Preliminary Survey Results -- Businesses Sold

According to our survey results so far, the average number of businesses sold in 2010 was 11 with a range from 0 to 297. The average for offices was 16 and the average for sole practitioners was 7 businesses sold.

If you haven't yet completed our industry survey, you have until the end of this month (just 4 days away) to complete the survey online and receive a free electronic copy of the industry survey results. If you have already completed the survey, feel free to forward the survey link to other brokers you know. The more brokers complete the survey, the more accurate picture we'll be able to provide of the 2010 state of the industry.

Ten Questions Buyers Should Ask

Inc. recently posted "10 Questions to Ask Before Buying a Business." The 10 questions are excellent and certainly a prospective buyer should try to get answers to all of them. Below are a few comments based on many years of experience both as a business broker and business owner.

Listen to the Wife

If the wife does not want her husband to buy a business, it won’t happen. People get used to a regular paycheck. The idea that there is no paycheck and sometimes there won’t be a paycheck or the amounts of the paycheck month to month will not be the same, is the one thing that many wives cannot live with. The pay one receives owning one’s own business is what’s left at the end of the week. If the wife is not supportive, then the husband better keep looking for a regular "job-job". If she is supportive, success is almost assured. The good business broker should ask every buyer before getting too involved if he is married and, if so, is his wife supportive of him going into his own business. Then, if the answer is that she is concerned, ask the buyer to bring his wife in for the next visit. If she won’t come, she is likely scared to death and there will be no sale. On the plus side,...

Franchisors Shouldn’t Hold Back on Financial Disclosure

It’s important that franchisors disclose as much meaningful financial information about their franchise opportunity as possible. Providing franchise candidates this kind of information can prevent future franchisee problems from arising.

Recently, I received a telephone call from an individual looking to purchase a franchise. The person received my newsletter and asked if I could answer an important question. He explained that he was considering several locations to lease space for a franchise. He had contacted the franchisor about operating costs. In particular, he was seeking some information regarding the costs for leasing retail space. According to the prospect the franchisor told him that he couldn’t provide any cost or expense data other than the information contained in the FDD. My first response was to ask if he was represented by a franchise attorney. His response: “Not yet.”

I explained to him, that under the Revised Franchise Rule, cost and expense data was not considered to be a financial performance representation. I provided a quick overview of the FDD and in particular Item 19, explaining how the previous regulations were strict and somewhat ambiguous when it came to financial disclosure. Now, franchisors can disclose expense and cost data, which should help franchise prospects make a more informed decision. My admonition to the individual was to seriously consider whether he should proceed in purchasing the franchise.

This isn’t the first time this situation has come up. Franchisors that hide under the previous Item 19 requirements

25 of the Worst Franchise Investments

Everyone, especially the franchisors, brags about how successful franchising is and how much safer it is for would-be business owners to buy a franchise as opposed to an existing non-franchised business. Blue MauMau's recently released chart of the 25 franchises with the highest SBA loan default rates clearly demonstrates it “ain’t always comin’ up roses,” with the #1 worst franchise investment boasting a 71.1% SBA loan default rate.

According to Blue MauMau, "Some of the perennial worst franchises to buy — hoagie sandwich shops, ice cream stops, and auto repair garages — dominate this year's list. The recession has only helped their failure rates climb."
 

Ed Teixeira of FranchiseKnowHow.com commented on the value of this list.  "Consider that loan defaults don't happen overnight but rather reflect a certain continuum of franchise performance...I'll offer my unsolicited comment that releasing this kind of information is important for the franchise industry. So many of us enjoy and depend upon this industry and it appears that there are always a certain number of franchise concepts that are definitely flawed."

Old Pro and the Cold-Canvas Call

The Old Pro had just returned from his vacation. He was suntanned and ready to go. The summer was over, and it was time to get back to work; so we had invited him into the office to talk to some brand new people we had just recruited.

We had not even finished introducing the Old Pro, when he began, “Selling businesses is tough work, but for those who are willing to pay their dues, it can be very rewarding. There are no short cuts to success, especially in the beginning. Your manager is going to make you learn the hard way —I know, because I trained him.

“He’s going to tell you to go out and talk to the small-business owner. This may not sound like it’s the easiest or most efficient way to get listings,—and maybe it isn’t—but there’s a method to all this. Small-business people...

C-Store vs. Quick Serve Restaurant

We found the following of interest to anyone selling C-Stores. The chart points out the growing popularity for convenience food.

“Reasons for choosing this c-store over other places for purchasing prepared food over even quick service restaurant. Note also that convenient location was very important over quick services establishments.

C-store vs. QSR off-premises, 2009 percent of traffic

Source: The NPD Group as seen in Nation’s Restaurant News, October 18, 2010. www.nrn.com

Introducing the “Old Pro”

For those of you unfamiliar with the “Old Pro,” he is the legendary G. R. “Russ” Wright, a man who introduced many to business brokerage, and whose own career spanned over 50 years. Occasionally, we will include an “Old Pro” story on the blog, often reminding readers of the tried and true basics of business brokerage. The following is from an article I wrote for the January 1987 issue of the Business Broker and offers an introduction to our “Old Pro”.

At the suggestion of a family friend, I moved to California in 1962. That family friend was our “Old Pro,” and subsequently became my mentor. Just before my arrival, three of Russ’s top salespeople had left to form their own business brokerage firm. I should point out that Russ had been in the business since 1935, so by 1962, he was indeed a pro! (I should also point out that Russ eventually became my father-in-law, but quite a few years elapsed before I married the boss’s daughter).

California was a licensed state, so while I was studying for my real estate examination...

Hot Business List -- April 2011

Below you will find the current “hot” business list courtesy of data from Businesses For Sale (www.businessesforsale.com). We asked Businesses For Sale for a monthly ranking of business types based on the number of “hits” on their site. This ranking is not based on the actual sale of businesses.

Top 10 Businesses:

1. E-Commerce Businesses
2. Convenience Stores
3. Miscellaneous Restaurants
4. Bars
5. American Restaurants

Personal Goodwill Revisited

In Darrell Arne's recent newsletter dealing with personal goodwill, Darrell notes that a case tried over 12 years ago is still being cited in recent personal goodwill cases.  He provides a summary of this case, Martin Ice Cream Co. v. Commissioner 110 TC 189 (March 17, 1998), and then goes on to summarize four more recent tax cases that challenged PGW allocations.  Darrell closes his newsletter with five lessons from the court, including what industry makes it harder to argue personal goodwill and what type of agreements support the allocation to personal goodwill. Recommended reading!

To Fee or Not to Fee

My staff and I have worked hard to reach the high levels of competency we have achieved. Between educational and vocational awards, designations and battlefield tested skills we have the scars and medals shared by many of our contemporaries in this occupation we share. Whether it’s practicing as brokers on main street, intermediaries in M&A, valuations for divorce, shareholder actions, estate matters, potential sale, etc., buy-side engagements or arranging financing so that our clients maximize their life dream, we all strive for excellency.

So why do so many in our industry perform for free, sans fee?

We charge potential clients an upfront fee for a strategic options valuation before being engaged to represent the sale of the company. We ask buyers to pay a retainer if they want us to represent them in a business search. We charge a fee to aid a buyer in securing financing and credit back to the buyer if we’re paid an origination fee by the lender.

Sure, it’s argued that we should work on a success fee basis like real estate brokers. They do a comparative market analysis for free and then hope they will get the listing and eventually get the property sold. Many business brokers/intermediaries do an evaluation for free with the hopes of getting the listing. Even if all we had to do was pull BizComps and Pratt’s Stats and present same in a 2-page report, chances are we’d still have 2 to 4 hours of work invested. I’m constantly amazed when I hear of a contemporary in another office working for free. Even if you do not have valuation credentials, are you not more qualified than most to offer an expert opinion of value?

Resolving the Controversy of Franchise Brokers

In a report by Franchise Update Media Group, 57% of the franchisors responding to the survey reported using franchise brokers. Despite the use of franchise brokers by franchisors their use remains somewhat of a controversy. This article explains why.

The use of franchise brokers by franchisors has grown dramatically over the past 10 years. Industry sources indicate that over 50% of franchisors use franchise brokers. By franchisor brokers, I refer to firms with a broker network versus the sole proprietorship. The use of franchise brokers is not limited to a particular size franchisor; franchisors both large and small use franchise brokers.

Start-up franchisors utilizing brokers can receive a boost in starting up their franchise system. The challenge is that many franchise broker firms are reluctant to market franchises represented by a brand new franchisor. In fact, if a franchise broker is willing to include a start-up franchisor in their portfolio one could question the judgment of the broker group since the start-up has no franchise history or performance.

Whenever, I’m asked about using franchise brokers I explain that franchise brokers can be a benefit, however, their service is limited to providing the franchisor a completed application from a qualified prospect. This means that...

Loan Issue Threatens Closing

Hi Tom,

Once again I need your opinion.

Situation:
I have a deal that made it through due diligence and all parties agreed to move to the closing (scheduled for yesterday). In late 2010 the seller had taken a personal unsecured loan and paid off his business equipment loan from 2008 (UCC filed with the state). After weeks of pressure to produce the payoff letter, the seller informed me the second loan was in fact not an unsecured loan as he thought but a restructured loan which still used the equipment as collateral. I have confirmed it is a personal loan, but the UCC is still in place and naturally the bank will not terminate it. The seller refuses to pay off his personal loan with the proceeds of the sale. The buyers are not happy.

Question:
Do you have any suggestions as to how this deal might be structured which will allow the sale to go through and the seller not to pay off the personal loan?

JG

Update on Len Krick's Situation in Nevada

Here’s an update on the issue with the Nevada State Securities Division:

1. I delivered the 200,000 pages of documents plus 2,750 electronic files to the State by the deadline on the subpoena.
2. I am currently in a deal which is scheduled to close escrow this Friday. The parties decided to do it as a stock sale and I backed away at that point. The selling entity is an old C-corp. I have been working on this deal for a year. The commission due is $297,500.
3. The State warned my securities attorney that if I was involved in any stock deals after I received the subpoena, that I cannot conclude them that way. Instead, I need to “turn them into a consulting agreement” and “bill” my client for time at standard rate.
4. They did not indicate that they were unaware of my big deal that I am doing and that, on January 28th, it turned into a stock, but we know that they must be aware because they were emphatic about “any deal since the subpoena”.
5. So, I had my attorney draft the Second Amendment to the Listing Agreement, which I discussed in my last e-mail. I spoke with my client. He said he would sign it if I gave him a discount on my fee (meanwhile it was his idea to do the transaction into a stock deal, not mine). I agreed and sent him the amendment, which is a $52,500 discount from the full fee.

FDA Proposal for Restaurants Food Labeling is Far Reaching

This article from Nixon Peabody in their Franchise Law Alert, outlines key components of proposed food labeling regulations by the FDA.

The Food and Drug Administration has issued two proposed regulations to implement calorie labeling requirement for menus, menu boards, and drive-through menu boards in franchised restaurants and retail food establishments with 20 or more locations. The requirements would include vending machines. Considering that approximately 50% of restaurants are franchise operated, these proposed regulations if enacted, will impact franchisees.

Businesses Startup Rate at 15-Year High

Last year 565,000 new businesses were started every month. That’s 6,780,000 or over 6 and a half million for the year. Another way of looking at it is that every month in 2010, 340 of every 100,000 adults launched a business. And, apparently the numbers were about the same in 2009. Now, obviously the businesses launched weren’t all General Electric or Ford Motor Company. In fact, very few even had one employee. And, we all know that many of them folded in the first two years.

But, the good news for business brokers is that many of them will be successful and eventually be sold – for all of the various reasons known so well. There are many sole-owned and operated businesses; and many others that are just husband and wife owned and operated businesses. Many of these, however, end up to be quite successful. There is a market for them. The government complains that very few (too few, according to it) hire employees. Unfortunately, many small businesses delay, or just won’t expand to require employees because of the cost. By the time one adds all of the taxes and insurance (including health) to a reasonable salary – it just doesn’t make sense. What the government doesn’t figure on is that much of the work that an employee might contribute is being outsourced to another one-person operation. This obviously helps maintain small business. And, don’t forget, a home-based business does not pay rent and can deduct the office portion of the home.

Business brokers should take advantage of this huge increase in small business.

Baby Boomer Bubble???

Surveys have suggested that there will be a flood of new businesses for sale as baby boomers reach the age of 65 and that this will drive down the price of firms.

We do not believe it and see no evidence of it.

The reality is that people are living longer and healthier and see no good reason for retiring just because a certain age has ticked over. Many have no faith in the government looking after them and are unimpressed with the returns from investment in term deposits, shares, property, and (naturally) finance companies.

Of course, every business changes hands eventually, but we are not expecting a sudden flood.

April Market Report from Clyth MacLeod

Business sales are still slow. The main problem is a lack of good listings – saleable businesses with proven profits or genuine potential. Owners are hanging on to their firms.

Yes, we have plenty ofbuyers – immigrants, corporate redundancies, returning ex-pats, and people wanting to fly on their own wings. They are cautious and credit is very difficult to obtain – but they are ready, willing, and able to buy when the right opportunity is presented. We welcome the new financial year and look to many more business sales.

Participate in BBP's Industry Survey for 2010

Throughout the month of May, we are inviting all business brokers and intermediarys to complete our Industry Survey for calendar year 2010.  In appreciation for the time required to complete the survey, participants will receive free Industry Survey Results.

Survey results offer a glimpse of industry averages, changes and trends over time, as well as the general state of the industry. Obviously this "glimpse" is only as accurate as the data entered by those in the profession, so we do ask that participants take the time necessary to provide accurate information.  We so appreciate those who have completed our industry surveys in the past.

If you complete the survey by May 31st, we will make sure you receive a free copy of the results.

Begin the Survey Now

Old Fashioned Values

It is almost 50 years since I sold my first business – a Four Square Store in Otahuhu – and I have been involved in nearly 7,000 business sales since.

Some things don’t change:

• Our Code of Ethics is still the same: “do unto others as you would have them do unto you”.
• Be honest with business appraisals – tell owners what they need to know, not what they want to hear. We don’t “buy” listings.
• People answer our phones – not press #1 or “your call is important”. To us your call really is important.
• Still believe “a man’s word is his bond” (or a woman’s) – but it is prudent to get a signature today.
• Stick to our knitting – we sell and value businesses – not commercial buildings, farms or houses.
• Our fees will be low and be fair – up to 50% lower than some firms – yet providing outstanding marketing and personal service.
• We welcome immigrants – they enrich our country, financially and culturally.
• Integrity is non-negotiable – we will not tolerate any unethical conduct in our team.
• Technology is great (crunching numbers, handling databases, fast communication) but it hasn’t increased productivity and profitability despite our large investment in computers, programmes, etc. People sell businesses.
• We say “NO!” to listing and selling businesses we think are “dodgy”.

Call me “old-fashioned”, but my name is on the company and we plan to be in business for many more years.