Ingram's October 2022

S M A L L B U S I N E S S A D V I S E R F I N A N C I A L A D V I S E R

by Aaron Wiens

Is This the Time to Buy?

Unique circumstances of the current economy might provide businesses with growth opportunities.

For strategic buyers, this is when you evaluate whether a business is the right fit. It may take months or even years to find the right company to merge with your culture and bring the right balance to facilitate growth. Often, a seller wants to ensure the right person or entity takes over the busi ness. Do research to truly understand their business and be able to articulate how the sale will benefit both parties. In small-business situations where clientele is loyal to the owner, it’s common to experience a drop-off in business when you first take ownership. This is some thing to factor in when you run num- bers and forecast ROI in the first years. If you don’t already have advisers whom you consult on financial and stra tegic decisions, now is the time to find trustworthy experts for the acquisition process. This team often includes:  Accountant Enlist a strong team of advisers First, make sure you are ready to ac quire another business. Before you can close an acquisition deal, you will need to prepare fairly extensive documentation. To ensure you are ready to sign when the right opportunity arises, there are several ways you can prepare your business now: 1. Organize and complete your fi nances on a monthly basis. Financial institutions or investors will ask for your trailing 12-month set of books. 2. Work with your financial advis ers to assess your business’s financial well-being. 3. Pass a background check. Acquiring a business can be a strate gic next step to growing your business or your portfolio. With a solid under standing of your financial well-being and a clear vision for your future, you will be prepared to make decisions to get you further on the path to your long-term goals.  Lawyer  Banker  Small business consultant  Broker For strategic buyers

If you are evaluating ways to grow your business, acquir ing another business may be an option. With the economy in a unique position and tens of thousands of small businesses in the United States up for sale, knowing what to look for and how to undertake a business acquisition will allow you to make sure your business is prepared to take advantage of the opportunity. Unlike a competitively priced home, which may sell within a matter of days, studies show that it takes an average of eight to 10 months to sell a small business. This is even the case for successful, cash-flowing small businesses. If you are considering buying a business, there are two buyer scenarios. First, you may be a strategic buyer seeking to realize synergies by combining or running another compa ny in the same or a related industry as your existing business. Or, you may be a financial buyer: a company or individual with out a company in the industry but with an interest in purchas ing as a financial investment. Whether you are a strategic or financial buyer, there are ways you can determine, “Is it time to buy?” Understand your borrowing options There are many financing options available to those look ing to acquire a small business. Most notably, favorable lending terms are found in U.S. Small Business Administration loans, which exist specifically to help qualified small businesses ob tain capital for expansion or operations. Another increasingly popular financing option is seller fi nancing, in which the seller allows the buyer to pay off a fraction of the price of the business over time with interest. Although a more complex transaction, a seller acting as the “lender” has a vested interest in the business and demonstrates confidence that the business can continue to be profitable in years to come. Research: Asking the right questions The first numbers you will be presented with when you examine potential ROI for a business purchase include annual gross revenue and profit, as well as its EBITDA (earnings before interest, taxes, depreciation, and amortization). You should also request at least three years of profit-and-loss statements so you can reconcile the two. Depending on the size of the trans action, it may make sense in some cases to engage a reputable accounting firm to perform a Quality of Earnings report. For the full picture, the due diligence process includes vetting additional financial documents, including interpreting past tax returns, with the help of your accountant or financial adviser. Next, you will want to find out how involved the current owner is on a day-to-day basis. If you are a financial buyer, re member you are buying all aspects of the operation, which in cludes employees, liability, and day-to-day management.

Aaron Wiens is a vice president with Enterprise Bank & Trust in Leawood, Kan. P | 913.663.5525 E | awiens@ enterprisebank.com

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October 2022

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