How to Buy a Business in a Potential Recession

How to Buy a Business in a Potential Recession

Today, I’m addressing a great question from Jesse, who’s concerned about buying a business right before a possible recession. Here’s how you can approach this situation with caution: https://youtu.be/1MVbXYpYFCA 

1. Assess Industry Impact

• Recession Sensitivity: Different industries react differently to economic downturns. For example, luxury goods and travel-related businesses often suffer more during recessions than essential services like healthcare or basic consumer goods. Evaluate the industry of the business you're considering. Are its customers likely to cut back on spending during a recession?

• Local Economy: Consider the economic health of the area where the business operates. If major employers in the area are vulnerable to a recession, the local economy might decline, affecting local businesses.

2. Evaluate Expense Structure

• Variable vs. Fixed Costs: Businesses with high fixed costs (e.g., rent, salaries) are more vulnerable to revenue declines. Look for businesses with more variable expenses that can scale down with reduced revenues. This flexibility can help the business weather economic downturns better.

• Cost Management: Review how the business manages its costs. Can it adjust its expense structure if revenues drop?

3. Review Reporting Systems

• Financial Monitoring: Ensure the business has strong reporting systems to track financial performance in real time. Good reporting helps identify problems early, so you can act before issues become severe.

• Data Accuracy: Verify that the financial data you’re reviewing is accurate and up-to-date. Strong reporting systems should reflect real-time performance and trends.

4. Negotiate Terms of Sale

• Financing Structure: If possible, negotiate favorable terms with the seller, especially regarding financing. Seller financing can be flexible and might include terms that help you manage downturns, such as interest-only payments during slower periods.

• Flexibility in Terms: Discuss terms that allow for adjustments based on business performance. For instance, you might negotiate terms that adjust based on future sales or performance metrics.

5. Understand the Seller’s Motivation

• Motivation Check: Find out why the seller is selling. If they’re motivated by personal issues rather than economic conditions, they might be more open to negotiation and seller financing.

• Seller Insight: A seller who’s transparent about their reasons for selling and willing to assist with the transition can be a good sign. Conversely, if they’re insistent on a high price with no flexibility, they might be trying to offload a problematic business.

6. Build a Relationship with the Seller

• Trust and Communication: Developing a good rapport with the seller can provide valuable insights into the business’s true condition and the seller’s motivations. A cooperative seller can also offer support and advice post-sale.

• Negotiation Stance: Approach negotiations with a mindset of collaboration rather than confrontation. This can lead to better terms and a smoother transition.

Final Thoughts

A potential recession doesn’t necessarily mean you should avoid buying a business, but it does require more careful consideration and due diligence. By evaluating the industry’s sensitivity to economic changes, understanding the business’s expense structure, and negotiating favorable terms, you can better position yourself to make a sound investment.

There is an entire module in Business Buyer Advantage: Online Training all about structuring purchase deals in a recessionary environment. Learn more at https://www.BusinessBuyerAdvantage.com

If you haven’t already, sign up for my email list at https://www.DavidCBarnettList.com 

 

Get into Biz 101 Ep8 Closing Transition or Launch

               

***New Video Alert!

Part 8 of the ‘Get into Business 101’ summer series.

Today, we’re talking about what happens on closing day and when you take over a business you just bought. 

Also, the initial startup to a new business and how these things can kinda be similar.

Check out this week’s video:  https://youtu.be/lD6ycnQLW2k 

Cheers

See you over on YouTube

David C Barnett

How to Avoid Scams When Buying a Business

Today, we're diving into an important topic for anyone looking to buy a small business: how to recognize and avoid scams and frauds that can lurk in the business-buying process. 

Understanding the Key Players

When buying a business, there are typically three main parties involved:

1. Buyer: That's you, the individual looking to purchase a business.

2. Broker: An intermediary who helps connect buyers and sellers. This could be a business broker or another type of agent.

3. Seller: The current owner of the business who is looking to sell.

Each of these parties can potentially be involved in scams, either directly or indirectly. Let’s break down some common scams and how to protect yourself.

Common Scams and Red Flags

1. Broker Scams

• Upfront Fees: Some brokers might ask you for a fee before they provide any detailed information about the businesses they claim to represent. In legitimate transactions, the seller typically pays the broker's commission. If a broker is asking for money upfront just to provide details on a business, it’s a red flag.

• False Listings: Some brokers may list businesses that don’t actually exist just to attract fees or interest. Verify the legitimacy of the broker and the business listings before proceeding.

2. Seller Scams

• Pay-to-Peek: Sellers may ask for a non-refundable deposit or payment to access financial statements or other critical information. This is akin to a car dealer asking for a fee just to view the inside of a car. Don’t pay to view financials; you should be able to see this information as part of the due diligence process.

• Misrepresentation of Financials: Sellers may exaggerate or fabricate financials to make the business appear more profitable than it is. Always perform thorough due diligence. Check the financial statements against bank statements, sales receipts, and other supporting documents.

3. Transactional Scams

• Fake Financials: Sellers might create fake or inflated financial statements to make the business seem more valuable. They might show inflated sales figures or under report expenses. Scrutinize the financials and cross-check with actual business operations and documentation.

• Fabricated Sales: Some sellers may create fictitious sales or revenue spikes to boost the appearance of profitability. Watch out for sudden, unexplained increases in sales figures and investigate the reasons behind them.

Protecting Yourself

1. Verify Broker Credibility: Check the broker’s reputation and reviews. Ensure they are licensed and have a history of successful transactions.

2. Due Diligence: Always verify financial statements and business operations with independent sources. Request detailed records and cross-check them with bank statements, purchase invoices, and sales receipts.

3. Avoid Paying Upfront: Do not pay any fees to view information or access business details. Legitimate brokers and sellers will provide this information as part of the due diligence process.

4. Structured Deals: Structure the deal to share risk with the seller. For example, you can negotiate terms that allow you to pay a portion of the purchase price based on future performance.

2023 HC#011 Texas Buyer needs focus and overcoming his BATNA mistake Video

 

HC#011 Buyer007 has a license to search! This anonymous caller wants help to figure out why he can’t find good deals, why the sellers on bizbuysell are playing the Bait and Switch game and if a franchise might be the answer. If you listen to the end, however, you’ll hear a really juicy part about his mistake in calculating his BATNA (Best Alternative to a Negotiated Agreement) as he forgot to include one really big cost/benefit of doing a deal which may cause him to totally change his criteria.

Get into Business 101 Ep 7 Due Diligence, Financing, Getting Investors

***New Video Alert!

Part 7 of the ‘Get into Business 101’ summer series.

Today, we’re talking about Raising Money and doing Due diligence.

I dispel a lot of misconceptions about where you find investors, how you get the cash to fund your business acquisition and how you manage the process of due-diligence.

Don’t get into something that might bite you!

Check out this week’s video:  https://youtu.be/aXiN3L69UH0 

Cheers

See you over on YouTube

David C Barnett

LIVE Jonathan Bennet Scale and Sell a Service Business

 

Scale and Sell a Service Business with Mini-Me’s New Livestream guest- Jonathan Bennet I’m happy to have Jonathan join me on a live broadcast. He’s has grown a consulting business by training others on how to deliver the services, then sold it off in a management buyout! Tune in and as we’ll be discussing his journey and how he executed this very difficult transition from ‘being the guy’ to being a true owner. We’re also going to dip our toe into the world of ‘B-Corp Status’ and how it helped in marketing to a very specific customer segment. This is a ‘must see event’ for anyone in the service or consulting industries. Be sure to join live so that you can ask questions, replay will be available. We’ll be going live August 19, 2024 at 1PM Atlantic Time and 12 Noon Eastern Time See you there! David C Barnett

Is Buying a Business the Same as Building a Billion-Dollar Brand?

Today, I want to dive into a topic that often comes up when people consider buying a business: Is it like founding a billion-dollar company? https://youtu.be/cZbm0LO6lsM 

The Reality of Building vs. Buying a Business

While attending a conference in Fort Lauderdale, I had the chance to hear from Brian Smith, the creator of UGG boots. His story is both inspiring and eye-opening, especially for those of you thinking about starting a business from scratch. Brian's journey started with a vision and a product idea, but it took him six years before he could even take his first paycheck out of the business.

In the early days, he sold just 28 pairs of boots in the first year. By the sixth year, despite his efforts, he couldn't afford the inventory needed to keep the business going. Eventually, he lost ownership of the company, only to get back in later and grow it into a billion-dollar brand.

Why Buying a Business is Different

Brian's story highlights the risks and long road that many entrepreneurs face. This is why I emphasize that buying an established business is fundamentally different from starting one. As a business buyer, you're not just an entrepreneur; you're an investor. You’re purchasing a business that's already generating cash flow, which can provide immediate income and financial stability—unlike starting a business where you might not see a return for years, if ever.

The Advantages of Buying an Existing Business

1. Immediate Cash Flow: Unlike startups, an established business comes with an existing customer base and revenue stream.
2. Lower Risk: With an existing business, you can analyze past performance and predict future success more accurately.
3. Faster Path to Income: Instead of waiting years to see profits, you can start earning right away.

Conclusion: The Path to Business Ownership

While stories like Brian’s are inspiring, they also underline the challenges of starting from scratch. If you have financial obligations, buying an established business might be the smarter, less risky path to becoming a business owner. It allows you to avoid the long, uncertain journey that many entrepreneurs face.

If you're ready to explore buying a business, I encourage you to check out my online course, Business Buyer Advantage : Online Training. It’s designed to guide you through every step of the process, ensuring you're well-prepared to make a successful acquisition.

Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com 

Cheers!

Dave

2023 HC#010 Isaac buys a VERY SMALL window company Video

 

HC#010 Isaac buys a VERY SMALL window replacement company. Actually, it’s his dad’s and he wants Isaac to do the deal so he can retire six months from now. They’re both realizing that this may not be a very valuable business, so, can dad grow it enough in a few months for it to make sense for his son to pay big bux for it? If not, is there any value at all and how should we be thinking about the value of what is there. Even though it’s small, it would be easier to take it over than to start something from scratch.

Get into Biz 101 Ep6 Make Offers

 

***New Video Alert!

Part 6 of the ‘Get into Business 101’ summer series.

Today, we’re talking about Making Offers.

Lot’s of em.

AND- what we can learn from the responses we get back from sellers.

Check out this week’s video:  https://youtu.be/rXftHpMBSBM 

Cheers

See you over on YouTube

David C Barnett

LIVE Loreta Tarozaite Online presence strategist

 

Do you look good on camera? 

New Livestream guest- Loreta Tarozaite

Executive Presence Strategist and On-Camera Coach.

I’m happy to have Loreta join me on a live broadcast.

She has been working in marketing, communications and making people and companies look good for over a decade.

Tune in and as we’ll be discussing managing the way you appear and seem to people over virtual meeting media.

This is a ‘must see event’ for anyone that wants to make a great impression over Zoom or other modern media.

Be sure to join live so that you can ask questions, replay will be available.

Set yourself a reminder on YouTube here: https://youtube.com/live/m74rk3DfGTQ 

We’ll be going live August 12, 2024 at 1 PM Atlantic Time, 12 Noon Eastern Time

See you there!

David C Barnett

 Should You Delay Closing if Permits Aren't Ready? Key Insights for Business Buyers

Today, I’m tackling a crucial question: If you're buying a bar or restaurant and can’t get the necessary liquor or food service permits in time, should you delay the closing? https://youtu.be/M8UH6Y2LrBM

Navigating Permits and Licenses: A Must-Know for Business Buyers

When purchasing a business, especially one that requires specific permits or licenses, it's essential to understand the implications and processes involved. Permits and licenses vary greatly between jurisdictions, affecting the closing timeline and overall viability of the business.

Understanding Permit Requirements

Before making an offer, you need to know which permits and licenses are required for operating the business. Here’s what you need to consider:

1. Corporate Structure and Personal Liability: Even if you operate under a corporate name, many permits, like liquor licenses, may require a specific individual to be responsible.

2. Health and Safety Certifications: Ensure key staff have the necessary certifications, such as food handling permits.

3. Local and State Regulations: Different permits may be required from state and local governments. Ensure all relevant permits are identified and obtained.

The Risk of Closing Without Permits

Closing a deal without the necessary permits can be risky. If you can’t secure the permits after the purchase, you may end up with a business you can’t legally operate.

Real-Life Examples

1. Restaurant Inspections: A buyer assumes a restaurant will pass health inspections based on its operational history. However, during the permit transfer, unexpected issues like missing fire suppression nozzles can arise, causing delays and additional expenses.

2. Liquor License Transfers: In some areas, transferring a liquor license requires a public notice period, potentially exposing the deal to public objections and delaying the closing.

Strategies to Mitigate Risks

1. Include Contingencies in Contracts: Make the closing contingent on obtaining all necessary permits and licenses.

2. Build Relationships with Inspectors: Experienced buyers often have relationships with inspectors, speeding up the permit approval process.

3. Stay Informed and Prepared: Research all relevant regulations and maintain open communication with permitting authorities.

Conclusion

When buying a business that requires permits, it’s critical to ensure all necessary licenses are secured before closing. This not only protects your investment but also ensures smooth operation from day one.https://www.DavidCBarnettList.com

2023 HC#009 Ernie builds a business brokerage Video

 

Ernie just sold his first business for a customer and now wants insights into growing his business brokerage. The goal? Build up enough cash to exit and buy another business. We talk marketing, positioning, value propositions and more. If you’ve ever dreamed of collecting a 10% fee on the value created by SMB entrepreneurs on exit, you’ll find this conversation very insightful.

Get into Biz 101 Ep5 BATNA Startup and Effectuation

 

***New Video Alert!

Part 5 of the ‘Get into Business 101’ summer series.

Today, we’re talking about BATNA

Best Alternative to a Negotiated Agreement and why it matters.

Also, how startup entrepreneurs control risk via Effectuation and why a startup plan should be in your BATNA calculation.

Check out this week’s video:  https://youtu.be/JUnEVQ_aCgo 

Cheers

See you over on YouTube

David C Barnett

How to Price a Business with No Profit:

 

How to Price a Business with No Profit: A Strategic Guide Setting a price on a business that isn’t profitable can seem daunting. If you're in this position, don't worry; I've got you covered. Today, I'll break down the strategies you can use to determine the value of a business that doesn't show profit. https://www.youtube.com/watch?v=MPb2LYFq-mI

   

1. Understand Valuation Methods

There are three primary methods to value a business: market comparison, capitalization, and asset accumulation. When dealing with a non-profitable business, the capitalization method is off the table because you can't capitalize zero profit. Let's explore the two viable options.

2. Market Comparison Method

In the market comparison approach, you compare your business to similar businesses that have been sold recently. Typically, businesses are valued as a multiple of their cash flow or seller’s discretionary earnings. However, if there’s no profit, you can’t use this method directly. Instead, consider the sales revenue.

How to Do It:

• Research recent sales of similar businesses.

• Calculate the sale price as a percentage of their annual revenue.

• Apply that percentage to your business’s revenue to estimate its market value.

3. Asset Accumulation Method

This method involves valuing the tangible and intangible assets of the business. Tangible assets include machinery, equipment, and inventory. Even if a business isn’t profitable, it likely has valuable assets that can be sold.

How to Do It:

• List all tangible assets and estimate their current market value.

• Include intangible assets like customer relationships, brand reputation, and any intellectual property.

• Sum the values to get a rough estimate.

4. Combining Methods for a Fair Price

Often, the best approach is to use both the market comparison and asset accumulation methods to set a realistic asking price.

Example:

• Market Comparison yields a value of $100,000.

• Asset Accumulation yields a value of $80,000.

• Average the two for an asking price of around $90,000.

5. Financing Challenges

A business without profit is unlikely to secure bank financing, making seller financing crucial. Explain to potential buyers that traditional loans are not an option, and be prepared to offer flexible payment terms.

Typical Scenario:

• Asking price: $90,000.

• Buyer offers: $40,000 down payment and $50,000 paid over five years.

• Ensure the down payment exceeds the liquidation value of the assets to protect your interests.

6. Negotiate with Flexibility

Expect negotiations. Buyers know your business can’t secure traditional financing, so they’ll push for better terms. Be ready to accept offers where the down payment is higher than what you’d get from an asset liquidation auction.

Key Strategy:

• Compare down payment offers to potential auction outcomes.

• Choose offers that exceed the auction estimate, ensuring you get the best possible deal.

7. Consider the Bigger Picture

Even if the business isn’t profitable, selling it can keep employees’ jobs and maintain customer relationships. It’s often better to sell at a lower price than to close the business entirely.

Final Thoughts

Valuing a non-profitable business requires a strategic approach, combining market comparison and asset accumulation methods. Flexibility in negotiations and financing is crucial to making the sale attractive to potential buyers. If you have any more questions or need personalized advice, feel free to reach out. Good luck with your business sale!

If you want to learn more and see my latest videos, be sure to subscribe to my email list at https://www.DavidCBarnettList.com 

David Barnett