By Anna Hrushka
Pacific Business News
Feb 8. 2018

Owning a business can provide flexibility, freedom and autonomy, factors that some workers often fantasize about after years of working for a company or corporation.

The idea of setting your own schedule and becoming your own boss can be enticing for some, as one business broker told Pacific Business News.

“There certainly are a large number of people who have been dreaming of owning their own business,” said Jim Mayfield, who owns Island Business & Commercial Brokerage on Kauai. “All it takes is one bad boss and I think everybody starts thinking about it.”

Mayfield himself made the transition from employee to employer 11 years ago, when he left his job as vice president and business banking manager at Bank of Hawaii to start his own business and commercial brokerage firm, where he now assists both buyers and sellers in the life-changing transaction of buying a business.

“When you own your own business, for better or for worse, you are in control of your own life as much as possible,” Mayfield said. “At some of these large corporations, things happen. People get laid off and it’s not necessarily because they are not good, hardworking, intelligent employees. If you are a good, hardworking, intelligent employee who got laid off for reasons completely beyond poor performance, that’s a good time to start thinking about owning your own business.”

Pacific Business News interviewed industry professionals to hear their tips and advice when it comes to buying or selling a business in Hawaii.

Tip for buyers:

Make sure you are ready for the lifestyle change

“Buying a business and being a small-business owner is a lifestyle choice and a lifestyle change,” said Joe Burns, director of the Small Business Development Center on Oahu, which assisted eight to nine purchases or sales of small businesses on Oahu last year. “The responsibility of making payroll every month and having that business go on is not something that everyone is cut out to do. Anyone that wants to step into this role without any prior experience really needs to go in with eyes wide open.”

Jane Sawyer, district director of the Small Business Administration told Pacific Business News those looking to make the leap to business owner need to look at the role they’ve played in their working career.

“Some might have been key employees, an operator or COO in a medium to small business or large corporation where they have been involved in the operations of a business. But they may not have fully evaluated what happens when it’s up to them to put their paycheck on the line or [make] big decisions that would impact or diminish all the assets that they’ve accrued over that lifetime of work, because that can happen,” she said. “A lot of people think, ‘I’ll just be the boss and this thing is going to take off.’ But they may only have had a limited view of operations.”

In some cases, however, prior experience accrued as part of a larger corporation can benefit a new business owner.

“Having worked in a company for years, that’s definitely valuable knowledge, and that’s definitely value that can be brought to the table,” Burns told Pacific Business News.

Mayfield said the stakes are high for a buyer who expects to manage the daily operations of a new business and he or she needs to be prepared to invest a substantial amount of time and energy to keep it running after the transaction.

“When you’ve sold your home, and put everything you’ve had into buying a business and have taken out a bank loan for hundreds of thousands of dollars, you’re going to want to stay right on top of that business for quite a while until you’re comfortable that everything is going well,” he said.

Burns said the mindset of an owner compared to that of an employee is different, and buyers need to be aware of the pressures and responsibilities that come with taking over an existing business.

“There is pressure to make it successful, and that’s not necessarily a bad thing. But you have to be the type of person that’s not going to wilt under that pressure,” he added.

Tip for sellers:

Start early

“It’s a long path from people who start to think about buying a business to somebody who actually signs a purchase agreement,” Mayfield said.

While some sellers may only be flirting with the idea of selling their company, Mayfield said it would be to their benefit to start the process as early as possible.

For a generic business — such as a retail clothing store — that may not require significant operational expertise, Mayfield said the process can take a matter of months. But for an operation that requires special knowledge or certification, the process could take twice as long.

“The more specialized the business is, the more difficult and lengthy the process,” he added.

For sellers who may not be ready to sell but are interested in gauging the level of interest on the market, Mayfield said his business has created a separate listing for companies that “might be ready to sell.”

“About 25 to 30 percent of all businesses that sell, sell to people who are ready to buy now,” Mayfield said. “They are active. I may not know about them, because they may not have seen any listing that they are interested in, but there’s a large group of those people, and they are just waiting for the right business to come on the market.”

Tip for buyers:

Don’t forget about the working capital

“Buyers should look at what kind of small-business financing is available with an SBA guarantee,” Sawyer said. “There are some rules and criteria, depending on the size of the business and the value of the business.”

If a buyer wants to go the SBA route to finance their purchase, in most cases, they only need to put 10 percent down, according to the SBA’s website.

The SBA loans can be paid back over as long as 25 years for real estate and equipment and 10 years for working capital.

“Frequently, buyers know about the down payment, but they forget about the working capital,” Mayfield said. “And the working capital is important.”

Mayfield said it’s important that buyers understand the amount of working capital that is required to operate the business, in addition to the down payment required for the purchase.

“Some businesses don’t have a lot of working capital. Others, like a contractor where they have to put all the money upfront and don’t get paid for a while, those businesses require a substantial amount of working capital,” Mayfield said.

Tip for sellers:

Be prepared to provide some financing

“There’s a lot of risk in financing a business purchase and ideally the banks want about 35 percent cash in to mitigate the risk,” Mayfield said.

Mayfield said banks are aware of the risks associated with new ownership.

“Even if a buyer has a great working relationship with the seller, they’re still not going to have the competency up front that the seller will have,” he added. “The banks will frequently be looking for the seller to provide some seller financing to the buyer to complete the purchase, because it mitigates their risk. Ten years ago, that was uncommon. Now you’ll see that pretty much any business sale going at the $2 million or $3 million range, every one of those will be some seller finance.”

Tip for buyers:

Do your research and consult with professionals

Marie Lau, who owns Hokulani Bake Shop, said she wishes she would have invested a little more in due diligence when she purchased the business last year.

Lau bought the bakery after working for the last seven years as a manager for Chun Wah Kam Noodle Factory, a business owned by her family.

“I wouldn’t have closed the deal so fast and done more due diligence, checking the background and financials of the company,” she said when asked to reflect on what she would have done differently. “I wish I had taken more time and been a little more thorough.”

Lau said that while she did have a lawyer who assisted with the deal, consulting with an accountant and even seeking the perspective of a marketer would have helped.

“They really have to become a great detective,” said Sawyer on how buyers should vet a potential purchase. “They need to glean as much information as possible and check independently even from what the current owner, attorney or someone might provide for them to verify some of the information that might be questionable.”

Sawyer said licenses, permits, tax returns and contracts are all important documents that should be looked at closely in addition to a business’s financials.

Burns said consulting a tax attorney or CPA is also a necessity.

“If you put together a purchase agreement, have an attorney look at it to make sure you’re not getting into any legal trouble,” Burns said. “That’s good for both sides and it’s just common sense. You might be surprised at the amount of people that don’t feel that’s necessary.”

Mayfield said when enlisting a CPA, it’s often helpful to find one that specializes in business transactions.

“Use a tax attorney and specialty CPAs,” Mayfield said. “Their primary job is handling these kinds of sales. They know how to structure these deals to mitigate the tax consequences.”

Tip for sellers:

Implement a succession plan

Owners who want to put their business on the market should consider implementing a succession plan prior to the sale, Burns said.

“What we like to tell sellers is, if you are going to be selling, start to have a plan where you are less and less important to the daily operations of the business,” he said.

Burns said owners should look for employees with leadership skills that can step up to handle daily operations of a business in preparation for when the business is sold to a new owner.

“That’s always a key for a seller because if a seller is so important to the business and they leave, then how is that value going to be maintained or enhanced in the new company with the new owners?” he added.

Tip for buyers:

Make sure the seller is accessible after the sale

No matter how thorough the documentation or extensive the research, Burns said there will always be questions that arise post sale.

“Having access to the seller is something that’s very valuable,” Burns said, adding buyers can have seller access formalized in the purchase agreement.

Mayfield said in addition to having buyers work hand in hand throughout the process, he includes language in the purchase agreement that stipulates the length of time a buyer should be able to contact a former owner following a sale.

“What I have for up to a year is to allow telephone questions, email questions and video chat,” he said. “The seller doesn’t need to come into the business, but they are very willing to answer any and all questions the buyer has because no matter what the buyer asks, the odds are 90 percent the former seller is going to know the answer off the top of their head.”

Mayfield said post-transaction communication is what he defines as a successful sale of a business.

“To me, a successful sale of the business is when a buyer and seller are able to continue working together for some period of time, which is negotiable until such time as the buyer starts feeling pretty comfortable,” he said.

Mayfield said most sellers are proud of the business they built and are willing to support the buyer so that the business can continue to be successful.

Tip for sellers:

Know what your business is worth

Mayfield estimates around 80 percent of owners believe their business is worth far more than what the market says it’s worth. Oftentimes, that inflated valuation comes from owners including their company’s potential when determining the asking price.

“Buyers do not pay extra for potential,” Mayfield said.

Mayfield said a recent Kauai client wanted the business valuation to include the potential extra revenue that would come from moving the operations to Oahu, where the increase in population and tourists would dramatically impact sales.

“Do I believe that if somebody moved their business from Kauai to Oahu they could grow revenues and profits dramatically? Absolutely,” Mayfield said. “But I had to make sure that they understand that buyers buy based on the latest financials and historical financials. They don’t pay a premium for potential. If the asking price is out of the ballpark, compared to standard multiples of all the other listings, people spend five seconds on that web page before they click and go to the next listing,” he said.

Burns said in many cases, he recommends a seller enlist the services of an accredited business valuation professional.

“Valuing a business is part science and part art,” Burns said. “You can easily say the value of a business is just what somebody is willing to pay. True, but you have to have a starting point.”