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Learning, Sharing, and Teaching => Entrepreneurship => Topic started by: Kroaler on October 30, 2020, 02:27:04 PM

Title: Correct way to buy a business? Please offer suggestions!
Post by: Kroaler on October 30, 2020, 02:27:04 PM
Hello all,

Hopefully someone on this forum can get me going in the right direction as I'm a bit lost.

Has anyone bought a business directly from an owner before? How did you do it? How do you suggest doing it?

I dont need help with valuation but the actual mechanics of proper transfer and what professional services should be utilized. Feel free to send me to any useful informative articles.

Business:
Small Salon - Price 15k - Paying cash
Income is made from Booth rents.
In my state, the owner does not need a license, only ensure those practicing have a license.
How did I hear about it? - Small world. I met an older gentleman at the local beauty supply house and somehow it came up in conversation about where my current location is and he mentioned hes got one out that way he needs to sell one day... etc etc


What is the "correct" way to make this transaction? Do certain lawyers specialize in this? A business broker? I opened up 1 small spa this year, but since it was built from scratch I didn't have to do any transfer of ownership.



Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: cool7hand on October 31, 2020, 05:08:13 AM
You absolutely want to work with a lawyer who specializes in closely held business transfers. Is this an asset sale or sale of the entire entity? If the business's most important assets are its name and relationships with is stylists and its customers, how are you ensuring protection of those assets in the sale? Non-competition and non-solicitation agreements? What about transfer of the servicemark (same as a trademark, but for a service business)? What information has the owner provided and how will the deal ensure the owner warrants its bona fides? What sort of entity on your end of the deal maximizes any tax or other advantages? Good luck!
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Kroaler on October 31, 2020, 09:07:17 AM
Thank you for the response! Already some things to consider.
My somewhat dumb understanding of lawyers breaks them up in pretty broad categories:
Real estate
Criminal
Family
And then smaller stuff like immigration.

Can someone kickstart me on what type of law or keywords one would use to find a lawyer that does this type of thing?

Update- It appears acquisition attorneys are a thing.

Update- The book "Buy then build" Has this process broken into steps. Starting around page 240.  (In case anyone ever looks up this topic at a later date)
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: cool7hand on November 01, 2020, 02:48:19 AM
You will find both attorneys and accountants who specialize in mergers and acquisitions. Usually if you find one or the other, that professional will be able to recommend an attorney or accountant.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Kroaler on November 22, 2020, 01:46:37 PM
Just an update for anyone who may read this later.

I continued down the path.  From previous commercial lease experience I expressed that was my top concern to the person selling it.

Good thing I did because that's the current hold up.  The Landlord is not willing to allow to the new purchaser (Me) to assume the current lease.
Instead he wants to terminate the old lease, and start a new 36 month lease with a +50%(!) rent hike AND no exit clause allowed.  Seems like a cash grab in my opinion.  Next actions are to give the current lease a more thorough review for assignment and sublet.

If all fails - The owner will be a contact I have and I can just purchase the assets and move to a different location when the current lease expires and the current owner doesnt renew. (Hes already stated he wont renew at the terms offered to me when other properties are available with better terms, + hes scaling down all his businesses)

I'm sure I could also "partner" with him at 1/2 the business price for the immediate future also - But for now well see what the lease says in detail and go from there.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: SeattleCPA on December 01, 2020, 07:57:41 AM
@Kroaler this blog post's info may be too late or too general to help... but then again...

https://evergreensmallbusiness.com/buying-a-small-business-tips/
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Smokystache on December 06, 2020, 08:20:50 AM
@Kroaler: Any updates on this deal or are things waiting until after the winter holidays?
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Kroaler on December 06, 2020, 08:53:45 AM
Still working on it.

The lease is an issue so we're looking at some different options where I buy in as partner and take operational control. So far this seems to limit my liability more on this deal.

This also achieves the goal of the seller since they don't want to deal with it any more (they have another bread and butter business with substantially higher revenue to focus on).
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Michael in ABQ on December 28, 2020, 03:40:24 PM
I get that the current landlord doesn't want to lock-in a long-term below-market lease. On the other hand, retail tenants that are actually paying their rent are certainly getting scarcer.

How long is the current lease? I can't imagine it was more than a 5-year original term for a small salon.

I've read a lot of commercial leases and it's fairly common that they don't allow the tenant to transfer the lease to another party, even if they sell the business. So just be careful because you could end up making a deal with the business owner and then the landlord could declare your new business is in default and demand full payment of the remaining lease.

Maybe the landlord will be willing to offer a deal somewhere in the middle. Say a new 3-year lease that increases 10%/year instead of going straight to 50% higher.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Kroaler on December 29, 2020, 06:22:47 AM
I had a huge thing typed up but I lost it.

Anyway the landlord seems to have a 0 negotiation policy.
I offered to meet the 150% increase but only if I could assume the remaining 16 month commitment. (This location is too small to commit to 36 months)

No deal - New 36 month lease at the 150% rate and no exit clause or no deal.

I'm re structuring the deal so that I take operational control for the next 16 months so the current owner can focus on the other things they have going on.   After 16 months (around 12 really) I'll just move this business and combine it with my other one with a landlord I feel better about.

The current owner wants out and would just shut it down and walk if it wouldn't leave people jobless.

All things considered, no regrets at all. I'm glad obstacles were encountered and I've already learned alot more than I thought I would. This knowledge will definitely come in handy later on.    Ultimately the amount of money in using for this little project is small compared to my NW and I'm just really happy to be learning new things.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: EXLIer on February 20, 2021, 02:15:43 PM
Definitely read the book "Buy then build"
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: bwall on February 24, 2021, 11:40:42 AM
I had a huge thing typed up but I lost it.

Anyway the landlord seems to have a 0 negotiation policy.
I offered to meet the 150% increase but only if I could assume the remaining 16 month commitment. (This location is too small to commit to 36 months)

No deal - New 36 month lease at the 150% rate and no exit clause or no deal.

I'm re structuring the deal so that I take operational control for the next 16 months so the current owner can focus on the other things they have going on.   After 16 months (around 12 really) I'll just move this business and combine it with my other one with a landlord I feel better about.

The current owner wants out and would just shut it down and walk if it wouldn't leave people jobless.

All things considered, no regrets at all. I'm glad obstacles were encountered and I've already learned alot more than I thought I would. This knowledge will definitely come in handy later on.    Ultimately the amount of money in using for this little project is small compared to my NW and I'm just really happy to be learning new things.

Yes. Just going through the motions now might not have resulted in a deal, but the experience can be very valuable in the future. For example, landlord/tenant negotiations. You can also keep you eye on this property and see if new tenants are lining up to get in or if it sits empty for months on end. Or maybe it's purchased by a developer and torn down/rebuilt?

Experience is the best teacher.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Kroaler on November 05, 2021, 09:01:41 AM
Definitely read the book "Buy then build"

I did read that book and think its excellent. I now fully own or partially own 3 businesses (and always pondering ideas for a 4th, I guess it brings me joy).  Starting from scratch and buying existing both have pros and cons (I have done both) and everyone should evaluate what is ideal for their goals. 

Now for an almost 1 year update from the OP:
I've had both ups and downs. There were times I wish I wouldn't have bought it and there are times I'm glad I did.    At the 1 year mark I'm glad I acquired it. While there were some headaches, each one presented me with an opportunity to learn and become better.

The accounting books that I used to evaluate the business have proven to be accurate. The business has made a small profit for me month over month with opportunity for growth as I feel like investing time towards it.  Its on track to pay back the initial investment I made to buy it by April. Seems fair to me.    The learning opportunity alone was worth it for me.  Getting a business that pays back the initial investment and throws off some extra cash is icing on the cake.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Michael in ABQ on November 05, 2021, 01:24:10 PM
Congratulations. Buy then Build was the book that helped me decide to purchase a business rather than trying to grow a side hustle business. Especially with SBA loans right now - and all the goodies they had the last year (3 months of free loan payments and waiving the normal origination fee of $10k+) it was almost a no-brainer.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: Lamancha on November 06, 2021, 04:37:49 PM
Congrats on hitting the one year mark.  That's definitely the hardest year.

We passed the three year anniversary of buying our business last week.  It has been so hard these first couple of years.  Lots of blood, sweat, and tears.  I regret buying it sometimes, and have cried myself to sleep more than once.  That being said, I am so glad we did it.  It has launched us towards FIRE so much faster than I thought possible.  Now that we are several years in, things are finally starting to settle into place.  I am trying to slowly ease out of the everyday running of things and letting the staff take over all of the day to day operations.  2022 is the year to get my work/life balance back in order.

Good luck to anyone thinking about buying/starting a business.  It's a wild ride, but it's worth it.
Title: Re: Correct way to buy a business? Please offer suggestions!
Post by: SeattleCPA on November 19, 2021, 10:55:35 AM
Definitely read the book "Buy then build"

I did read that book and think its excellent. I now fully own or partially own 3 businesses (and always pondering ideas for a 4th, I guess it brings me joy).  Starting from scratch and buying existing both have pros and cons (I have done both) and everyone should evaluate what is ideal for their goals. 

Now for an almost 1 year update from the OP:
I've had both ups and downs. There were times I wish I wouldn't have bought it and there are times I'm glad I did.    At the 1 year mark I'm glad I acquired it. While there were some headaches, each one presented me with an opportunity to learn and become better.

The accounting books that I used to evaluate the business have proven to be accurate. The business has made a small profit for me month over month with opportunity for growth as I feel like investing time towards it.  Its on track to pay back the initial investment I made to buy it by April. Seems fair to me.    The learning opportunity alone was worth it for me.  Getting a business that pays back the initial investment and throws off some extra cash is icing on the cake.

OK, you definitely need to check out the recovery startup business employee retention credit if you paid wages in Q3 or Q4 of 2021.... I forgot about this thread...

Again, more info here: https://forum.mrmoneymustache.com/entrepreneurship/psa-that-'recovery-startup-business'-employee-retention-credit-equals-$100k/