Advantages of Buying Businesses for Sale by Owner
Businesses For Sale By Owner (FSBO)
Existing businesses are being sold all the time, but many sellers elect to use the services of a business broker. This saves them time and effort, although a broker – no differently than a Realtor in the housing market – is paid a fairly substantial commission for handling the transaction. There are advantages to the seller when it comes to businesses for sale by owner (often abbreviated FSBO in a sort of business shorthand), but there are even more advantages to the buyer of a business for sale by owner.
Advantages – Let Us Count the Ways
With a business for sale by owner, the buyer can expect to benefit in the following ways:
- Selling price – Since most FSBO situations arise because the seller is looking to eliminate paying a commission on the transaction, there is usually some wiggle room during the price negotiation phase. True market value usually has a sales commission built into it. For example, if XYZ Company is priced at $250,000 with a 10 percent broker’s commission, the buyer will only see $225,000 out of that sale. While you probably won’t convince him or her to sell it to you at that lower price, you might get them to split the difference. A savings of $12,500 in this situation is well worth the asking.
- Equipment – A business for sale by owner is more likely to include equipment and everything that goes along with it. Having to put up additional money to replace computers, printers, furniture, fixtures, and similar items can be a real drain on a buyer’s pocketbook. Because most business owners bought this stuff years ago, and it’s long since been paid for, they usually have a lower opinion of its residual value than would a business broker who sells businesses all day long. For instance, with a FSBO transaction, the seller is just as likely to say, “Let’s not quibble about those three PCs; I’ll just include them in the deal,” whereas a broker might insist that you pay fair-market value for every item in the place.
- Inventory – As with equipment above, a FSBO opportunity gives you a chance to pick up existing stock for far below its resale or replacement value. To the owner, it’s just one more thing between him (or her) and retirement, while you will look upon a warehouse full of widgets as gold incarnate.
- Financing – Very few buyers these days have the financial resources to purchase a business outright. As a result, you will probably need to secure some level of financing. In most circumstances, these funds would come from a bank or credit union, by emptying out your retirement fund, or borrowing money from friends and relatives, or by taking on one or more business partners. With a business for sale by owner, however, the best financial resource you have is right on the premises – the seller. Many FSBO transactions involve some level of seller financing, usually at below market rates and for a length of term more generous than you might find at your neighborhood lending institution.
- Expertise – The seller has knowledge of the company, the industry, and the clientele that is invaluable to someone coming in off the street. Oftentimes they will be more than willing to stick around and help you learn the ropes, especially if you are on the hook with them for some or all of the financing (see the item directly above). No matter who they are, people love to give advice, and who better to ask for business advice than the person who just sold you the company? And because they were likely associated with the business for a long time, the company’s successful continuation can act somewhat like a legacy in their mind. As the buyer, that’s a great benefit to you.
Closing Question
Which of the bullet points noted above seem to offer the greatest advantage to someone looking to buy a business for sale by owner?
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09/23/09 at 02:09 PM
Each point may have some relevance from time to time, but on balance they are just juicy hypotheticals and myths far more than reality. The hazards to and caused by a buyer and seller, not educated and thinly experienced in the process, generally far outweigh the possible savings from sidestepping use (i.e., cost) of a expert help. This assumes a broker is trained, experienced and full service.
Experienced brokers are experts, add value, smooth the transaction and reduce risk. Professional buyers, such as Private Equity Groups, often express preferences for working through a professional intermediary representing the seller, even though the nominal price paid may be higher. In your example, where the buyer and seller “save” $25K out of a $250K transaction, consider the real savings after the cost of having a deal misunderstood, poorly conceived and badly constructed gone bad after closing, with seller and buyer fighting it out to save themselves. We see it time and again.
A third generation pro in the sale of business quips, “left alone, a buyer and seller most often destroy the very transaction they are trying to accomplish.” We concur. In my third decade of respresenting sellers and buyers, I would seldom, if ever, advise someone I care for to try to buy from a FSBO.
10/13/09 at 11:10 AM
While there are advantages to buying businesses for sale by owner (FSBO), we certainly agree that experienced business brokers are experts, add value, and reduce risk.
Here are some additional articles worth reading:
The Key Benefits of Using a Business Broker
What Separates the Good Business Broker From the Bad?
The 8 Biggest Mistakes When Buying A Business