The current economy may be tough for many individuals who are looking, without much luck, for work that will get some money coming in again. But for franchisors who offer an alternative to the headaches and insecurities of corporate employment, business is on the rise.

And buying into a franchise system can be a smart investment for someone who doesn’t feel secure about a future working for someone else. An auto service, fast food outlet, mailing center or other kind of franchised business can provide a solid and predictable income.

But that choice has some dangers and drawbacks that the franchisors don’t always mention when they’re signing up new franchisees and collecting substantial fees from people who want to buy a business.

For those wondering whether to leave--or have been pushed off the corporate ladder, and are considering a career as a franchisee, here are some of the primary arguments for and against that choice.

PRO

A proven system is one of the key advantages offered by franchisors. They’ll tell you, when selling a business--and it’s somewhat true--that they’ve already made the mistakes in perfecting the model, so you don’t have to. They’ve established a brand that is recognized in their market, and they’ve learned what works to promote sales.

Buying a franchise often is easier than getting an independent business for sale because a potential purchaser has plenty of people--other franchisees--who can help with the due diligence by discussing their own success and problems. Besides, there often is better financing available when setting up or acquiring a franchise, compared to the challenge of raising the funds needed to acquire a non-franchised enterprise.

Once in business, many franchisees appreciate the practical and experienced advice they get about building sales and avoiding problems from the franchisor. And they benefit from pricing and service advantages when purchasing products and supplies that they can acquire with other franchisees at group rates.

CON

But buyer candidates are advised not to get swept away by the franchisor’s assurances and enthusiasm, because franchises fail more frequently than the parent companies admit. And there are some negatives to this business strategy that the franchisor won’t reveal.

The first drawback, of course, is the need to pay a fee of several thousand dollars, maybe tens or hundreds of thousands, just for the privilege in investing in the business. That chunk of cash is required in addition to the money a buyer has to produce for build-out of a new franchise or acquisition of an existing business for sale.  Then there’s working capital and marketing money that must go into the pot. Yes there may be financing through the company, but supporting that debt can take much or all of the profit of the business.

And while there is benefit to a system that is proven to work in producing and selling products and services, it also means limitations. The franchisee usually can’t expand the business by addition of say, ice cream cones at the sandwich shop, or by performing brake jobs along with transmission repairs. Violation of the franchise agreement by breaking the rules can have dire consequences, such as losing the business and all that was invested.

Also to be considered is how quickly the asset of a well-recognized brand name can become a liability. Just ask fast food franchise owners who suffered a big drop in business, not their fault, because of bad publicity when another franchisee sold contaminated french fries.

As in any business decision, the best approach to determining whether a franchise purchase is a good idea, starts with common sense and includes some research and knowledge of, or a quick education about the industry in which the company is involved.

About:  Peter Siegel is the Founder & President of BizBen.com. He consults with business sellers, business brokers, and agents on marketing & advertising strategies when selling businesses and has written three books on how to buy & sell small businesses. If you have a question about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

Watch for more blog posts answering viewer questions in the future!

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  Tags: franchises, franchise, franchises for sale

The number of small and mid-market California business sold in October increased substantially from the figures posted for the past few months. We hope this marks the beginning of an upward trend into the rest of the year and in 2010.

The total of 1,314 closed escrows last month compares to under-1,000 figures for three of the past four months. And the increase comes at a time when this good news is apparent in other leading economic indicators.

A key factor in the boosted sales activity is increased availability of purchase funds from small business lenders. And we believe the SBA can be thanked for that. Earlier this year, the federal agency--with funds directed to it from the American Relief and Recovery Act--instituted several rule changes to get its preferred lenders back into the market, making loans to aid in small business purchases. Among the changes was the suspension of loan application fees, increasing its guarantees up to 90% of the value of a loan, and raising the amount of goodwill permissible in a loan it will underwrite.

Also contributing to the positive direction for sales of small businesses is the increasing willingness of people to move forward with their plans for buying and selling. There has been a high level of uncertainty about the economy among entrepreneurs since the problems on Wall Street were reported, beginning last year. Now that buyers and sellers have determined that the economy has not gone over the cliff, they are more inclined to act.

Buyers who are serious about owning a business are starting to make decisions regarding what they want and to make purchase offers. And sellers are coming to the realization that if they are ready to sell, there may be no benefit in waiting another six months or so.

October small and mid-sized business sales, by California county are as follows:

Alameda: 62, Amador: 1, Butte: 5, Calaveras: 1, Contra Costa: 42, El Dorado: 8, Fresno: 37, Imperial: 1, Kern: 18, Kings: 1, Lake: 1, Lassen: 1, Los Angeles: 379, Madera: 1, Marin: 5, Mendocino: 1, Merced: 7, Mono: 3, Monterey: 13, Napa: 3, Nevada: 6, Orange: 99, Placer: 11, Riverside: 23, Sacramento: 64, San Bernardino: 58, San Diego: 129, San Francisco: 61, San Joaquin: 10, San Luis Obispo: 14, San Mateo: 32, Santa Barbara: 25, Santa Clara: 59, Santa Cruz: 7, Shasta: 11, Solano: 14, Sonoma: 26, Stanislaus: 16, Sutter: 7, Tehama: 1, Trinity: 1, Tulare: 9, Tuolumne: 3, Ventura: 30, Yolo: 7, Yuba: 1

About:  Peter Siegel is the Founder & President of BizBen.com. He consults with business sellers, business brokers, and agents on marketing & advertising strategies when selling businesses and has written three books on how to buy & sell small businesses. If you have a question about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

Watch for more blog posts answering viewer questions in the future!

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  Tags: small business

Before I start I would like to just make this statement; and if you don’t get anything else from this writing, please learn this. The Laundry Business Model and the full justification of Value of the business are based on its anticipated longevity. A laundry is more comparable to a Commercial Property with a ground lease and other businesses with extensive improvements than like most other business types. For example, the laundries that I remember from my youth (40+ years ago) are, with one exception, all still there.  So, the first test of value for a Coin Laundry is the potential of a long term life expectancy. With that statement made, this article is being written to help show the potential investor the scope of issues to consider before purchasing a coin laundry; and to try to make a little sense out of the numbers. In an actual evaluation these items and more would be considered and evaluated. This is in no way to be considered an outline or menu on how to evaluate a laundry; but rather to demonstrate the scope of the analysis to be conducted.

First, let’s discuss the basic issue of the multiplier (__x Monthly Net = Value).  I hate to tell you how often I have seen people burned because they ran around with what they thought was some kind of secret formula (multiplier); only to discover that “in their case” the formula didn’t support the long term value of the business. A formula is only a base line. This is a measurement of comparison; from the differences of one laundry to another. I like to compare it to the simple test of dropping a plumb line and looking at all the areas that fall East and West of it. This is basic in appraising the value of anything.

The question is what is the multiplier? What adjustments should be considered and to what degree. So let’s make this easy and call the multiplier 60. This is a reasonable place to start. In the 24 years I have made this industry my home, the number has been as low as 50 and as high as 70. One seems as wrong as the other so somewhere in the middle is a good place to start. The 60 number has held reasonably steady, long term. Truthfully, the adjustments against it will determine the value, more than the multiplier, itself.  Right now there are laundries available at all kinds of pricing. It’s confusing, to say the least. But for the most part, laundries seem to be performing well, considering the economic conditions and surprisingly enough continue to sell at about 56 to 60 times Monthly Net price range, in California; That is, ONCE YOU HAVE MADE THE ADJUSTMENTS.  So, what are the primary areas of adjustment

1. The Lease is your first consideration. Without a lease of adequate time to return your investment and then have time to sell to the next investor, the business could be devalued and your ability to sell and regain your initial investment diminished. You need also look at and understand the following,

a. The ground value (what can not be re-located) is easily in excess of ½ the value of a Laundry; even in a new laundry. So, without a good lease, your investment is not secure. The term of the Lease must be of adequate length and reasonable in terms order to both support and amortize the investment; while leaving you the ability to resell the business at some point in the future for a fair return. It is often necessary to negotiate the lease terms with the landlord; at opportune times and almost always at the time of transfer from one investor to the next.

b. The continuing terms of the lease and options should compare well to other leases for other Laundries in the area.

c. The cost of the Monthly Lease rate with NNN and CAM costs must be within the standards of a typical Laundry Business Model.

d. Your lease should be looked at by an industry specialist and an attorney, before signing.

2. The Equipment, Services and Fixtures should be in good condition or the cost of modification and doing deferred maintenance should be considered.

a. What are the age, make and condition of the equipment. Older equipment will affect your operating cost and if not properly maintained, will cost you customers as well.

b. Are the services adequate and in good condition for the equipment; both that are in place and following any future changes and upgrades you might make.

c.  Is the look and condition of the bulkheads, tables, floor and so decor current?

d. Is the laundry kept sanitary, clean and well operating at all times?

3. Understand the Business Model; this is the area to look for long term sustained or increased value to your business. A laundry with correctable imperfections is an opportunity that must be considered when purchasing a laundry. Some of the areas to look at are,

a. Operation Style. Is the business attended? Should it be? Any ancillary businesses?

b. Know the competition; including the apartment houses. You need to know if the laundry vending pricing is within the reasonable norm for the area.

c. Is the equipment mix consistent with the demands of the customers in the area?

i. Enough large washing machines?  
ii. Up to date dryers? (Dryers are faster today, with larger size options and more efficient)
iii. Is the dryer revenue proportionate to the total income?
iv. What percentage of income comes from ancillary businesses?
v. What plans are in place to offset increased utility expenses?

4. The Market Area,

a. Do the demographics and City plans support the long term requirements of the investment and your future marketing plans?

i. What is the rental population within the immediate area?
ii. What is the Household/Family size?
iii. What are the commute time, traffic count and median income for the area?

5. Location issues also need to be considered.

a. Parking is a big issue; especially in densely populated areas.
b. Ingress, egress and visibility should be good.
c. The Center tenant mix can influence your business. Some businesses eat up valuable parking at prime times. Bars, Salons, Dance and other Studios, to name a few.

The laundry business is an all cash, necessity of life service business that is easy to operate, financially rewarding and considered one of the safest US businesses to invest in; and it is most certainly recession resistant. That said. Right now, the basic business model is distorted in many areas and while it offers the smart operator the chance to exceed normal expectations, it is also a dangerous to proceed without the knowledge and understanding of what you are buying. However, to make it even more challenging, it is not very realistic to expect to look at clean records in every case. In some cases (maybe most) it is important to recreate the business through analysis to determine the true value and the true potential.  It would not serve you well to recommend that you not consider these laundries. In fact, they are often the best choices. But you owe it to yourself to go in fully aware.

Learn more by attending one of our upcoming Laundry Buyers Workshops. They are free and intended to assist serious investors in understanding their anticipated new business. You can reach us at (619) 227-5711.

 

About The Author:  Chuck Post specializes in assisting those selling or buyinig coin laundries throughout Southern California. He also offers other specialized services: Expert Witness Services & Coin Laundry Valuations. Make sure you check out his popular monthly workshops on the topic of buying and selling coin laundries. You can reach Chuck direct at 619-227-5711.

Watch for more blog posts / articles from me in the future!

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  Tags: businesses for sale, business for sale, business appraisal

Over 205 new postings yesterday - BizBen viewers top picks yesterday included a San Fernando Valley Web Development, an Internet Portfolio Site, a Laguna Hills Restaurant, a Central Valley Area Gas Station & Mart, a Downtown Area Restaurant, as some of the more popular California small and mid-sized businesses for sale that were added and reviewed by business buyers, business brokers, agents, intermediaries, and business owners yesterday on BizBen.com.

11/3/09 BizBen Top Search Requests Included:

1. Web Design, Development, Hosting Service for sale located in San Fernando Valley - Price: $244,000, Adjusted Net: $131,000. Web Design/Development And Hosting Service. Over 100 Listed Clients.

2. Internet Portfolio Sites for sale located in CA - Internet - Price: $4,999,999, Adjusted Net: Call/Email. Comprehensive Portfolio Of Affinity And Geo-Targeted Blogs.

3. Restaurant for sale located in Laguna Hills - Price: $285,000, Adjusted Net: $96,000. Very Popular Food Establishment In Mall Food Court. Loyal Patrons.

4. Shell Gas Station, Mini Mart, Real Estate for sale located in Interstate 5 Area - Price: $2,950,000, Adjusted Net: $382,409. Established Service Station On Interstate 5. Original Owner Since 1972 Retiring.

5. Restaurant for sale located in Downtown Area - Price: $109,000, Adjusted Net: Call. Location! Location! Seats From 39 Up To 50. Street Parking. Can Be Converted.

6. Residential & Commercial Awning Sales & Service for sale located in Marin County - Price: $50,000, Adjusted Net: $34,000. Awning Sales And Installations For Homes And Commercial. Established 10 Yrs.

7. Yogurt Shop for sale located in San Diego - Price: $90,000, Adjusted Net: $60,000. Profitable Yogurt Shop. Owner Willing To Carry 50%.

8. Industrial Equipment Distributor for sale located in LA Area - Price: $2,175,000, Adjusted Net: $900,000. Establish, Profitable Distributor And Manufacturers Representative.

9. Coin Operated Car Wash for sale located in SF East Bay Area - Price: $175,000, Adjusted Net: $31,000+. Coin Operated Car Wash With Automated Wash W/High Traffic.

10. Pizzeria for sale located in San Bernardino - Price: $30,000, Adjusted Net: Call. Great Location In The Inland Valley Area. Upscale Neighborhood.

11. Liquor Store for sale located in Canyon Country - Price: $149,000, Adjusted Net: Call. Liquor Store With Lots Of Potential. On Busy Street, Great Visibility. Low Rent.

12. Yoga, Pilates & Wellness Center for sale located in South Bay - Price: $390,000, Adjusted Net: Call. Established In 2000 - Well Known, Highly Reputable Yoga, Gyrotonic® & Pilates.

13. Beauty Salon for sale located in Los Angeles - Price: $75,000, Adjusted Net: $50,000. Best Beauty Salon You Can Buy! Relaxing And Most Importantly Profitable.

14. Cold Stone Creamery Franchise for sale located in Hollywood - Price: $479,000, Adjusted Net: $100,000. Cold Stone Creamery,heavy Foot Traffic, In The Kodak And Chineese Theater Mall.

15. Bali Silver Jewelry Cart Retailer for sale located in Orange - Price: $20,000, Adjusted Net: $50,000+. Unique Bali Silver Retail Location. Easy To Run Simple Operation.

16. Upscale Liquor & Wine Store for sale located in Tracy Area - Price: $350,000, Adjusted Net: Call. Very Upscale Liquor And Wine Store Located In Established Area.

17. Shell Gas Station, C-Store, Real Estate for sale located in Sacramento - Price: $999,999, Adjusted Net: $168,100. Shell Station With Property - Very Good Cash Flow - All EVR Done.

18. Postal And Gift Store for sale located in Oceanside - Price: $99,500, Adjusted Net: $36,000. Postal, Fedex, UPS, Gifts, Mailboxes, Etc. Shopping Center Location.

19. Upscale Bistro Cafe for sale located in Sonoma County - Price: $60,000, Adjusted Net: Call/Email. Cute Upscale Cafe In Historic Building.

20. Custom Car Audio, Accessory Wheels, Tire Shop for sale located in Signal Hill Area - Price: $285,000, Adjusted Net: $150,000. Custom Car Audio & Accessory Biz Great Location Busy Street.

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  Tags: business opportunities, businesses for sale, business for sale

Six important things to consider whether buying or selling a coffee shop:

1- Location- many things can be done to improve a business but as they say, location location location! Most good coffee shop are located in areas that have good foot traffic and people passing by. If your considering buying a coffee shop that has weak foot traffic be prepared to spend significant money continually advertising the business to remind patron where you are.

2- Rent- Whether you buying or selling, your rent shouldn't be more that 10% to 15% of your monthly gross sales. If it is it has to be renegotiated or you'll be working to pay the landlord. If, as a seller, you've been given a temporary rent reduction due to the economy, then you or your broker has to speak to the landlord to make sure it can and will be permanently passed on to the new buyer.

3- Menu- Does the shop serve any food items? My coffee shop listing had doubled their numbers by adding food items, ie; sandwiches, salads, breakfast and even burgers, all without a hood! Adding food items can be a great idea just make sure there are no restrictions in your lease that would be in conflict with another tenants lease exclusive right to sell. Also you have to work with the health inspector to see what is permitted in your area especially when working with limited equipment.

4- Prepare to be bought or sold- I tell all my sellers, the more organized you are the less time you'll have to spend explaining everything to a buyer and this doesn't just include the financial information. You might know to add dash of this and a spoonful on that but buyer wants the clients to be just as happy with the whatever their buying as they were when the seller was there. The fact is the more you document the easier the training will go when you sell. So start writing things down and creating your own SOP manual for your little shop, otherwise you can expect many phones even after the sale is over.

5- Deciding to get in the business- Buying an existing business can can be a goldmine or it can be fatal. Knowing what and who your dealing with is key. Go to as many coffee shops as you can and sit there a while and observe while trying the coffee. Ask questions like, "do you roast your own beans here?" Note the machines they are using. Gauge the the prices they are charging and the area your in. The secret to most independent coffee shops is the local feeling when you go in and the experience you have when you're there.

Coffee shops have a special place in our culture, we meet our friends there, we treat ourselves to something a little decadent, we even have meetings there. The question is whether or not you see yourself understanding and catering the culture. If the answer is, "yes" then it's the right type of business for you!

About The Author:  Christina Lazuric is an Orange County Business Broker who shares her broker experiences with BizBen readers and has had varied direct small business experience in the past but now assists small business owners sell their business and offers business buyers find their dream business to operate. Phone Christina direct at 949-257-7823.

Watch for more blog posts / articles from me in the future!

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  Tags: buying a business, sell a business, buy a business

FREE!  COIN LAUNDRY BUYERS WORKSHOP

NOVEMBER 7,  SATURDAY - IN SAN DIEGO at 12:00 NOON

Email your RSVP to,  pbibroker@yahoo.com as soon as possible. You will receive the address and other details by November 5, 2009.

We try to keep these events small enough to accommodate beneficial discussion and questions.

You will be given a packet including a work up sheet to use when you are researching this business.

First, we will start at a local Coin Laundry, where you will gain Hands On experience in examining the working laundry. We will go for coffee and have an open discussion about the Pro’s and Con’s of the Laundry Business.

LEARN WHAT TO LOOK FOR AND WHAT TO LOOK OUT FOR IN PURCHASING A COIN LAUNDRY.

The Coin Laundry Business is an excellent investment. Unfortunately, it is also a difficult business to purchase with reasonable assurance of the accuracy of information.

We at PBI are Laundry Consultants. We are not directly affiliated with a Distributor or Manufacturer of equipment. We work directly for you, the Buyer. Regardless if you are working with a Seller, Sellers Agent; or a distributor, we are in your corner in the transaction.

I have SOLD, DEVELOPED and RE-TOOLED hundreds of Coin Laundry Businesses over a 24 year span.  You are encouraged to review a few of the articles I have written here on BizBen.

I look forward to meeting you.

For more information about this workshop please feel free to phone:

CHUCK POST  (619) 227-5711 or

CHRIS MASON (949) 878-2755

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  Tags: buying a business, buy a business

One of the most popular business offerings is the carwash. It’s considered easy to run, the number of cars on the road continues to increase, while it doesn’t seem that carwash installations are being added to keep pace.

But there are some challenges involved in buying a carwash business.

Three Models:

Small business buyers considering this industry will be aided by understanding its three basic business models.

The "tunnel" wash uses a long building for soaping and rinsing as each vehicle travels on a conveyor and later is dried and vacuumed by hand. This is the costliest way to get into the business--usually priced over $1 million, and the one producing the highest revenues and profits. With employees to manage, and a seven-figure cost, this is the most demanding of the carwash models. The owner of this business type often is a corporation or partnership, with two or more people involved, each investing capital, borrowing ability and management time.

Much smaller installations are the "drive through" arrangements that require the customer to stay in the car while it’s being washed. There is no hand labor involved except the customer’s do-it-yourself vacuuming at the end.

Least costly and also the lowest revenue producer is the "self-service" installation using individual bays with wash wands, soap brushes and, once the customer has cleaned the metal finish--front to back, some coin-operated vacuum cleaners to do the same to the interior.

A review of carwash businesses currently available on this site reveals there are opportunities in each of the three categories, with some businesses that seem to be hybrids, offering a mixture of facilities. And while some for-sale carwash businesses involve an installation on leased property, other offerings include the real estate.

Most carwash buyers are particularly interested in businesses with real property offered in the package. It means security; no risk of losing the right to conduct business on the site, and the possibility of enjoying property appreciation.

Other buyers in this category, however, want their investment to go strictly for revenue production. The more money they can put in, the more immediate income they expect to receive. For this part of the market, a carwash with a long lease, perhaps an option to buy the property in the future is the most appealing opportunity.

Valuation

A carwash for sale might be a relatively uncomplicated business to operate. But determining its value usually is a challenge.

Various appraisal approaches are advocated, and the valuation problem is complicated by the question of whether real property is involved.

One popular guideline suggests starting with a determination of market value for assets, including equipment and improvements, inventory and--if this is the case--the real estate. Arriving at the total will involve taking inventory of parts and supplies at their costs, and adding the appraised value of the property, buildings and equipment.

To this value, add what the business is worth. That’s a figure determined by using a factor between two and three to multiply against the annual discretionary income of the seller. And whether the appropriate multiplier is closer to two, or to three, depends on the same factors taken into consideration when evaluating any business, such as location and condition of the equipment.

On a cautionary note, it should be pointed out that many municipalities are concerned about the land use, water use and wastewater discharge associated with car wash businesses. A visit to City Hall should be part of the investigation of any carwash business, to make sure there are no planned changes in laws or ordinances that will negatively affect the business.

See all carwashes for sale on BizBen at this time.

Do you have feedback on buying carwashes? Feel free to comment below on your experiences with either buying or selling California carwashes.

About:  Peter Siegel is the Founder & President of BizBen.com. He consults with business sellers, business brokers, and agents on marketing & advertising strategies when selling businesses and has written three books on how to buy & sell small businesses. If you have a question about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

Watch for more blog posts answering viewer questions in the future!

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  Tags: small business, buying a business, buy a business

Why do we take a deposit from a buyer when preparing and executing a Purchase Agreement Contract?

The short, legal answer is that “without consideration a contract is unenforceable”. The potential problem is that I negotiate and agree upon a price, terms and conditions to buy a business and sign an agreement with a seller but do not put up a deposit. Tomorrow the seller changes his mind, doesn’t want to sell or finds a buyer who will pay more money. The seller ignores your agreement and decides not to sell or goes on to buyer number 2 and you cannot enforce your original Purchase Agreement because there is no consideration.

How much consideration should I give as deposit?

One dollar can make it enforceable but it will only convince the seller that you as a buyer are not serious. As a broker I like to see a deposit of 5 to 10% of the purchase price.  A minimum amount of $5,000 deposit with the offer. When I do open escrow I like to open with 10% of the purchase price. More on this below.

Are Deposits refundable and when?

In almost every case there are one or more contingencies in the Purchase Agreement.  Until a buyers due diligence is satisfied the deposit should be refundable. Sellers need to cap the time period on due diligence and not let it drag on. After the buyer is satisfied with their due diligence I like them to sign off and remove that contingency.  Thereafter deposits should not be refundable. An exception to this would be if the buyer cannot get approved by the landlord (a good broker should perform his own due diligence on the buyer and pre-qualify them).

Cashing Deposits and Opening Escrow:

I prefer to do the deal in this manner. My Purchase Agreement has buyer and seller authorizing me to hold the buyers deposit un-cashed until opening escrow. I have the buyer perform their due diligence before opening escrow. Once approved I open escrow and deposit their check with the escrow holder.

Return of Deposit to Buyer:

Once their deposit is in escrow and escrow is signed, no escrow company will release the deposit back to the buyer or forfeit it to the seller (even if it states the deposit is non-refundable) without a written cancellation instruction signed by both parties instructing the distribution of the deposit. When the market was in a frenzy a few years ago, many deals were done with a release of a pre-agreed amount of money to the seller upon opening of escrow (this cannot be done on any business with an ABC license). The early release of funds skirted the issue of signing a cancellation agreement later. It is hard to get a buyer to sign a cancellation forfeiting his money at a later time.

With all the above said; I feel it is best for all parties involved to perform due diligence, and remove all possible contingencies before opening escrow. Then once you go to escrow it is a very solid deal.

About The Author:  Lee Petsas has been selling businesses with UBI Business Brokers in Southern California since 1981. In 1999 he became the Owner and Broker for UBI. He is still active daily in Listing and Selling businesses. He has been approved multiple times by Courts as an Expert Witness in the area of Business Valuations. UBI has been in Southern California selling businesses since 1965. You can reach Lee direct at 714-363-0440.

Watch for more blog posts / articles from me in the future!

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  Tags: buying a business, buy a business

Should a business opportunity offering include the real estate?

There are no right or wrong answers to the question about whether the seller of a business should include the real property, or sell the company only and continue on as the landlord/lady.

This question was posed to our panel of experts and we got a diverse range of suggestions and ideas, demonstrating that the solution to this puzzle depends on circumstances and requirements of the parties.

Roseville attorney Joe Sandbank pointed out--as did other panelists--that including the property in the deal “should increase the number of potential buyers.” And Joe commented, along with other panelists, that “including the real estate will make it easier for potential buyers to obtain financing, as many SBA lenders are not interested in doing loans unless the real estate is included.”

An explanation of this was offered by Randall Barondess, Director of Troop Business Services and Commercial Brokerage in Westlake Village: The “S.B.A. looks favorably upon real estate tied to business acquisitions, due to collateral.” He said the ability to add real property collateral along with the business assets to secure a loan “will certainly make it more appealing to the S.B.A.”

A reminder about getting purchase money from an SBA-backed lender, was offered by Matt Coletta, Managing Partner of Business Team in Woodland Hills, who observed that “The business will, of course, still need to generate positive cash flow to substantiate the payments.” And Matt’s strategy was this approach: “Giving the buyer the choice (with or without the property) will increase your odds in selling the business.”

Another idea, from Patrick Marsch of First Choice Business Brokers in San Diego, was to “consider a short term lease on the real estate to achieve the desired business price, while giving the seller some attractive tax advantages.”  Behind this suggestion is Patrick’s observation that “The commercial real estate market is down right now, so the appraised value of the real estate is down. You can use this lease term to bridge this down market.”

Attorney Sandbank also noted there are tax implications for a seller who includes the real property in a deal, and he advised that the business owner talk to “your CPA to determine the after-tax consequences and your investment options based on both selling and keeping the real estate.”

A useful suggestion from Joe Atchison, a Riverside County based broker of the Sunbelt Network, was to “list the business with an asking price not including the real estate, but say in the Business Summary that ‘real estate is available for fair market value.’” Joe stressed the importance of getting an appraisal on the real property. And he noted that “some buyers will only purchase a business if they can also buy the real estate.” Included in the types of enterprises that are more appealing with their property, according to Joe, are “gas stations, day care centers, self storage facilities and specialized manufacturing businesses.” He added that “a buyer with a 1031 property exchange requirement” also will want the real estate to be part of the package.

Among Joe’s suggestions was that offering both real and personal (business) property “gives the business sellers a lot of pricing flexibility in that they can discount the business in exchange for top dollar for the real estate…” or visa versa. And he made a good argument in favor of keeping the real estate by noting that if the seller still holds the real property, it’s easier to take the business back from a buyer who defaults on an obligation to that seller.

To Taj Randhawa, at RE/MAX in Fresno, inclusion of the real property is a necessity for a buyer who wants to get purchase money funds from a lender. Said Taj: “To get a business loan without real estate is like finding water on the moon!” And he observed that “no bank is doing any loan with 35% down without secured real…property collateral.”

Following is the question that a BizBen visitor posed to the Panel of Experts, and the responses, edited for clarity, from some panel members.
 
“I am thinking of selling my business but I also own the real estate where my business is located. Is it a good idea to sell the real estate with the business? Are more buyers looking to buy a business with the real estate? How will having real estate (or not) affect potential buyers seeking financing to buy my business? Some feedback on this issue would be nice since I am about to put my business up for sale and debating whether to include the real estate portion."

Here are the details from our panelists:

“Most business buyers do not want to, or cannot afford to buy the real estate utilized by the business.  However, some buyers will only purchase a business if they can also buy the real estate.  Gas stations, day care centers, self storage facilities and specialized manufacturing businesses are some businesses that fall into this category as well; and a buyer with a 1031 property exchange requirement.

Most business owners that I have worked with wanted to keep the real estate, lease it to the buyer and benefit from the future appreciation on the real estate.  That strategy did not work out well for recent sellers due to the collapse in commercial property values.  More buyers will want to purchase property now that values are down but, on the other hand, financing is more difficult so fewer will be able to quality.  Owning the real estate gives the business seller a lot of pricing flexibility in that they can discount the business in exchange for top dollar for the real estate or get top dollar for the business for a below market lease rate or sale price.  The SBA is now guaranteeing 90% of a real estate transaction with no SBA fees.  The SBA’s 7(a) business acquisition loan program and their 504 commercial real estate acquisition program have been described as “the only fiscal stimulus that small business is going to get.”

My suggestion is to list the business with an asking price not including the real estate but say in the Business Summary that ‘Real estate is available for sale at fair-market-value.’  Do get an appraisal on the real estate so you will have an answer when asked about the real estate asking price but do not advertise the number.  Of course, if the real estate does not appraise at the agreed upon sales price the buyer will want a reduction in the price.  Show a lease rate in the Business Summary that is at market and indicate flexibility on price and terms such as:  ‘X,XXX square foot facility owned by seller who will write a new market rate lease ($X,XXX per month, plus NNN)  with flexible terms and options in an effort to meet the buyers needs.’

You probably know that commercial lease rates are in a free-fall so they will likely be lower when you get a serious buyer.  Revise the Business Summary when/if you learn that the going lease rate has changed.  You can get the buyer out quicker if he/she defaults on a seller note if you are also the landlord.  Be sure to have an  ‘Assignment of lease for security’ clause in the sales agreement.  And, of course, if the business is sold with a seller note, you will want a personal guarantee from the buyer and should file a UCC-1 on the assets of the business.  Landlords kill a lot of deals so, if you are the landlord, you avoid this third party risk and can be more flexible and creative with the terms of the transaction.”

Joe Atchison, Sunbelt Network, Riverside County

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“Depending upon how you structure your financials, the business could be worth more money with the real estate.  S.B.A. looks favorably upon real estate tied to business acquisitions due to collateral.  Will certainly make it more appealing to the S.B.A.”

Randall J. Barondess, Director, Troop Business Services, Westlake Village

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“The value of the business and the value of the real estate are obviously handled separately. It is important to note that the business will need to show payments of fair market rent in the expenses for the business to the owner. If not this will need to be adjusted. I advise my clients to offer the real estate both for sale or for lease. I would determine a fair market value for both. Some buyers are interested in only leasing and not buying the real estate. When a buyer purchases the real estate, a lender will be more inclined to provide financing for the transaction. The business will of course still need to generate positive cash flow to substantiate the payments. If the buyer of the business decides to lease the real estate, then the seller can look to sell the property to an investor with that lease in place. Giving the buyer the choice will increase your odds in selling the business.”

Matt Coletta, Managing Partner, Business Team, Woodland Hills

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Yes, yes and yes.  All things being equal, real estate attracts a far greater population of buyers.  Financing is also easier with real estate as part of the package.  When negotiating the ultimate deal, consider a short-term lease on the real estate to achieve the desired business price while giving the Seller some attractive tax advantages.  The commercial real estate market is down right now so the net effect is that the appraised value of the real estate is down. You can use this lease term to bridge this down market.

Patrick Marsch, First Choice Business Brokers, San Diego

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Its all depends upon business financials too. If his business is showing great cash flow and buyer is experienced and strong financially and credibility-wise, then he can be qualified for a business loan. Otherwise to get a business loan without real estate is like finding water on the moon!  Best idea is to sell with real estate and there are better chances of selling easily with 20-30% down. Even if the business is strong financial-wise, and showing good income, the buyer still has to come up with 50% down these days. No Bank is doing any loan with 35% down without secured real estate or property collateral !!

I hope the seller knows his business's paper work well to make a decision now!

Taj  Randhawa, RE/MAX, Fresno

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"My recommendation would be to first discuss the matter with your CPA to determine the after-tax consequences and your investment options based on both selling and keeping the real estate. If the question remains after that consultation, you should consider making it an option for buyers to either purchase or lease the real estate. This should increase the number of potential buyers. Also, including the real estate will make it easier for potential buyers to obtain financing, as many SBA lenders are not interested in doing loans unless the real estate is included."

Joe Sandbank, Attorney, Roseville

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About:  Peter Siegel is the Founder & President of BizBen.com. He consults with business sellers, business brokers, and agents on marketing & advertising strategies when selling businesses and has written three books on how to buy & sell small businesses. If you have a question about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

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Over the past few months one of the most challenges aspects of acquisition financing to overcome has been fulfilling the Global Cash Flow requirements.  In years past most lenders would look at an acquisition to see if the business itself could support the debt being taken out for the purchase, support the ongoing business expenses and they really didn’t look at the other financial obligations of the new owner.

As we all know, things have changed significantly in the current lending climate.  When a lender reviews an acquisition purchase today, they look at the full financial picture of the borrower, hence, Global Cash Flow.  The lenders will review not only the cash flow from the business but will want to know if the owner will have any outside income.  Often times a new owner will not consider keeping their current job, many feel the lenders want to see them leave their job to run the business on a day to day basis.  However, this is not always the case, sometimes keeping your current job can be the difference in whether or not the loan will be approved.

When shopping for different opportunities it is very important to assess the entire picture.  For starters, write down all your personal expenses and determine what you need to make on a monthly basis to meet your obligations.  When seeking a business, look at the cash flow to ensure the business meets your personal obligations, the business operating expenses and the new debt you would be taking out on the loan.  If it looks like the business doesn’t meet those needs and you have no passive recurring income you should consider your options.  Determine whether you can keep your current job and still oversee the business being purchased or talk to an expert to help you determine what businesses may be right for your situation.

About The Author:  Jonathan Smith is a financing/loan broker, consultant who assists with SBA loans, conventional financing, and private lenders for business purchase financing. We works with business buyers, owner/sellers, business brokers, and agents. For assistance with business purchase financing options phone him direct at 888-859-9838.

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  Tags: small business, business