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What a business broker can teach a buyer

What a business broker can teach a buyer

Leading business intermediaries, VR Business Brokers have some important lessons for the potential buyer

Educating the buyer in the business buying process as to what they can expect in a transaction is an important task.

Topics you should cover are: why you spend time up front qualifying, established business vs.start-up business expenses, financing, risk management, components that are key to a successful enterprise, and how to place value on a business. The concept of return on initial investment should also be explained.

The buyer has come to you to buy a business and they'll want to know how it got it's price tag. You should explain how business value is derived. Business valuations are combinations of several market factors. A multiple of the earnings of a business combined with an industry standard for valuing that business and the asset value of a business, all come together to place a value on a business.

What is crucial for the buyer to understand is that a business' value will also depend on purchaser specifics. The same businesses can have different values to different buyers. This depends on their down payment abilities and overall ideas for future growth. This means taking a specific business' cash flow and considering the entry fee into that business transaction for the buyer and the retirement of debt.

You should also explain the physical business buying process. Part of that process is having the buyer sign the non-disclosure agreement at the beginning of the interview. (The non-disclosure agreement covers some key points, including the fact that any information divulged is confidential, that you have not audited or verified the information, and that you collect commission from the seller).

You will likely be showing a particular buyer anywhere from three to five businesses along the specifications they have given you. You should explain the negatives of a particular business and you will have the information available to analyze each business, if need be. You also want to cover where a buyer should seek advice and opinions on the particular businesses that are being looked at; this advice should probably come from current or former business owners.

You should also introduce the buyer to the concept of escrow - a third middle party that represents the transaction only and is paid for by both the buyer and the seller. (This depends on the laws in your state; in some states, the escrow documents will simply be prepared by an attorney).

Depending on your state laws, the person performing the escrow function will prepare all closing documents and hold all money for distribution after closing.

This article was contributed by leading global business intermediaries, VR Business brokers

VR Business Brokers

About the author

VR Business Brokers are a leading global business intermediary offering valued representation in the sale of privately owned enterprises.

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