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free summary of Buying and Selling a Business by Garrett Sutton from Rich Dad Advisor Series

Synopsis

Buying and Selling a Business is a clear and concise book that introduces its readers to key strategies for effectively selling and acquiring business investments. Written in a chronological way, this book guides you from start to finish completing a winning transaction. This includes how to overcome the many obstacles that can arrive along the way. Built around real-life stories, Buying and Selling a Business prepares you on all fronts. 

About Garrett Sutton

Garrett Sutton is a highly sought after Attorney with over 35 years of experience in corporate law. Having assisted hundreds of entrepreneurs and investors protect their assets and achieve their goals, Garrett has also become a bestselling author in both legal and layperson genres. Additionally, Garrett is a highly sought after guest speaker and currently serves as a member of the elite group of “Rich Dad Advisors”.

Why Investing in a Business is a Better Idea than Starting Up your Own Business

If you don’t know what you are doing, buying and selling businesses can be the riskiest of all three investment classes. At the same time, buying and selling businesses can be the most profitable of them all. 

Garrett makes the argument that it is a lot easier to buy a company than to create a startup. This is because there is much less financial risk involved with buying an existing business than starting one up yourself.

An existing business must be done doing something right to still be in existence. The rewards of ownership and independence are the same for a startup and existing business, but an existing business already has a path for the future. 

Why Sell Rather than Keep a Business?

There are certain circumstances when it is a good time to sell rather than hold onto your business. Generally, the best time to sell is when the industry is in good shape. 

It is important to point out, though, that sellers have little or no control over this. Therefore, all you can do is keep your company in prime selling condition in order to take advantage of when the industry is in good shape. So, sometimes it is best to sell when events pop up and there is a greater motivation for you to sell.

In Order to Sell Well, you have to Overcome the Issue of Sellers and Buyers Speaking Different Languages

The buyer and sellers speak different languages; both the buyer and the seller want the company to sell. Both want as painless a process as possible, and both want it over quickly. Neither wants the business to fail with so much in common. How could anything go wrong? 

Each is viewing the whole process through a different set of lenses.

The buyer is watching the road ahead. All discussions are filtered through a view of future goals. In contrast, the seller is watching the rearview mirror. All discussions are filtered through historical contexts. Both are making decisions and posturing through their own lens. To overcome these differences, you must also try to see the other person’s point of view. Knowing this and trying to see things through the other side’s filter can make the whole process. To make these even more simple for the reader, Garrett analyzes each step of the sale from each side’s point of view.

How to Set a Firm Foundation as a Potential Seller

Be Prepared for Difficult Questions

One of the greater barriers to a sale is the buyer having fears of what could potentially happen in the future to unravel the business. Therefore, fear of what is to come may have some buyers looking for new suppliers, customers, and jobs. The follow up can be far-reaching without the owner ever knowing about it. Therefore, sellers need to be proactive from the beginning. Sellers should sign confidentiality agreements and be ready with a plan of how to alleviate the potential fears of the buyers.

On top of this, as a seller, you need to present your company as a viable purchase. All financials should be clear and current. All company policies and procedures should be formalized. The more you have in writing the easier it will be to overcome objections proposed by the buyer. You also want age on the documents. For example, if the documents were prepared just one month prior to negotiations for a sale, this unpreparedness may be used against you.

Prepare Your Accounts Professionally and Hire Attorneys

As a seller, you should draft your perspectives as no one knows your business better than you. However, do bring in experts for advice. An attorney will be especially helpful to present the information in the prospectus and the proper conditional, no guarantee language. This means you won’t be sued if the business is not meeting the forecast financials.

The primary way a buyer judges a target business is by the numbers. Financial reports must be accurate and credible, by meeting the professional standards of the buyer. The financials might look good to an untrained eye, but you must make sure they stand up to scrutiny by the buyer. Therefore, hire an expert accountant and PA to help you with this.

Additionally, it is also important to understand that buyers usually prefer asset purchases, where they acquire the business’s assets. This way, the buyer assumes no liabilities for the previous entity, except the one.

Don’t Give Away Too Much Information but Be Honest

Another important tip for sellers is to not easily give information out about the business. You don’t want buyers who are just fishing for deals or worse trawling for free information about your business. It is advisable to protect yourself in writing, by creating a confidentiality agreement. 

Also, be forthcoming with the facts. Be honest. In fact, sellers are never sued for telling too much, only for not telling enough. It’s best to disclose everything. 

It is vitally important that sellers produce advertisements that are persuasive. These advertisements must generate interest and justify the asking price. False claims and exaggerations are not appropriate and can get you in trouble. Therefore, they should be avoided.

Additionally, you do not want to give too much information out about the business, especially before you have a confidentiality and nondisclosure agreement signed. You should always leave the following information out of advertisements: specific location, company name or address, or detailed listings of financial statements.

Keep your Decisions Rational

Don’t let emotion get the better of you. Your business is your baby, and you’ve put a lot of time and effort into it. However, if you want to successfully sell it be sure you’re not rationalizing your price out of the market as a buyer. You’ll need to understand the operations of the target company. It’s not enough that the price is right in order for the deal to be a good one.

You must also accept that your asking price won’t necessarily be the sale price. The initial price should be relatively high, as the gap between an initial price and selling price tends to be between about 10 and 25%. 

Get a Working Capital Loan

After selling a business you will most probably need a working capital loan too. As a seller, you will likely not get the entire purchase price in cash. Some sellers will accept promissory notes secured by assets in the business. Others may prefer contingency payments where payment is made when the business meets certain sales targets. A seller also may opt to take stock in the buyer’s company or take convertible securities as part of the payment. Therefore, either way, how the business is run is still important to the seller after the closing deal is done.

If the business doesn’t do well. You may find yourself stuck with a useless note or stock, or you might even find yourself back running the company. Therefore, you want to sell to the right people and want to be free from taxation. Selling smart doesn’t just mean selling for the right price. Understanding the taxation element in the sale of the business can mean selling for a lower price and taking home more money.

How to Equip Yourself, as a Buyer, to Purchase Something

Do your Research

Buyers must be extremely prepared and well researched. Therefore, buyers should analyze sellers, industries, and the business up for sale. Buying a business takes preparation, knowledge. and a little bit of faith. If you are not an expert in the industry you’re considering entering, then become one. Take some classes, read extensively, and/or take a temporary job in the field.

Plus, once you start evaluating companies, double-check all facts yourself. Never take the seller’s word as gospel. Therefore, always ask questions. Be blunt and be nosy.

If the seller’s financial information is informal or has any blips, even if the data is in perfect order and it’s prepared by a recognized accounting firm, you still need to verify the legitimacy of the seller’s claims. Look out for artificial increases in sales, by a seller granting easy credit to customers who would normally be turned down. Buyers should also look out for peaks in professional service fees. A peak in accounting fees can be a sign of an IRS suit. Similarly, a peak in legal fees could suggest a lawsuit was filed when considering the purchase. 

All in all, account for unexpected expenses and the cost of buying the business. Be sure you are getting sufficient value for your purchase price. 

Get a Solid Team Around you

It is vitally important that, as a buyer, you hire the right people to support you. A good attorney should be the first recruit for both the buyers and sellers. The attorney will be intimately involved in every step of the sale process. Bringing him in early on will give you a greater chance of success. Also, make sure the lawyer specializes in business sales and acquisitions and has an understanding of tax law. It is important to remember, though, that the attorney should not be making business decisions for you. Their legal advice should just supplement and support good business advice.

A good accountant is also extremely important for buyers, but also sellers. Again, it is much better if the accountants have experience in the industry and can explain complex issues in simple terms. This will help you to make more informed decisions. Additionally, an accountant can be very helpful for a buyer, not just with analyzing the company’s finances, but also with money-raising efforts and personal contracts.

The final obligatory professional recruit is a business broker. They will act in the same way that real estate brokers do as intermediaries between buyers and sellers. They have listings from numerous sellers and can search out the right business for a buyer or the right client for a seller. The primary benefit of using a broker is confidentiality. He can pre-screen potential buyers to be sure of their level of interest, as well as their ability to pay the evaluation price you have. This will save you the hassle of dealing with weak interest and the possibility of snoopy competitors. 

You should be looking for a mentor from the start. Search your network of friends and family for someone who has found success in your field. These people can guide you in making the correct decisions and how to avoid the mistakes they made. 

Remember buying a company has more than just financial liability. Your reputation, your personal finances, your family’s future, and your personnel are going to be connected to this new venture. Be sure you have a strategic plan in place before you begin looking to assemble a team of advisors.

Utilize Stock Transfers

Garrett claims in the book that he usually prefers stock transfers because you pay fewer taxes on the sale. In fact, sellers might even offer a sales price discount for accepting a stock sale. The key here is that the new owner takes on all assets and all liabilities, whether the buyer knows about them or not. It’s important to recognize that in a stock purchase transaction, there are significant risks for the sellers as the seller may be held to an incredibly high standard of candor and disclosure under securities laws.

The field of securities law is extremely complex and subject to shifting definitions. An honest and well-intended seller can be wiped out by an anti-fraud suit. 

Valuations

 A business has only three things of worth: assets, the ability for those assets to produce earnings, and Goodwill.

There are numerous valuation methods for determining the value of a business. The most widely used method is the earnings approach, which measures the worth of earnings. The earnings for the past five years are multiplied by the capitalization rate. Every industry has a formula for multipliers that consider sales, not profits.

This is a simplistic method that can be used for a first glance valuation. However, both buyers and sellers will need a professional accountant to help with valuation. They may even want to bring in a professional business appraiser, as this provides greater objectivity.

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