Ready, willing and able buyers should be able to find the right business to acquire in no more than one year from the time they begin their search. The reason so many buyers sometimes seem to take forever to identify the right opportunity is because so many buyers aren’t remotely prepared to commit to actually buying a business. If you have a clear understanding of what your acceptable target criteria are, if you have your funding lined up and ready to deploy, if you have your transaction team built, and if you have the time and motivation to commit to the search process, there is a very high likelihood you’ll find a business you’ll be excited to acquire.

There are actually multiple answers to this question depending on some factors related primarily to the size of the transaction and the source of purchase funds. If you are buying a business without the need for third-party funding assistance, you can expect that transaction to close much more quickly than a transaction that is relying on outside investors, private equity approval, bank financing, etc., to close. Additionally, larger transactions are usually going to take longer to close than smaller ones – larger deals are more complex, more complex deals have more diligence requirements, and more diligence requirements require more time. With all of that said, you should expect deals under $10 million without third-party financing constraints to close within 60-90 days (2-3 months) from the LOI, but closer to 120 days (4 months) if outside funding is needed. Transactions over $10 million are almost always going to require third-party involvement, and will typically close in 120-180 days (4-6 months).

Lack of response, lack of knowledge, lack of information – those are the three big areas where a seller’s representative can either make a deal exceptionally smooth, or cause it to be a total disaster. Responsiveness is key. You don’t have time to sit around waiting for an advisor to communicate. Your time is valuable and you’re undoubtedly considering multiple opportunities at the same time. It’s also concerning when an advisor can’t answer basic questions about a business. How are you supposed to do an adequate initial evaluation of an opportunity if you can’t get basic details? And finally, if you’re not able to put your eyes on basic information about a business, that either means the seller is the bottleneck or the advisor hasn’t done their job requesting the proper documentation – in both cases, it causes you problems.

If you ask a seller, the answer is unequivocally “no!” Of course the seller wants as much cash at closing as possible. But the real question is understanding if you “need” seller financing in the deal, or just “want” it. There are no wrong answers to those two questions, but it is important to understand your position. If you “need” seller financing to make the deal work, don’t avoid that discussion and make sure you’re laying out your reasoning. But if you just “want” seller financing, that’s also okay – you just need to be prepared to move forward or walk away if the seller won’t agree to including it in the terms of the deal.

There are two sides to an SBA transaction – the borrower (buyer) and the business (seller), and each is equally critical to getting an approval and closing the loan. We’ll start with the business side of the equation. First, if you’re working through an M&A advisor or broker that is representing the seller, you should expect they should have already presented the deal to multiple lenders and gotten pre-qualification for SBA financing, or been told “no.” While this pre-qualification is non-binding and does not guarantee approval, it does provide a good indication of lenders’ appetites for the deal, provided a qualified buyer is applying for the loan. Banks typically want to see three years of financials (tax returns being critical) so that they can understand the trends of the business and ensure historical results would support the debt service on a buyer’s loan. Of course, at this stage they are using very general requirements for the buyer, which is why it’s just a pre-qualification. On the buyer’s side, the same pre-qualification disclaimer applies here – you may be pre-qualified, but the lender has no idea what the business looks like yet. Lenders want to understand from you where your liquidity sits, what your business background and work experience has been, what living expense requirements you have to maintain, what your personal debt amount is, and of course your credit score. At the end of the day, individual lenders are given very broad guidelines by the SBA, and then it’s up to each bank to determine their own credit box and other criteria for deals they want to finance.

Business owners want to protect their sensitive and confidential information as much as possible during a sale, so the decision on what to release and when to release it can be a touchy subject. On the other hand, you need access to quality data and information in order to make an informed decision about your interest in a business for acquisition, so you should expect to receive anything and everything available by the time you complete due diligence. If you’re working with a good sell-side M&A advisor, you should expect to receive at least three years of redacted P&L reports, balance sheets and corporate tax returns immediately following your execution of the NDA. This data should provide you with enough insight to know if moving forward makes sense or not. From there, as you move through your evaluation process, there may be additional details specific to the business you want to review before preparing and presenting an LOI to the seller. Depending on what you are asking for and what the seller is willing to provide at this juncture can vary greatly, but you should still not expect to receive anything that discloses the business’ employees’, customers’ or vendors’ names. However, once an LOI is in place and you begin your due diligence review, the seller should be willing to provide full access and disclosures to you regarding anything you need.

An important thing to keep in mind when you start to evaluate a company for acquisition is that business owners are busy people! So, while it’s important to eventually get a chance to meet the seller as part of your review and evaluation of the deal, you run the risk of turning the seller off if you press too soon for that meeting. A seller wants their first meeting with a buyer to be worth the time, so it stands to reason that you need to have made some progress in your initial review of the company before asking for the seller’s time. A good M&A advisor should ensure that you have not only been able to understand the basic details about a business, but that you have also had the opportunity to review adequate financial data on the business and been able to get fairly detailed follow-up questions answered – not to mention, prove that you are qualified to make the purchase. At that point, if both you and the advisor agree it makes sense to move forward, it would be time to ask the seller to carve out some time to talk directly with you.

Be forewarned – most sellers have probably been ill-advised by someone in their circle that they should demand a stock sale, purely for tax reasons. A good M&A advisor, however, can explain to their client why the likelihood of a stock sale is actually very low in most cases. This is a very basic explanation, but it paints the right picture – typically in a stock sale, seller’s proceeds are taxed as capital gains, whereas in an asset sale, different portions of seller’s proceeds are taxed as capital gains and ordinary income. From the buyer’s perspective, buying the stock of a business means you inherit the asset value from the seller’s balance sheet and can only depreciate that remaining amount (which in many cases can be $0), whereas in an asset sale, fair market value of the assets is established for closing and you can depreciate that full amount in the future. Additionally, in a stock sale, you will be assuming the seller’s liabilities, known and unknown. While the purchase agreement will do its best to release you from that potential liability, there is still some risk you will be taking in that regard. Having said all of this, buyers and sellers still agree to stock sales regularly. They become especially useful in situations where a business has some very lucrative, attractive or difficult to obtain contracts or licenses. Typically in an asset sale, permission from the issuer to transfer contracts to the new owner is required, which can sometimes be a concerning risk. But in most stock sales, these approvals aren’t necessary because the contract is staying with the same business, the business is just owned by someone different.

This topic almost always touches a seller’s nerve, not necessarily the concept of working capital as much as the method of calculating it. Until you’re buying a business for more than $2.5 million, it’s rare to have working capital included. Most of those transactions are going to be bank-financed, and between your post-closing liquidity plus the bank building in some working capital or a line of credit, you really won’t need the seller to leave working capital behind. Then, until deals reach the $10 million level, working capital will be part of the conversation, but not necessarily in the sense of it’s pure accounting definition. These transactions will usually find the buyer and seller working out an amount of working capital that makes sense for that specific business operation and its cash flow model – there is a bit of negotiation in these agreements, for sure. But once you get into deals exceeding $10 million, you can expect the seller to be prepared for a working capital adjustment based on generally accepted methodology, which is often calculated as current assets excluding cash, less current liabilities. With all of this said, many transactions don’t follow any rules when it comes to working capital, and it boils down to what a buyer and seller agree to.

Buying a business is a complex and risky endeavor, so having a good M&A attorney on your transaction team is critically important. Keep in mind, not every business or corporate attorney is well-versed in business transactions, so you also need to make sure the attorney you choose is actively involved in the M&A space. NorthStar has a tremendous network of M&A attorneys if you’d like us to make referrals or introductions.

Generally speaking, if a QoE is being ordered, it’s going to be the buyer’s responsibility to engage a firm to perform it and pay the fee. In some cases, a seller’s M&A advisor might recommend to their client to have their own QoE performed as part of preparing to sell, but those scenarios are unique. As far as the question of whether you need one, in some cases you don’t have a choice. Some lenders on larger deals will require this type of financial confirmation to move forward with a loan. However, some buyers want to have the peace of mind and professional opinion that comes from a QoE as part of their due diligence review, while others feel that level of review is unnecessary if they are comfortable enough evaluating a business’ financials themselves or with the help of an accountant.

There really is no hard-and-fast rule regarding a buyer’s introduction to the employees of a business they are purchasing, but there is a logical way to look at this question. First off, does the business truly have key employees? If not, then there should be less urgency on your part to need to meet them. If so, then it stands to reason that meeting those people, or that person, is a smart idea for everyone involved. While you certainly don’t want to lose any employees after the sale closes, losing a key employee can create immediate challenges. So the ability to establish a certain level of comfort between yourself and key employees is a great way to make everyone feel better about the upcoming transition. When it comes to timing, this is the bigger issue to overcome with business owners. Sellers don’t want to risk informing their staff too early, only to have the deal fall apart. That not only creates unrest and concern with the employees, but also makes discussions with future buyers more difficult to keep confidential. Most sellers will entertain the idea of bringing employees into the loop at a point in the transaction process when closing feels imminent. In many cases, that will be once the purchase agreement has either been signed or at least agreed to in final form. But in most transactions, only the key employees are informed pre-closing, and you won’t meet the entire staff until after closing.

There are too many personal factors that directly affect this answer to be able to offer any specific guidance here. However, there are three general guidelines you can apply to your personal financial circumstances that will prove helpful in determining a range of business values you should be willing to consider. Let’s start with the liquidity required to purchase a business. Unless you are planning to purchase a business without third-party assistance (in which case you would need a significantly larger capital injection), you will typically be able to acquire a business with 10% to 20% cash down. So take the amount of liquid capital you have available, or plan on investing, and multiply that by 5-10, and you get a rough sale price range of what you can afford. Another piece of this puzzle is understanding the amount of after-debt cash you need from the business. In other words, what does the business need to pay you, after you’ve paid the annual debt service, for you to live the lifestyle of your choosing? It’s pretty simple math – use an amortization calculator to figure out your annual principal and interest payments on the debt your financing, deduct that from the SDE (seller’s discretionary earnings) of the business, and what’s left over needs to be enough for you to live on, at a minimum. The final consideration is understanding debt coverage. Generally speaking, lenders want to see a minimum debt coverage ratio of 1.25. Simply put, that means they need to see $1.25 from the business for every $1.00 of loan payment. There is a simple formula you can use to help determine if a deal “cash flows” for the bank – annual debt service multiplied by the required coverage ratio. If the result of that equation meets or exceeds the SDE, the deal cash flows. Here’s a practical application. Assume you a) have $200,000 liquid to invest in a business acquisition; b) you need to pull $250,000 out of the business to maintain your lifestyle; c) you are financing the debt with 10% down at 7.5% for 10 years, and d) the bank’s debt coverage ratio is 1.25. Considering your available liquidity, you should confine your search to businesses priced from $1 million to $2 million. So for this example we’ll assume a $2 million price. Using the above financing terms, your annual debt service will be approximately $250,000 – meaning the business needs to produce about $500,000 in SDE for you to service the debt and take out what you need to live. The final check is to make sure the deal cash flows for the bank. Take the $250,000 annual debt service multiplied by the 1.25 coverage ratio, which gives you $312,500 – that’s the SDE the bank is going to need for the loan to cash flow. Assuming the SDE of the business you are looking at is at least $500,000, this is a deal that will work for you.

The fact is, most business buyers do not have an M&A advisor on their transaction team. Whether or not you need one is a personal question you should honestly ask yourself. There are tremendous benefits to working with a good buy-side advisor, but completing a successful business purchase can be done without one. It’s not unlike many other decisions you’ve probably made regarding whether or not to engage an expert to do something for you, or assist you with. Do you really need a lawn service to mow your yard? Do you really need an accountant to file your taxes? Do you really need a headhunter to find you a job? There are no wrong answers to any of these questions, just as there is no wrong answer to the question of engaging a buy-side advisor to assist in your business purchase. A good representaive is going to be an asset! You’ll likely save time, frustration and money in the end, with the result being a much smoother and successful acquisition process. You can read more about NorthStar’s Buy-Side Representation Services and what we offer our clients here.

The term “industry experience” is a little bit of a fallacy. If you’re a plumber that’s never even managed a crew and you’re buying a plumbing contractor, that doesn’t guarantee you’ll be successful running and managing that business as the owner. Conversely, if you’ve acquired, run and exited a successful IT services company, for example, and you’re buying a plumbing contractor, you don’t necessarily need plumbing experience to have success at running that business. At the end of the day, there is so much more that goes into acquiring the right business for your skillset than just industry experience, although that experience can certainly be a positive. What’s more important is “applicable experience.” Applicable experience includes direct industry experience, but it also includes an expertise in other aspects related to owning and running a company. The bottom line is, don’t assume you need to focus only on considering businesses that you have direct industry experience in. While it can be a positive, it’s not the most important success indicator.

If you aren’t required to sign some sort of NDA in order to get confidential information about a business, that’s a good indication you’re looking at some sort of shady deal. No seller or seller’s representative with anything of value to protect is going to allow a buyer access to sensitive and confidential information without signing an NDA. There’s simply too much risk for the seller, and absolutely no reason you shouldn’t be willing to sign one. With that said, read the agreement and feel free to ask questions if you don’t understand any of the language. Nearly all NDAs include the same basic terms, so in most cases there should be few issues, if any.

What’s the old saying? Everything is negotiable? The same holds true in business acquisition transactions. However, don’t ever approach an offer with the idea that the seller has built in room to negotiate. If the seller has a good advisor on their side, then the asking price should have some teeth behind it - they should be able to back it up with facts. There’s no harm in asking the advisor how the value was calculated, which will demonstrate pretty quickly if a proper business valuation was performed. Regardless, if you do decide to try and negotiate the asking price, keep one critical thing in mind – have a reason! Nothing causes a seller to toss an LOI in the trash faster than a buyer making a "below-ask" offer just to see if they can get a deal. However, if your below-ask offer includes a thorough explanation of how you came to that number and why, you’ll have a much better chance at a positive response. It’s also a good idea to run your thoughts by the seller’s advisor to get their feedback before taking your first run at the seller.

M&A advisory is not real estate brokerage, where co-brokering is accepted and typical. It is rare to find a seller’s representative willing to share commission with a buy-side advisor. In the M&A space, if a buyer engages a professional to represent them in the acquisition of a business, the buyer will be responsible for that representative’s fees. Now, there are several different ways buy-side advisors structure their fee arrangements, so make sure you get specifics from every firm you interview. You can read more about NorthStar’s Buy-Side Representation Services and fee structure here.