Aloha,

During the past three months, Island Business Brokers, LLC, has been the broker for the purchase and sale of four significant businesses on the island of Kauai, totaling almost $4 million in sales price. Throughout the process, we worked hundreds of hours with both the buyers and sellers to handle the myriad of issues that arise when a business changes hands. Just a few of those issues involve the negotiation of all dimensions of the purchase agreement, the handling of inventory, lease renegotiation and assignment, defining the non-competition agreement, and creating a training and transition plan. Our references speak glowingly about our ability to handle all the issues throughout this complicated process.

Island Business Brokers, LLC, continues to be “the source” for buying or selling a business on Kauai. We welcome the opportunity to speak with you about the prospective sale of your business!

Mahalo,

Lauren

Some business owners don’t realize that, in spite of all of the problems with their business, it still has value. Most business owners face constant problems in running their business, no matter how much time they put in; or how much money is invested; or how efficient they have made the business operations. It is, as they say, “the nature of the beast.”

Operating a business is not an easy job, so when it comes time to sell, business owners tend to look at only the negatives. “Who would want all of these headaches?” they ask themselves. However, by looking at the positives, especially from a buyer’s vantage point, a business owner can see the value he or she has really created. By purchasing an existing business, a buyer eliminates many of the problems encountered when starting one from scratch. As the media constantly point out, the failure rate in starting a new business is very high. Failure is reduced considerably when one buys an existing business. Here are just a few of the reasons:

   
t is important that potential sellers understand just what buyers go through to become business owners. Statistics reveal that only about 1 out of 14 would-be business buyers actually buy a business. If the prospective buyer is employed, he or she has to make the decision to leave the job. Then there is the necessary financial commitment, including any loans or assumption of debt relative to the purchase of a business. There are also the issues of family and personal responsibilities – an unsupportive spouse can nullify a purchase. Another factor to consider is that most buyers are first-timers, and since they have never owned a business, the prospect of doing so can be daunting. The real sticking point, however, is whether the prospective buyer can make the leap of faith essential to purchasing their own business. The inability to make that leap is why many who want to go into business for themselves don’t.

An Established Business
An existing business is a known entity. It has a historical track record. It has a customer or client base, well-established vendors and suppliers. It has a physical location, furniture, fixtures, and equipment in place. The term “turn-key” operation is over-used, but an existing business is just that, and has a host of other attributes.

Business Relationships
In addition to the existing relationships with customers/clients, vendors, and suppliers, most businesses have experienced employees who are a valuable asset. Buyers may already have established relationships with banks, insurance companies, printers, advertisers, professional advisors, etc. If not, the existing owner does have these in place, and they can readily be transferred.

“A Pig in a Poke”
Starting a new business is just that. No matter how much research, time, and money are invested, there is still a big risk in starting a business from scratch. You don’t necessarily get what you see. The existing business, however, has a financial track record and established policies and procedures. A prospective buyer can see the financial history of the business – when sales are the highest and lowest, what the real expenses of the business are, how much money an owner can make.

Price and Terms
With an existing business, the seller has everything in place – the business is in operation and a price is established. Opening a new business from scratch can be the proverbial “money pit.” Purchasing an established business, the buyer knows exactly what he or she is getting for his money. In some cases, the seller is also willing to take a reasonable down payment and then finance the balance of the purchase price.

The “Unwritten” Guarantee
By financing the purchase price, the seller is saying that he or she is confident that the business will be able to pay its bills, support the new owner, plus make the payments to the seller.
 

Nothing is more shattering to a business owner than to have a valued employee announce that he or she is leaving and opening a competitive business in the same town. If the business owner doesn’t have anything in writing covering this situation, all an owner can do is wish them luck or throw them out the door – depending on his reaction to the news, which most likely isn’t good. By then it’s too late to do anything.

What could have been done? Unfortunately, the business owner hires someone and over the years, a relationship is established so that the owner feels that the employee will be there forever. When the person was hired, the owner didn’t know whether he or she would or could do the job, and by the time it was established that he could, it seemed that asking for an agreement was unnecessary or would even be considered an insult by the employee. It would be prudent for an employer to require anyone hired for a key position to sign some type of agreement containing the terms under which an employee could leave his or her employment. Such an agreement is commonly termed a “noncompete agreement.”

In an article titled “Lose the Employee, Keep the Business,” by David Koeppel, in the New York Times, there are three basic ways of handling the noncompete issue. Koeppel writes, “The legal protections fall into three categories. Noncompete agreements bar employees from competing directly with their former bosses. Nonsolicitation agreements prohibit them from recruiting employees or clients of the business they left. Nondisclosure agreements (also called confidentiality agreements) forbid them from using information they gleaned at their former workplace. A single employment contract can include all three provisions.”

The laws governing noncompete issues vary by state, so the best thing to do is to consult your legal professional for what works in your state. A noncompete agreement can be completely nullified if not done properly. For example, if a court should rule that the length of time in the agreement is unreasonable, the entire agreement could be nullified. It’s important that any agreement be reviewed by a legal professional to ensure its legality.

Going to court is certainly an option if the agreement is breeched, but it can take a long time to get there, and proving who took what and when or how you were actually damaged is difficult. Certainly, if a violation of the agreement occurs and damage is done, then litigation is warranted. What an agreement can do is make an employee think twice before breeching the agreement.

Also, keep in mind that an experienced person would not sign a noncompete, since if the job didn’t work out, for whatever reason, he or she would not be able to work for anyone else based on the agreement. However, the courts are reluctant to prevent a person from working in their field. In fact, courts are reluctant to stop anyone from working – period. In a case where someone is bringing experience to the job, it might be better to just prevent them from taking any of your employees and/or to prevent them from taking your business information with them.

All business owners should take these non-compete issues seriously when hiring key employees or when promoting an employee to a key position. It’s always difficult when a valued employee leaves, but it can be a lot worse if they take your business model or documents, etc., as well as one of your other employees, and then opens up across the street.

Some time ago, the Small Business Administration (SBA) had a study prepared titled “Financial Difficulties of Small Businesses and Reasons for their Failure.” The study surveyed individuals whose businesses were in financial difficulty and subsequently failed. Following are some of the more “way-out” reasons. Although many of them are hard to believe and some of them quite humorous – they are all real reasons as stated by the business owners.

Tax Troubles

The IRS stepped in and took over the bank account.
The IRS threatened to repossess their tools of trade if they did not pay the $20,000 in back taxes immediately.
The IRS agent told them that they would put padlocks on the doors if they couldn’t come up with the money in one month.
Pressure from IRS. The IRS is “merciless.”
The IRS was attempting to reach the non-debtor’s wife’s income (i.e., levy) for tax liabilities, which all preceded her marriage to the debtor.
The IRS changed the locks on the business, and the business had to declare bankruptcy in order for the owners to be able to even get into the building.

Personal Profiles

 The bank was not going to refinance her business because of a divorce settlement.
An inability to control blood glucose level, cholesterol, etc., due to the stress of dealing with creditors.
His wife had a nervous breakdown. He just knew they couldn’t handle their bills.
The injury to his arm.
She could not pay her medical bills. She had filed bankruptcy as soon as she couldn’t pay her bills, rather than get behind in payments.
Creditors were hounding him to pay his wife’s credit card. He had not canceled the cards after the divorce. He returned his but never closed the account.
He had lost a court case in trying to settle child support and was given 48 hours to settle $36,000 of debt, which was impossible.

And, finally, some explanations from those who suffered a calamity that pushed them into failure, and subsequent bankruptcy:

Calamities

 The engine blew in the truck, and they couldn’t afford to buy another one.
His van was stolen and he could no longer transport the equipment necessary to carry on his business.
The organization they were linked with sold out and was taken over by another organization that was hard to work with.
A gas explosion.
The death of a foreman.
The State came in and tore up the road.

Anyone who buys or starts a business has to be, to some degree, a risk-taker. Many people who fail in business shrug off the failure and start again. In fact, many very successful businesses have been started by those who failed in a previous venture. As the old saying goes, “If at first you don’t succeed, try, try again.” Many entrepreneurs do just that.

www.islandbusinessbrokers.com
info@islandbusinessbrokers.com
phone: 808-823-8866 • fax: 808-823-6189