to the extent that you can continue to increase your company s sales and net income. You company s earning is your bottom line and is proportional to your wealth building growth rate. When you are ready to sell your business and cash out (see section below), your business will be valued in proportion to the amount of money it can generate for its buyer. Therefore, your key to creating wealth growing your small business is in the amount of profit that the business generates. We purposefully put an emphasis on the items discussed above (product knowledge, convenience, employee satisfaction) because they should be the backbone (or an important part) of your profit-generation strategy. And, as you know, steadily increasing your profit, will likewise increase the amount you can sell your business for, and therefore increase the amount of 172

173 173 cash that end up in your pocket when you cash out. To increase your potential to cash big, I strongly suggest that you manage your business like the big corporations do. That is you should: Organize an advisory board of people who know your industry. If you can t pay them, provide them with a service that they need or give them a small ownership share in the business. You need people of influence to help you build your business and grow Use an accountant to handle your filings and, if possibly, audit your business yearly Create an Employee Manual and put Operating Procedures in place Inspect your numbers and keep track of your income statement and balance sheet quarterly (or have your accountant do so) Keep your finances separate from the business, even if it is a sole proprietorship Doing so will ensure that your business is better prepared for a sale. A professionally managed business is much more attractive to a buyer because if managed efficiently, will a) be able to run itself, and b) will have audited financials prepared by a CPA. Since your goal is to sell the business and cash out, your focus should be on keeping your earning on an upward slope. Use the multiple of earning at which you purchase the business to estimate your selling price for the business. For example, the table below shows that you paid 2.5x earnings for the business. Assuming that your future buyer is willing to pay 2.5x earnings as well, if you can keep growing your net income (by increasing sales and reducing or keeping expenses the same) to $400,000 over 5 years,

174 you are almost guaranteed to sell the business for $1,000,000. Your debt level and ownership stake will determine the amount of cash that you actually receive at closing. For example, if you owed $100,000 and had a partner, you would not get the entire $1,000,000 at closing. You may also have to pay a broker fee, unless you sell it yourself. Build An Empire Through Acquisition If you want to put the process on overdrive and build your company at a faster pace, you will probably want to add a systematic acquisition approach to the strategies for growth that we discussed in the previous paragraphs. 174 Company Position When Purchased Income $200,000 Expense $100,000 Net $100,000 Earnings Price Paid $250,000 Purchase Earning Multiple 2.50x 1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter Please note that you should not go on buying other businesses until you have become a master manager of your first business. Initially, your priority should be to put in place an operating model that is efficient and produces a continuous flow of positive earnings every quarter. Once you have that model in place and it is working (by continuously producing profits) you are ready to go on and buy more businesses. Some people are satisfied with one business that they can grow. But some others will find it more

175 175 challenging to continue to acquire other businesses and build their wealth faster. Please keep the following points in mind as you look for more businesses to buy: It is best to buy a business that is the same as the one you already own, especially if this is you second one. Having the same business in different locations is much easier to manage and will provide the most cost benefits. Different businesses have different needs and owning two businesses in totally different industries without enough resources to manage, them can actually be very costly The next best businesses to buy are those that provide services or sell products that are ancillary to the product or service you are currently selling Simply buying a business does not mean that you add 100% of that business value to your net worth. After you close on the transaction, you may end up with expenses that may result in a loss of value. Be sure to buy businesses that will add 100% of their value to your net worth (or total equity) immediately Do not buy cheap businesses that are loosing money with the hope that you will use current resources to fix them. Especially during your early days, stick with businesses that you already own and only purchase businesses that are profitable, even if they are small Always keep in mind that your goal is two-fold: 1) To have a steady flow of cash streaming your way (so don t buy money-loosing businesses); 2) To build a business that someone can will be able to buy from you for more than you paid for it Try to buy with no money down by using your current business as leverage. You goal is to take over the business from the owner by merging it with yours and pay over time. Business owners will trust another business

176 owner and are more willing to work out payment arrangements with the buyer, especially if that buyer has a similar business Try to buy businesses that you can accommodate where your current business is located. That is if you are buying a dry cleaning business and you own a Laundromat, can you cancel the dry cleaning s lease and move the business to where your Laundromat is located. Usually this arrangement works well with service businesses because the location is less of an issue. For retail business this may not be possible The table below can help you track your wealth building progress as you buy more and more businesses. Income Expense Net Earnings (a) Earning Multiple Paid To Purchase (b) Business #1 Business #2 Business #3 Business #4 Business #5 Business #1 Current Value (c) (a) * (b) Price Paid (d) Other debt/partner (f) Equity (e) (c) (d) Business #2 Business #3 Business #4 Business #5 Your total wealth in those businesses is equal to the sum of all the numbers on the Equity (e) line. That is not the sale price of those businesses. It is the amount that would end up in your pocket after you sell the business, paid your debts and made distributions to any other partner(s). Selling The Business And Cashing Out You Will Likely Make More Money Selling Your Business Than Running It! Although you never have to sell your business, running it as if your sole purpose is to do so in the future is one sure way to build a valuable 176

177 177 enterprise. That is why from the start, you need to prepare the business and/or operating procedures so that your company can be run by anyone, and not just you. In other words, your business should be able to supply you, or whoever becomes the new owner, with good cash whether or not you (or anyone else) actively run it. That in itself creates tremendous value. Whether you cash out through a sale to the public via an IPO (Initial Public Offering) or to an individual or larger corporation, buyers want to own businesses that do not need too much attention and can be easily integrated within a larger entity. Therefore, for you to really cash out big (usually within 5 to 7 years), you will need to build your small business into a larger enterprise by: Establishing procedures and systems that will allow the business to run itself, Delivering outstanding customer service, Continuing to add assets by selectively acquiring (or building) more businesses that fit your model and increase your bottom line. Establishing Procedures & Systems The key point here is to setup operations so that as you grow, you can successfully sell your products and/or services to an increasingly larger pool of customers. Let s say that you own a book publishing company and through some business contact, suddenly receive a large order to deliver 100,000 copies of one of your books to one of the big distributors. Will you be able to accommodate the order flawlessly, on time, within budget, and with outstanding customer support? If your answer is yes, then you have successfully transformed your business into a highly systemized cash machine. If your answer is no, you need to immediately analyze the way you currently run

178 business and figure out how to make the necessary changes to a) run itself, and b) be easily scalable. You never know, that big order may come any day! Be sure you re ready. Delivering Outstanding Customer Service "Do unto others as you would have them do unto you," may seem self-evident in the way we try to conduct our personal lives, but takes on added importance and significance as a guiding principle in the world of business. These days, not only do customers want a fair price on the products they purchase, they also demand superior service from their vendor. Companies of all sizes are realizing that their strongest selling point can sometimes boil down to treating customers as they would like to be treated -- or better. Consumers want their needs met, and they want them met with exceptional service all the time. And the message is getting through. The growing significance of meeting -- or exceeding -- customer demands for quality service has special implications for small business. For it is in this arena that small companies can, in the least expensive way, set themselves apart from the competition. In fact, a recent year study showed that small businesses, which put heavy emphasis on customer service, were more likely to survive and succeed than competitors who emphasized such advantages as lower prices or type of product. Five Rules Of Customer Care Critical to keeping customers happy is to understand them and the way they think. For example, customers do business on the basis of emotional desire: they want what they want -- when they want it. Customers also tend to gravitate toward a company or group of people they like. Plus, most customers have a strong 178

179 179 tendency to stick with businesses with which they are familiar, and are slow to change buying habits unless given a very good reason. An important key to serving customers well is to not try to change them. Here are five suggestions to help you take full advantage of the critical element of customer care: 1. Conduct your own survey and profit from the ideas, suggestions and complaints of your present and former customers. Talk and meet with your them. Ask questions. Learn their attitudes, what they want and what they dislike. 2. Check employees' manners periodically. This is particularly important for small businesses, as bad communications skills (via , phone, personal contacts) can undermine other constructive efforts to build a profitable enterprise. 3. Rules such as prompt answering and a cheerful attitude of helpfulness are of critical importance. Have someone whose voice is unfamiliar play the role of a customer or prospective customer, preferably a difficult one. 4. Make customer service a team effort. Use group meetings, memos, posters and in-house memos to build customer consciousness throughout the organization. Continually drive home the crucial rule that getting and holding customers requires team play, and invite employee ideas. 5. Extend your efforts after hours. It's the friendly feelings people have that draw them to you and your business. Take advantage of social occasions or a neighborly chat to turn friends into customers, or to reinforce the loyalty of existing ones. Building Your Asset Base Simply said, you need to create a process that will help to duplicate what you already have. That is probably the best way to transform a small

180 business into a large one. Once a small business has put in place operating procedures to automate the delivery of its goods and has refined its customer service engine, the next logical step is to leverage its foundations and duplicate itself. One way to do that is to buy other businesses. By doing that you can a) increase buying power, b) cut expenses, and c) raise enterprise value. 180 Cashing Out Once a business owner has established his/her business as outlined above, cashing out can be done either via an Initial Public Offering (IPO) whereby the company is sold to the public, or via a sale to an individual or a larger corporation.

181 Convinced That Business Brokerage Can Help You Build Wealth? Here s how you can benefit even more: Go to /bizbrokcrse.htm, Buy The Complete Package And I ll Even Help You Get Your First Client At No Additional Cost! Here s what you get with your package: A printed copy of the Business Brokerage Home Study Course in a convenient 3-ring binder for easy access (Value: $149.97) The BizVal Business Valuation Software & a separate comprehensive Excel Valuation Workbook (Value: $274.95) All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic form if you decide to make changes to them (Value: $59.95) PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an and I will refund your money without asking any questions (even after you ve had the chance to review it for free!) The price you pay for all of the above? The modest sum of $49.99! If, However, After Reading This ebook, You Do Not Think That Business Brokerage Is For You, Help your friends who could benefit from this course by sending them to /bizbrokragefreecrse.htm so they can download their own copy of the course.

182 Appendix I: Managing Your Practice The Office: Location & Layout, Office Administration, Recruiting the Staff, Office Management This course is not about how to set up an office and hire other business brokers to work for you. We intentionally left this as an appendix item because we do not believe that a broker needs an office or staff to build a very lucrative practice. Our advice to all new brokers, whether or not they have ample capital to start a Business Brokerage practice, is to sell a few businesses before venturing into hiring staff and renting space. This may become an expensive proposition if things do not turn out as anticipated (e.g. you may realize that this business is no for you). We will only say that a successful broker will get to a point where he/she will need to decide whether to expand or keep the practice as is. Expanding can mean many things to many people. But keeping a small practice is fairly simple. All you normally need is to operate out of a home office or shared office, where clients can be invited for meetings, closing, analysis, etc. All that can also be performed from a home office as well. However, expanding a practice can mean renting office space, hiring a receptionist or sales assistant. It can also mean hiring analysts to perform valuations analyses, or hiring sales people to retain listings from sellers. From our experience, it is best to decide after a broker has closed on several transactions and is totally comfortable with advising his/her clients on purchasing and selling businesses. 182

183 Appendix II Practice Management Forms Included with your paid copy of the course b) Practice Marketing Documents Included with your paid copy of the course 184

184 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 1 of 11 1/19/2007 This Course Will Teach You All You Need To Know About Operating Your Own Business Brokerage Practice To Earn A 6-Figure Yearly Income... Contact me Order Press See what the KIP Business Report says about my book Read about me in Black Enterprise Magazine Print This Page Start Your Own Lucrative Business Brokerage Practice I Will Even Find Your First Client For You At No Additional Cost! Here's How You Can Earn A Substantial Yearly Income As A Home-Based Business Broker (Even If You Don t Have Any Money To Start). From: Rudy LeCorps RGL Publishing Dear Friend: If you're looking for the fastest way to start your own business, from your home, starting with very little or no cash - and you want to earn a substantial income keep reading. In the letter you re reading, you will find all you need to know to start your own business brokerage practice...from your own home. From a home office, from your den, from your kitchen table, from your bedroom if you need to! Even if you live in a one-bedroom apartment, there's no reason why you can't get started right away, even if you have no money. Own An Extremely Lucrative Business Brokerage Practice While Building Your Assets & Eliminating Debt That's the beauty of business brokerage. You can build a successful business, pay off your debts, and build a dream life of success for yourself

185 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 2 of 11 1/19/2007 and your family. You can start your business with very little, or no money and still keep your regular job until you know your business is a success. Many people have started this way and found the lifestyle, freedom and happiness they'd been seeking for years. And best of all, there is no limit to the amount of money you can make. Once your business is up and running, you can get as big as you want to get. You can stay a small one-man operation, or you can get employees, offices, and grow as big as you want. Some of the most famous companies in America started out as one-man businesses: Goldman Sachs, Dell, Virgin Group, and many more. Without a doubt, Business Brokerage, a multi-billion dollar industry, is one of the last businesses left in the world that anyone can realistically afford to start, from home, in their spare time, and yet have the opportunity to grow as big and as fast as they want. And it's a fantastic business, because your customers are, just like you, entrepreneurs, business owners, visionaries, risk takers, AND, they love what you do for them. Your Clients Desperately Need What You Do For Them! To small business owners, a skilled business broker who can help to sell a business is the most important person in the world. They don t want to spend all kinds of time finding a qualified buyer for their prized and successful business. They don t want to decide on the best price for which to sell the business, they want expert advice. Finally, they don t want to waste time speaking with potential buyers when they re busy running their company. Fact is, small business owners do not have time to sell their own business and are willing to pay a hefty fee (normally $12,000 or more) to a competent broker. But the reason I'm writing to you today is to tell you that now there's a fasttrack and affordable new program that can teach you the insider secrets of business brokerage in no time at all. It's a program that takes you by the hand and leads you through all the steps necessary to build and operate your practice and make as much money as you want. This program is so comprehensive, it will even teach you all the tricks and techniques you need to buy your own businesses with no money down! That is, if you decide, like I did, to start buying businesses for yourself! You'll learn about:

186 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 3 of 11 1/19/2007 The quickest way to identify those who want to sell their business... The most efficient way to analyze and price a business for a quick sale The most efficient way to find buyers for businesses you re selling... What the most successful brokers do - and how to do the exact same thing... The most common mistakes - and how to avoid them... Finding businesses you can buy for yourself with no money down... These are the secrets that helped me go from deep in debt to where I am today... High Profits (Six-Figure Income) In Business Brokerage This relatively new profession is making big news as a high income business. You can either conduct your business from the comfort of your home or from a traditional office. In addition, you can start with virtually no cash and start making big money right away. Here s why making money is not difficult in this business: 1. A Large Market. It is estimated that 18% of businesses are sold each year in the U.S., and there are approximately $360 billion worth of businesses sold each year. That's big money! 2. High Selling Price. Industry survey has shown that the average small business selling price is about $250, High Success Fees. The average commission to a broker who sells a business is $18,300 or more. 4. High Yearly Income. According to the latest information in The Business Reference Guide, the average home-based business broker earns between $300,000 and $400,000 in annual commissions. Some earn millions. 5. No overhead. You can start right where you are, in the comfort of your home, and pocket all your fees as profits. 6. No License Required. There are no specific business broker s license requirements and just 16 states require you to have a real estate agent license (AK, AZ, CA, FL, GA, ID, MI, MN, NE, NV, OR, SD, UT, WA, WI, WY, and IL requires a registration process only). Getting a real estate license is relatively easy and has never stopped anyone from succeeding in this fantastic business. "Of all the businesses I've owned this is the best business I've ever been involved in." -- Business Broker

187 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 4 of 11 1/19/2007 A Recession And Inflation Proof Business Business Brokerage is one of the last professions that is virtually unaffected by recession and inflation. More people tend to move to new areas...more people want to earn more money...many are locked into salaried jobs. Their Choices? Stay and deplete savings, or use those savings to buy an existing business with net earnings that meet their needs. There's an abundance of sellers, too. Making this business even more attractive is the fact that the baby-boomer generation is aging fast and many of them are business owners, adding millions to the pool! The bottom line is this: Whether or not the Economy is good, You Will Make Money. And lots of it too, if you know what to do. We know that small business is the engine that will drive us into the 21st century... You employ most of the people, create more than half of what we produce and sell, and create most of the new jobs, and we need to respond to that. Small business is the American Dream." President Bill Clinton, at a White House Conference on Small Business You Can Start Even If You Have No Initial Capital I started in this business with no money to market my service. However, after three months, I had signed up 5 businesses to sell, and was actively presenting them to possible buyers. Since I didn t have any startup capital, I used plenty of sweat equity. I called people, walked into local businesses, delivered homemade flyers, went to networking meetings... Anything I could do, I did! And it didn t cost me a dime but my time! Six months after signing up my first business, I had sold two businesses and got my first checks. My nominal fees for selling those two businesses added up to exactly $102,000 (although I did not receive the entire amount all at once). One business sold for $3,000,000, the other for $200,000. Since then, I have not only brokered several transactions, but I have also purchased businesses of my own. And, the best part is that I bought those businesses using none of my own money, which I will talk about in a minute... Since I started I've learned techniques about business brokerage that I'll

188 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 5 of 11 1/19/2007 share with you in my course. Secrets that can help you do the same thing I did, only much faster, and much easier. You don't need to make the mistakes I made - mistakes which can slow you down. Home-based business brokers can make a profit with a relatively small number of sales per year... Finding people who want to buy a business is not difficult. Brokers tell us that advertising in the businessopportunities sections of newspapers draws six to twelve inquiries per ad. Nine out of ten people who buy businesses are first-time buyers If, you are well organized, and like dealing with people and helping them solve their problems, then this high-income professional home-based business is for you! And, with my help, you can get started immediately. Hundreds Have Paid Thousands To Get Into This Business Here Is Your Special Offer To Get Started For Less Than A Penny A Day Now you can profit from what you ll learn without spending thousands. That's because all you need is spelled out in my new step-by-step Business Brokerage home study program. You'll profit wildly from my years of experience. What Franchisors Are Charging For Similar Packages Franchisor Franchisor Franchisor No. 3 No. 1 No. 2 Startup Cash Required: $2,5000 $50,000 Startup Cash Required: Unspecified Initial investment: between $25,000 and $50,000 USD. Investment Required: $100,000 Investment Required: Unspecified Well, I ve got great news for you! You will not have to pay anywhere near that. My program will cost you much less, and you WILL be making money with what you learn. Follow this foolproof system, and you can have an avalanche of cash flowing into your pocket within the next 3 to 6 months. Accept my risk-free offer, and you'll be able to... Initial Franchise Fee: $17,500 US dollars. Monthly royalties: $400 US dollars or 5.0% of the gross sales of the Office Broker the sales of small businesses and MAKE LOTS of money. Charge commissions between 5% and 12% of the sales price and set a minimum fee of $6,500 to $12,000, depending of the sale price.

189 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 6 of 11 1/19/2007 Co-Broker sales with other business brokers. Expand your sales potential through co-brokering arrangements. Each year, 2.5 million businesses change hands, giving us a $360 billion market to earn big fees! Establish solid relationships with Repeat and/or Corporate buyers. With businesses changing hands every five years on average, you can have a great relationship with many past buyers and sellers assisting them in future transactions. (I have used this one many times!) Earn fees by helping to Finance the purchases you broker. To illustrate the earning potential of this profit center, let's use the example of a trade school which wanted $1.5 million to expand overseas. The business had been operating for 15 years and had a solid track record. We identified an investor and earned a $70,000 fee! Earn fees by providing Valuation services to owners before they sell. Some valuation experts charge $5,000 or more for this service and there is a need for it. You ll learn all about valuation in this program. You even get a FREE software to do the valuation for you. Earn fees by writing business plans for owners who want to raise financing. Anyone looking to raise money from banks or investors have to have a business plan. 99% of business owners either don t have the time, or do not know how to write business plans. That s where you come in. You will learn about writing business plan in this program. Skyrocket your fees with Commission Investment. This one is my favorite! One of the sweetest rewards of business brokerage is that you can own a piece of a never ending variety of businesses that appeal to you, without ever investing a dime of your own money. For example, I have invested my commission in a Laundromat and two proprietary schools, not to mention the businesses I still own today. This is the easiest way to build a fast fortune starting with absolutely nothing. I hope that by now, you agree with me that you can build a huge profit stream, create your own handsome month-after-month income, explode your net worth, and save yourself the usual grief and aggravation. Getting Started: What to Do First It's Not What You Might Think... Normally you d be given the following advice if you wanted to start your own business. Consult with a lawyer to make sure you set up the right legal structure. Check with the county clerk s office to make sure "they permit a business like yours from a home office." Buy business insurance and "talk to an accountant" to make

190 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 7 of 11 1/19/2007 sure you're not missing anything. Get a toll-free number (to give the impression that your business is big). Invest in great business cards and letterheads. Well, I ve got news for you! That kind of advice will drive you right into the failure pit, unless of course, you have the money to do these things. You re probably wondering why. Because every one of these suggestions involves: spending money and complicating you life None of these activities involves creating cash to flow into your pocket. And that is the single most important thing you need to do, especially when you start with nothing, like I did. You won't get your business off the ground that way. Instead, >> Don't do anything you don't have to do until you have sold your first business. Setting up a corporation, buying insurance, and getting your local status secured is a waste of time when starting up a home based business brokerage practice. >> After you have made the first sale, make another one. And then another one. And then, print business cards. Don't worry about stationery. Just keep making sales. >> Once you are confident of your ability (and if you follow my advice you will be) to close on transactions, it is time to organize a marketing plan so you can roll-out your practice for good. This may involves hiring other brokers, moving into an office, advertising, etc. >> Notify regulators and government agencies AFTER your first sale when you do have money coming in and must pay your taxes. Doing so beforehand is useless. This is how I did it. You can learn from me or do your own thing and waste time and money. But I will repeat, SELL, SELL, SELL, until you ve sold your first business and the money begins to roll in! This program is built on real-world, tried and true experience. Follow my advice and you will succeed. Here s What You ll Find Inside My Business Brokerage Program... Why Not Get Started Today? You will literally receive an arsenal of powerful tools. You may not need all of them right away. But as you build your practice and wealth, I guarantee that you'll love referring back to them. Because every time you do, you'll

191 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 8 of 11 1/19/2007 find a new tool for exploding your profits and taking you to the next level. A printed copy of Start & Operate Your Own Lucrative Business Brokerage Practice Home Study Course in a convenient 3-ring binder for easy access. This is the ebook you previously downloaded. (Value: $149.97) BizVal Business Valuation System. Finding out how much a business is worth is easy, once you have this software! In just a matter of minutes the BizVal Business Valuation System will tell you what the business is worth. With just a few simple keystrokes, the program gives you the answer. It's quick and it's simple! And after the BizVal software is done, you can get a print out on paper to hand to your clients! (Runs on Microsoft Windows) (Value: $249.95) Screen print of the system Business Valuation Spreadsheets. For those who are familiar with Microsoft Excel, as an added bonus, I am also giving away this comprehensive set of Excel Spreadsheets in a Workbook that has been coded to allow thorough analysis of a company s financial. (Microsoft Excel Required) (Value: $24.99) Screen print of the system

192 Make $100,000+ A Year Selling Small Businesses - Become A Business Broker /bizbrokcrse.htm Page 9 of 11 1/19/2007 All the Forms and Contracts you need to immediately start your practice. The forms are also in electronic format if you decide to make changes to them (Value: $59.95) Some of the documents included: PERSONAL ONE-ON-ONE PHONE AND CONSULTATION WITH ME UNTIL YOU SELL YOUR FIRST BUSINESS. I Even Get You Your First Client! (This is the cornerstone of this package and it is priceless) Here is how I assist you as you begin to build your practice: a. Once you receive your package in the mail, I ask that you call me (or I call you if you do not have free long distance) so we can discuss the initial steps you need to take and a timeline for your first sale. During day 1 through day 7, as you study the material, I am available to answer all your questions either via e- mail or phone. b. Assuming that you have completed a preliminary study of the course, during week two, I work with you to get your first client. i) If you are in New York, I simply hand you your first client from my list of clients that I have acquired through my marketing activities. You simply have to find the buyer, and I still work with you to find one. ii) If you reside outside of New York, all you have to do is give me the name and phone number for businesses in your neighborhood with which you would like to work and I will contact those businesses on your behalf and get you your first seller. c. We then work together using s and a weekly phone call to find a qualified buyer. I help you stay the course and guide you until you close on your first sale. My only goal is for you to succeed. My complete lifetime guarantee. If you find out later that Business Brokerage is not for you, just send me an