How to buy a business: Some easy, others not

Filed under: Economic Development,Photo,Print | Tags:,
Jo Marini prepares a shot of java at her new business adventure, Raven’s Nest.

Jo Marini prepares a shot of java at her new business adventure, Raven’s Nest.

Caroline Bilodeau went into The Speedtrap coffee shop one day, asked the owner if he would sell the Palmer Lake business to her, and he said, “Yes.”

“A week later, I came back with a check, and it was done,” Bilodeau said. “It was a very quick and simple sale.”

Not all business sales are as quick and simple, according to two business brokers in Colorado Springs, Dave Finsterwald of National Business Brokers and Ron Chernak of First Business Brokers.

Business sales typically involve attorneys and accountants as consultants, and some involve brokers, they said.

“Finding a business is more challenging than it sounds,” Chernak said.

“When we first meet with a buyer, we talk with them about what they’ve done in the past and what they might want to do,” Finsterwald said.

Chernak will also ask clients to define their goals and objectives.

“Know how big a business is and how much you can afford,” Chernak said. Much like buying a house, a person who can afford a $300,000 home probably shouldn’t consider a $2 million property, he added.

Some buyers know the type of business they want to purchase, be it service, manufacturing, restaurant, distributor, automotive, or retail.

“We figure out how much money they would like to invest and how much money they’d like to earn,” Finsterwald said.

Chernak identified several steps to buying a business:

Confidentiality

Both Finsterwald and Chernak stressed confidentiality. Signing legal documents promising confidentiality is one of the first steps they take with potential buyers.

“Most sellers don’t want their employees to know,” Finsterwald said, adding that the employees will sometimes conclude – erroneously – that they will lose their jobs if they know the business is for sale.

“But that’s not the case. Employees are an asset. Most buyers want to keep the employees,” Finsterwald said.

“We have a number of businesses at any given time that we don’t market on the Internet,” Chernak said. “Confidentiality is a very important factor in business transfers.”

Assemble the team of accountant and attorney

“We always advise buyers: Have their legal counsel review the documents as well as their accountant do the financial due diligence,” Finsterwald said.

Chernak advises his clients to hire a transaction attorney with experience in business transactions. Finsterwald’s business will make referrals to attorneys and accountants.

Do homework on the industry

This step involves meeting the business owners and determining the comfort level of the buyer with the industry, Chernak said.

Negotiate a purchase agreement

The agreement involves the purchase price and closing date, along with anything else that’s involved with the business sale, Chernak said.

Both Chernak and Finsterwald prepare purchase agreement documents.

Perform due diligence

In this step, the buyer will have their accountants and attorneys review the documents and financials, Finsterwald said.

“Most accountants will randomly pick one month out of the year and they’ll audit that month. If that checks out, the whole year typically checks out,” Finsterwald said.

He and Chernak advise clients to review deposit statements, sales tax reports, profit-and-loss statements, balance sheets, tax returns, payroll records, invoices and contracts.

Complete financing and close the transaction

Banking for business transactions has been difficult, Finsterwald said.

“You needed a really high credit score and experience in what you were buying,” Finsterwald said. For example, a partner could find financing to buy more of a business, but someone with a background in computers had a difficult time purchasing a shop like a liquor store, he added.

“We will work with buyers to qualify and educate them relative to the size of business they can afford,” Chernak said. “We can also introduce them to the lenders.”

Chernak added that the majority of business sales of less than $5 million are financed through the Small Business Administration.

Multi-time buyers

Buying a business can be complex and time-consuming and, “a lot more intimidating to a first-time buyer,” Chernak said.

For the new owners of The Raven’s Nest, 330 N. Institute St., it was their second business. Jo Marini, Sara Crowell and Philip Petty, took over the coffee shop and bistro July 8.

“It happened by accident,” Marini said of the purchase. The three were having coffee one day in the shop when another lamented that the shop was selling.

Marini and Crowell had saved some money from their food truck, The Local, and they considered using that money to buy their second business.

That’s when they approached the owner.

For Bilodeau, the Speedtrap Bistro was her third business endeavor.

Determining whether a business suits her or not “has a lot to do with your gut feeling and what you’re passionate about,” Bilodeau said.

“I always purchase a new or failing business and I make them profitable,” Bilodeau said. “I trusted my ability to bring it back to life.”

In addition to her gut, she relied on research she did, reviewing the business’ financials, sales, payroll, the cost of goods sold. She considered also the success of neighboring businesses and was able to answer the question: Would she be able to pay herself back with profits from the business?

“It was nice to know we could step into something that already had customers,” Marini said. “It has great clients, great people.”

The trio put down a significant portion of the sales price, and for the balance, “We were able to work out financing outside the Small Business Administration,” Marini said.

Marini also said the previous owners made the transition simple.

Available now

Both Chernak and Finsterwald have plenty of businesses to offer.

“We have service businesses, a manufacturing business, some restaurants,” Finsterwald said. “We have some retail as well, liquor stores, car washes.”

The offerings are listed from $80,000 to $4 million, he added.

One trend Chernak sees is that the Baby Boomers are ready to sell their businesses. Chernak’s firm has several listings along the Front Range, and occasionally, the company will sell an out-of-state firm or to an out-of-state client.

“Now that the market has increased and businesses are worth more, those aging Baby Boomers are more comfortable with selling,” Chernak said. “We are seeing that in Colorado Springs.”