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The Business Transfer Newsletter
August 2015
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Who Are The Buyers For Small Businesses

Before the selling process begins, it is important to determine from where the prospective buyers will come. A few questions to consider are: Will the buyer have industry experience? Will he be a first-time buyer? Will he need financing? A business broker should be able to give a preliminary idea or priority list of the most likely type of buyer for a business. You will have a head start if the type of buyers you will be involved with can be identified in advance. By understanding the type a buyer, a seller will be able to anticipate the buyers different financing needs, geographic constraints, and a list of priorities.
Corporate Executive
According to the nation's largest business broker exchange, Business brokers network, approximately 70% of the buyers for small businesses are first-time buyers. The majority of these buyers are coming out of corporate America. This type of buyer generally needs some type of financing and will either be a victim of corporate downsizing or will have voluntarily opted out of the corporate rat race. Typically, they do not have a specific target industry they are searching for. Usually what determines the ultimate business he purchases will be determined by a combination of good cash flow, location and availability, not necessarily the type of business.

Geography is sometimes as important to the displaced executive as financing. He will typically own a home and be unwilling to relocate since the financial benefits of the deal are usually not large enough to allow for it, or substantiate relocation. He wants to replace his recently lost salary with a similar income from his new company. The executive buyer will usually have a quick time frame to pick the business of his choice since he will generally not have the financial ability for a down payment in addition to maintaining his living expenses over an extended period. The corporate executive is looking for a job to buy and a small business affords him that opportunity. This type buyer usually has a professional resume, college degree, and good credit, making him a candidate for SBA financing which will afford a seller the maximum amount of cash at closing.

A word of caution about buyers that are still employed in corporate America; they are rarely in a position to make a quick decision if any decision at all. Often the employed executive is waiting to uncover the business of his dreams and then decide if he is really going to give entrepreneurism a try. Be cautious with the buyer that is still in corporate America since he may very well be a dreamer rather than a doer.

Competitors / Vendors

Due to confidentiality, competitors/vendors should be approached with extreme caution. Even though either group may be the best buyer candidate, in many cases they should be the last prospects to approach. In all due respects to signed confidentiality agreements, by marketing your business you are still exposing yourself, and in this case to the people in the best position to harm you in the marketplace. You should make sure that the competitor/vendor is well aware of the exposure, and to keep a tight rein on company information. It is a good idea to proceed on a prospect-by-prospect basis when contacting competitors or vendors.

There are some advantages however in selling to either competitors or vendors. The decision process and due diligence period can be most efficient since the acquiring company knows the market and industry. These buyer types are often only interested in verifying basic company information and determining if there is a synergistic fit. In addition, financing difficulties are not as prevalent as with other types of buyers. The seller may not be required to offer any form of owner financing since the acquiring company may have the basis covered from the beginning.

Most often, we have found that business-to-business purchasers are not always the highest paying buyers because they are unwilling to pay the highest justifiable price for a business. Often these buyers would rather set up their own facility with in house assets before paying top price for an ongoing concern that includes substantial goodwill value. Many times owners have dollar signs in their eyes visualizing selling to a large company in their industry with deep pockets seeking to penetrate the sellers market. Although this situation has certainly occurred, especially during consolidation periods in an industry, it is not the norm.

Existing Employees

Many business owners feel that the best prospect for their business will be within the employee ranks. This can be a viable, positive method of exiting while also rewarding loyal employees with ownership. Sellers may request to present their business to the key employees before taking it to the general market. It is normal to think that employees would be a natural choice, however is very important they understand the commitment they're about to make. For example, after an employee discovers the reality of the down payment, the monthly debt payments, and the overall responsibilities involved in ownership, the downward spiral can occur. Another challenge of selling to employees is the likelihood of being induced to provide some form of owner financing and working capital. Also, in the event the new employee-turned-owner runs into financial hardship, the seller may find himself in a tough situation.

Investment Groups

Investment groups are always lurking in the shadows for good deals. This type of buyer is going to be interested in both a superior investment as well as a strong management infrastructure. In many instances, the investment group is only interested in the cash flow and has no interest in running the business themselves. In this situation the seller may be in a good position to stay on as a manager as well as receive an income stream from the sale. It is safe to say that if the business does not have management in place, the investment group will either not be interested or will drastically discount the deal.

Intergenerational Buyers

Sometimes the best buyers or relatives. It should be noted that unless certain procedures are followed, multigenerational sales could be "sticky." It is advisable, for example, to hire a valuation company to set the sale price and an owner to family member transfer. If a valuation company as an unbiased third party establishes the price, chances are this will not be an issue either before or after the sale. The evaluation company selected should have a good reputation as a specialist in business valuation, and as such, will include documentation for the findings. After the price is established, the family member should be handled like any other prospect.

A frequent problem that occurs is that a family member can take extensive time to make up his mind about purchasing the business. A good way to handle this problem is to give the family member a first right of refusal for a defined period of time. If the family member exceeds this time period, he should be ready to compete with other buyers for the business. Also, the family member should use a different CPA and attorney than those used by the family in the business to handle his side of the transaction. If ground rules are established from the onset, there will be fewer problems and hard feelings between family members as the deal progresses.

Foreign and Public Companies

Foreign and public companies are rare in the small business acquisition arena. A seller should have a solid support team before attempting negotiations with foreign or public companies. Much time can be wasted in understanding the buyers parameters and the exchange of information. Transactions of this type take significant time and often end in frustration

Joe 5-Star Pizzeria & Ristorante
5th Street Italian Kitchen
Pictured left to right: Oscar & Xaiver Sanchez - Sellers, Jason & Lindsay Tatlonghari - Buyers, Marcia Bowron - CBB Broker


This cozy pizzeria and Italian restaurant, located in the Katy area of Houston, was established in 2011 by an Italian chef. The restaurant seats 46 and has a small outside patio. The owner was ready to retire and sold the business.

The buyers had recently sold their half of an Italian Restaurant to their partner and were ready to go on their own. Jason has a degree in culinary arts from Art Institute of Houston and Lindsay is in finance at a Fortune 500 company.  They renamed their new restaurant and will be focusing on bringing in new recipes and expanding the catering aspect of the business.
This was the only business the buyers looked at with our firm and closed the deal within one month of seeing it.
"Our buying experience through CBB was exceptional!  We could not have asked to work with a more experienced and knowledgeable broker such as Marcia Bowron!  We are excited to introduce 5th Street Italian Kitchen to the Katy area, and look forward to meeting our future customers." ~ Jason & Lindsay Tatlonghari
Marcia Bowron listed the business and sold it.
Congratulations Theresa!

Theresa Clark has been the office manager at CBB for 30 years!! She started in August 1985 when she had three young children ages 3, 5, and 7. She now has 5 grandchildren. When I asked Theresa if she had any words of wisdom to contribute, she said,

"I grew up at CBB along with my kids. I've learned a lot. I've seen people come and go over the past three decades here, but, then again, some of them are still here that were here when I started."
You don't see people with 30-year careers at one company these days, and we are proud of Theresa's accomplishment. She's part of the 40-year history of our Company and has contributed to its success. We appreciate her and understand how rare it is to have such a loyal, long-standing employee.  However, she's more like family than employee.
We feel fortunate to have three exceptional administrative staff members that run the daily operations and processes of the company........Theresa, Angela, and Yolanda. Thanks to all of you.
Ask The ExpertsQuestion Ask The Experts

What should I do when I'm just starting to think about the possibility of selling my business?
Perhaps the single most important action you can take is to begin thinking like a buyer. They would be looking at your business as it is today, but would buy it for what they can do with it in the future.

Buyers look at two types of value when evaluating a business for purchase: tangible value and intangible value. While buyers will closely scrutinize and conduct their due diligence on tangible value that can be seen, measured and counted, the intangible value is the principal driver of business value and is their real focus. The intangible value is comprised of non-physical attributes or components that cannot be seen, counted or precisely measured, but are the building blocks of future earnings and growth. Some examples could be:
  • Sales backlog
  • Well respected brand
  • Proprietary process
  • Diversified customer base
  • Dominant market position
  • Seasoned work-force
  • Intellectual property, Trade secrets
  • Above average growth potential
  • Strong web presence
  • In-place management team
  • Documented procedures
  • Unique products or services
  • Above average profits
  • Diversified supplier base

Regardless of what buyers say about balance sheet (tangible) value, a buyers principal interest is the ability of the business to create future earnings growth (intangible).  And while accurate documentation of recent financial performance and current inventory is absolutely essential, the true market value of your business will be determined by the intangibles as perceived by buyers.

Texas Economic News

We watch economic and market conditions compared to the rest of the country because these factors affect business value. The following articles were all published since our last newsletter.
The 20 Richest Small Towns in America - Bloomberg - Fredericksburg: the only Texas town listed

Businesses Owned By Women In Texas Are Growing At More Than Twice The Rate Of All Firms Nationwide

Houston ranks among friendliest cities for small business owners -- Dallas#2 spot, Austin #4, Houston #7, San Antonio #10, Fort Worth #12

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