The Importance of Understanding Leases

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Leases should never be overlooked when it comes to buying or selling a business.  After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business.  It is easy to get lost with “larger” issues when buying or selling a business.  But in terms of stability, few factors rank as high as that of a lease.  Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.

The Different Kinds of Leases

In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease.  These leases clearly differ from one another, and each will impact a business in different ways.

A sub-lease is a lease within a lease.  If you have a sub-lease then another party holds the original lease.  It is very important to remember that in this situation the seller is the landlord.  In general, sub-leasing will require that permission is granted by the original landlord.  With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord.  Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.

The third lease option is the assignment of lease.  Assignment of lease is the most common type of lease when it comes to selling a business.  Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating.  In short, the seller assigns to the buyer the rights of the lease.  It is important to note that the seller does not act as the landlord in this situation.

Understand All Lease Issues to Avoid Surprises

Early on in the buying process, buyers should work to understand all aspects of a business’s lease.  No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.

Summed up, don’t ignore the critical importance of a business’s leasing situation.  Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation.  Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.

Copyright: Business Brokerage Press, Inc.

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Day One is the Day to Prepare Your Exit

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Pepperjam CTO, Greg Shepard recently published “Planning Your Exit Should Begin When You Launch” in Entrepreneur magazine.  In this article, Shepard puts forward a variety of thought-provoking ideas including that entrepreneurs should be thinking about partnering early on with those they believe will ultimately want to buy their business.

Thinking Ahead

Much of Shepard’s thinking centers around the fact that a large percentage of startups end in acquisitions.  In particular, he notes that in 2017, “mergers and acquisitions accounted for 93 percent of the 809 ventures capital-backed exits, yielding a total of $45.6 billion in disclosed exit value.”  Not too surprising, he also points out that according to a recent Silicon Valley Bank survey, over 50% of all startups are “hoping for an acquisition.”

For this reason, Shepard points out that entrepreneurs should be thinking about who may potentially acquire them from day one.  In particular, startups will want to build their companies in such a way that they will be attractive for acquisition at a later date.

Making one’s startup attractive for acquisition means thinking about such details as the Ideal Customer Profile, Ideal Employee Profile, and Ideal Buyer Profile.  This will help startups build the most attractive acquisition friendly company possible.  According to Crunchbase, exit opportunities frequently present themselves well before a company’s Series B funding.

Building Successful Strategies

Startups simply must understand who their customer is and why their particular product is attractive to that customer.  Likewise, having the right kind of employees with the right kind of training and know how is key.  Hiring the best talent is definitely a way for a startup to make itself more attractive for a potential future acquisition.

Shepard believes that once you understand your customer and have the right team to support your vision, you’ll want to focus in on companies that are most likely to be interested and construct an “optimal buyer pool.”  Finding this optimal buyer pool means finding businesses that serve similar markets and then making sure that your product, as well as your business model, both address an overlooked need within the existing customer base.  Combine all of these variables together, and your company will be more attractive for an acquisition.

Let Innovation Drive You

Another key point in Shepard’s article is that startups will want to provide products or services that potential buyers are currently not providing to their customers.  Additionally, he states that “Disruptors should seek out companies that are truly driven by innovation-perhaps those that have already established or partnered with innovative labs or accelerators.”

Ultimately, it is critical for startups to understand where they could fit within a larger organization.  Understanding this will help entrepreneurs make their company more acquisition friendly.

Copyright: Business Brokerage Press, Inc.

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What Makes the Sale of a Business Fall Through?

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There are a myriad of reasons why the sale of a business doesn’t close successfully; these multiple causes can, however, be broken down into four categories: those caused by the seller, those caused by the buyer, those that just happen (“acts of fate”), and those caused by third parties.  The following examines the part each of these components can play in contributing to the wrecked deal:

The Seller

1. In some instances, the seller doesn’t have a valid reason for entering into the sale process.  Without a strong reason for selling, he or she has neither the willingness to negotiate nor the flexibility to see the sale to a conclusion.  Without such a commitment, the desire to sell is not powerful enough to overcome the many complexities necessary to finalize the sales process.

2. Some sellers are merely testing the waters.  As detailed above, they are not at that “hungry” stage that provides the push toward a successful transaction.  These sellers merely want to see if anyone wants to buy their business at the price they would like to receive.

3. Many sellers are unrealistic about the price they want for their business.  They may be sincere about wanting to sell, but they are unable to be realistic about how the marketplace will value the business.  The demand for their business may not be there.

4. Some sellers fail to be honest about their business or its situation.  They may be hiding the fact that new competition is entering the market, that the business has serious problems or some other reason the business is not salable under existing circumstances.  Even worse, some sellers do not disclose that there is more than one owner and that they are not all in agreement about selling the business.

5. A seller may decide to wait until a buyer is found and then check with their outside advisors about the tax and/or legal consequences.  At this point, the terms of the deal have to be altered, and the buyer won’t agree.  Sellers should deal with these complications ahead of time.  Nobody likes changes–especially buyers!

The Buyer

1. The buyer may not have an urgent need or a strong desire to go into business.  In many cases the buyer may begin with positive intentions, but then doesn’t have the courage to make “the leap of faith” necessary to go through with the sale.

2 Some buyers, like sellers, have very unrealistic expectations regarding the price of businesses.  They are also uneducated about the nature of small business in general.

3. Many buyers are not willing to put in the hours or do the type of work necessary to operate a business successfully.

4. Buyers can be influenced by others who are opposed to the purchase of a business.  Many people don’t or can’t understand the need to be “your own boss.”

Acts of Fate

These are the situations that “just happen,” causing deals to fall through.  Even considering the strong hand of fate, many of these situations could have been prevented.

1. A buyer’s investigation reveals some unmentioned or unknown problem, such as an environmental situation.  Or, perhaps there are financial deficiencies discovered by the buyer.  Unfortunately, these should have been on the table from the beginning of the selling process.

2. The seller may not be able to substantiate, at least to the buyer’s satisfaction, the earnings of the business.

3. Problems may arise, unknown to both the seller and the buyer, with federal, state, or local governmental agencies.

Third Parties

1. Landlords may become difficult about transferring the lease or granting a new one.

2. Buyers and/or sellers may receive overly-aggressive advice from outside advisors, usually attorneys.  Attorneys, in their zeal to represent their clients, forget that the goal is to put the deal together.  In some cases, they erect so many roadblocks that the deal can only fall apart.

Most of the problems outlined here could have been resolved before the selling process was too far advanced.  There are also some problems that could not have been avoided–people do sometimes enter situations with the best of intentions only to find out that this is not the right answer for them after all.  These are the exceptions, however.  Most business sales can have happy endings if potential difficulties are handled at the appropriate time.

Business brokers are aware of the various ways a deal may fall through.  They are experienced in resolving issues before the business goes onto the market or before a buyer is introduced to the business.  To buy or sell a business successfully, sellers should resolve any potential deal-wreckers, following the advice of a professional business broker.

Although business brokers cannot provide legal advice, they are familiar with the intricacies of the business sale.  They are also familiar with local attorneys who specialize in the details of these transactions.  These attorneys will usually be more efficient, and therefore more cost-effective, than the attorney who handles a general practice.

Copyright: Business Brokerage Press, Inc.

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When It’s Time to Sell, Put Your Strengths First

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Putting your strengths first will help you sell your business.  While this may seem obvious, a surprising number of business owners will either improperly index the strengths of their business or fail to emphasize those strengths adequately.  In this article, we will examine five key business strengths that you should focus on when it comes time to sell.

Understand Your Buyer

You know your business, but you don’t necessarily know what buyer is best for it in the long run.  If you’ve never sold a business before (and most business owners haven’t), then you may not know how to best position and present your business for sale.

A business broker is immensely valuable in this regard.  These professionals are very good at determining which prospective buyers are serious and which ones are not.  Additionally, a business broker will use their own databases of prospective and vetted buyers and try to match your business up with the prospective buyers that are most likely to be a good fit.  When dealing with a buyer, a seasoned business broker will put emphasis on your strengths whenever possible.

Be Sure to Maintain Normal Operations

Selling a business can be very demanding and underscores, once again, the value of working with a business broker.  A business broker will focus on selling your business so that you have more time to focus on the day-to-day of running your business.

The last thing you want is to waste your time on buyers who are not serious.  Remember, if your business suffers as a result of the time you spend away from your business in the sale process, then the value of your business to prospective buyers could suffer.

Determining the Best Price

If you incorrectly price your business, you could dramatically reduce the interest.  Business brokers are experts at pricing businesses and can help you determine the best possible price.  Many business owners have unrealistic valuations and others may even undervalue their businesses or they fail to incorporate all aspects of their business.  Working with a professional business broker can help you quickly achieve the best price.  The best price possible will work to maximize the strengths of your business.

Getting Your Business Ready for Sale

There is a lot that goes into getting your business ready to sell.  The simple fact is that getting your business ready to sell isn’t a one-dimensional process, but instead involves every aspect of your business.  Getting your business ready to sell isn’t about making it look presentable and putting a “new coat of paint” on things, although this is a factor.

Instead it is necessary to have every aspect of your business in order.  From paperwork such as tax returns, contracts and forms to a business plan and more, it is important to consider every aspect of your business.  You should consider what you would want to see if you were the one looking to buy the business.  Be sure to do everything possible to build up your strengths.

Confidentiality

If word gets out that your business is up for sale, there could be a range of problems.  Employees, including key management, could begin looking for other jobs and suppliers and key buyers could begin to look elsewhere.  In short, a breach of confidentiality could lead to chaos.

Getting your business ready for sale means factoring in the strengths and weakness of your business then fixing weaknesses whenever possible and building upon your strengths.  Working with a business broker can help you address every point covered in this article and more.

Copyright: Business Brokerage Press, Inc.

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Evaluating Your Company’s Weaknesses

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The time you spend evaluating your company’s weaknesses is, as it turns out, one of the single best investments you can hope to make.  No one should understand your company better than you.  But to fully understand your company, it is essential that you invest the time to understand your company’s various strengths and weakness.

Your company, from the beginning, has been an investment.  It’s an investment in your time, your mental energy and, of course, your financial resources.  The time and effort you expend to locate, understand and then fix your businesses’ weaknesses is time very well spent.  Addressing and remedying your businesses’ weakness will not only pay dividends in the here and now, but will also help get your business ready to sell.  Let’s turn our attention to some of the key areas of weakness that can cause some buyers to look elsewhere.

An Industry in Decline

A declining market can serve as a major red flag for buyers.  You as a businessowner must be savvy enough to understand market situations and respond accordingly.

If you spot a troubling trend and realize that a major source of your revenue is declining or will decline, then you must branch out in new directions, offer new goods and/or services, find new customers and also find new ways to get your existing customers to buy more.  Taking these steps shows that your business is a vibrant and dynamic one.

You Face an Aging Workforce

It has been well publicized that young people, for example, are not entering the trades.  Many trades such as tool and die makers will be left with a substantial shortage of skilled workers as a result.  No doubt, technology will replace some, but not all, of these workers.

This is an example of how an aging workforce can impact the health and stability of a business.  If your business potentially relies upon an aging workforce then it is essential that you find a way to address this issue long before you put your business up for sale.

You Only Have, or Primarily Rely Upon a Single Product

Being a “one-trick pony” is never a good thing, even if that trick is exceptionally good.  Diversification increases the chances of stability and can even help you find new customers.  Additional goods and services allow you to weather unexpected storms such as a supply chain disruption while at the same time provide access to new customers and thus new revenue.

The Factor of Customer Concentration

Many buyers are concerned about customer concentration.  If your business has only one or two customers, then your business is highly vulnerable and almost every prospective buyer will realize this fact.  While it is an investment to find new customers, it is well worth the time and money.

A business broker can help you evaluate your company and, in the process, address its weaknesses.  Remedying your businesses weakness before you put your business up for sale and you will be rewarded.

Copyright: Business Brokerage Press, Inc.

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The Top Three Major Legal Mistakes to Avoid During a Sale

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The business sale process can be complex, which is part of the reason why it makes sense to have expert help in the form of a business broker.  Legal mistakes can be very costly mistakes.  A legal mistake can also bring the entire sale process to a sudden and complete halt.  Let’s take a closer look at what you can do to avoid these kinds of issues when selling your business.

Major Mistake 1 – You Skipped the Non-Disclosure Agreement

Nothing quite invites trouble like skipping the non-disclosure agreement.  If a deal falls through, then you have the NDA backing you up.  This document ensures that the prospective buyer doesn’t tell the world that your business is up for sale.  Never assume that a deal is going through until it actually is 100% complete.  Buying or selling a business is a complex process with lots of moving parts.  There is plenty of room for things to go wrong, and that is why you always need to have an NDA in place.

Major Mistake 2 – You Don’t Work with an Attorney

Let’s be very blunt here, if you are selling a business, then you need an attorney.  Just as there is no replacement for an NDA, the same holds true for working with a lawyer.  It is also vital that you properly prep your business for sale, which means getting paperwork organized and making sure that you have legally checked all your boxes.  Working with an experienced and proven attorney will help you ensure that your business is ready for sale.  If you’re not prepared for the deal, it can make buyers nervous.

Major Mistake 3 – You Failed to Get a Letter of Intent

A letter of intent is a valuable, and necessary, legal document.  Some sellers are reluctant to use it, fearing that it will slow down the momentum of the deal.  However, since this letter works to protect your interest and outlines expectations, this step should not be skipped.  For example, a letter of intent details the termination fee for the buyer, meaning that the buyer can’t walk away without consequences simply because he or she is having a bad day.  Importantly, a letter of intent ensures that you are only dealing with serious buyers.

Many things can go wrong while selling a business.  The more prepared you are before you begin the process, the greater the chances that you will not only avoid headaches, but also be successful.  Long before you put your business on the market, you should begin working with a capable business broker and attorney.  Their input and advice will prove to be invaluable and help you avoid a range of costly and time-consuming issues.

Copyright: Business Brokerage Press, Inc.

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5 Key Factors in Transferring Your Business to a Family Member

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The odds are that you’ve put a great deal of yourself into your business.  Inevitably, the day will come when you have no choice but to walk away from your business and begin a new chapter of your life.  Quite often, businesses are transferred from one family member to another.  In this article, we will examine 5 of the key factors you’ll want to consider when transferring your business to a family member.

Factor #1  Gifting Can Have Numerous Benefits

Will you be selling your business to a family member or simply gifting that business?  Gifting comes with several major advantages, for example, this approach can reduce your real estate taxes.  Also, the gifting process can allow you to maintain a level of control if the agreement is written properly.

Factor #2  The Buy-Sell Agreement

Don’t overlook the importance of the buy-sell agreement, which works to put everything in writing.  You may be tempted to forgo a contract since you are dealing with a family member, but this is a mistake, no matter how close you might be with your loved ones.  A buy-sell agreement adds clarity to the process, which can help to keep confusion levels low and the chances of success high.  When the time comes to transfer your business to a relative, you’ll want an expert to create a document that outlines all relevant details.  It should feature everything from the value of the business and the amount being paid for the business to who will be kept on the payroll to what level of involvement you’ll have once the process is finished.

Factor #3  Seller Financing

Seller financing is quite common among sellers, and when relatives are involved it becomes even more common.  One option is to consider a private annuity.  A private annuity allows for payments to be spread out for many years and can even extend until the end of your life.

Factor #4  Considering the Self-Cancelling Installment Note

In the installment note, it is possible to feature a self-cancelling clause, which can definitely benefit your family in the future.  This part of the paperwork will confirm that if you were to pass away before all the payments have been made, the remaining debt can be attached directly to your will.  If you are a parent selling a business to a child, then one of the key benefits of an installment note is that it keeps your other children from paying excess income tax on your estate.

Factor #5  Transferring a Business to a Relative and the IRS

You can expect the IRS to take a second look when you sell a business to a family member.  The IRS does this to make sure that everything is above board, due to the fact that many past business owners have acted in an unethical manner.  You’ll want to be very sure that every aspect of the sale is done professionally and that you have all your paperwork in order.

A business broker can help you deal the unique particulars that come along with selling a business to a relative.  Every business is different, and every sale is different too.  A professional business broker can help you avoid common mistakes and pitfalls.

Copyright: Business Brokerage Press, Inc.

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Maintaining Confidentiality Throughout the Sale Process

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There are two key ingredients when it comes to selling a business: professionalism and confidentiality.  If either of these two ingredients are lacking, then you’ll most likely run into problems.  Sadly, many sellers see their deals fall apart due to a breach of confidentiality.  You certainly don’t want to be among their ranks.

The simple fact is that a breach in confidentiality can negatively impact everyone from suppliers and vendors to creditors.  For example, vendors could change their terms and this, in turn, could have a major, negative impact on cash flow.  There can be a chain reaction of events that spirals out of control.

The potential negative outcomes of a breach in confidentiality are quite numerous, for example, employees and customers alike could begin to worry about the future of the business.  Employees could begin to worry about the safety of their jobs and begin looking for a new position.  Dangerously, this situation could lead to changes in management and the loss of key employees.  Likewise, customers, fearing instability with the business, could also decide to take the business elsewhere, leading to revenue problems.

Yet another complicating factor comes in the form of the competition.  If the competition hears that your business is up for sale, they could sense blood in the water and look to steal your customers.

Ultimately, a breach could give potential buyers cold feet.  At this point, it should be very clear that protecting confidentiality is a must.  One of the single best ways to ensure that confidentiality is maintained is to opt for an experienced and proven business broker.  Business brokers understand the simply tremendous value of keeping things under wraps.

It may be tempting to try and sell your business on your own, but it is vital to understand that doing so can damage your businesses’ reputation.  A good business broker knows how to shield your business from breaches of confidentiality.  By working with a business broker, not only are confidentiality agreements signed and taken seriously, but also you’ll know that prospective buyers are vetted and fully pre-qualified.  According to an article on Inc.com, broker feedback has revealed 9 out of 10 interested parties who respond to “business for sale” ads are not qualified to make the purchase.  Why would you want to risk giving away key details to these parties?

In short, you’ll have a much better idea of who you are dealing with and how serious they are about buying your business.  At the end of the day, there is no replacement for maintaining confidentiality.

Copyright: Business Brokerage Press, Inc.

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Embracing Retirement and Selling: 4 Tips for a Smooth Transition

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No one works forever.  Regardless of how much you love your business, sooner or later you will have to step away.  Owning a business can be very demanding.  This fact can be doubly true for owner-operators of businesses.  The simple fact is that you’ll have to embrace retirement at some point.

Most business owners have never sold a business before and may not know what to expect.  The good news is that prospective buyers usually like the idea of buying an established business directly from a business owner.  It is key, however, to do everything possible to make selling your business, as well as the transition period, as easy for a buyer as possible.

Prepping your business for sale has many diverse parts that need to be taken into consideration.  Prospective buyers want to feel as though they will have a seamless transition, so it’s in your best interest to evaluate what steps you need to take to make the transition smooth.

You are the world’s greatest expert on your business.  As a result, you are perfectly positioned to evaluate your business so as to ensure that it is both appealing to a prospective buyer and ready to sell.  Let’s take a look at the steps you can take to ensure a smooth transition.

The Top 4 Transition Tips

1. Automate as many processes as possible.

In this way, prospective buyers are less likely to be intimidated by the level of work involved in owning a small business.  The odds are good that many of your prospective buyers have never owned a business before.  One of the best ways to not scare prospects away is to make owning and operating your business as streamlined as possible.

2. Work with your employees, key customers and vendors to ensure a smooth transition.

Anything that can cause a potential disruption may scare off prospective buyers.  Put yourself in the shoes of prospective buyers and think about what may cause you concern if you were evaluating a business.  Once you locate those areas of potential concern, do what you can start to remedy them well before placing your business on the market.

3. Pick out your “second-in-command” before you sell your business.

Having a competent and proven “right hand man or woman” that can step in and essentially operate your business is a very attractive asset to have in place when it comes time to sell your business.

4. Consider working with a business broker.

Brokers are expert in the art and craft of buying and selling businesses.  They will be able to help you evaluate your business and address areas that need improvement so as to ensure a smooth transition.

Taking these steps will not just make your business easier to sell, but it will also shorten the amount of time it takes to sell.  The last thing you want when you are ready to sell your business and retire is for the selling process to drag on forever.

Copyright: Business Brokerage Press

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The Top Two Ways to Purchase a Business without Collateral

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Banks love collateral and for a very simple reason.  If you have collateral, then the bank has something it can take if you fail to repay your loan.  At its heart, collateral is a remarkably simple concept.  However, unfortunately, many people who want to start a business lack it.  All of this leads us to the simple question, “Can I start a business without a collateral.

1. Try the SBA

There are ways that you can start a business without collateral, but you will need some amount of money.  The larger the business, obviously the more money you’ll need.  Those interested in the zero collateral route will want to take a look at the SBA’s 7 (a) program.  This program incentivizes banks to make loans to prospective buyers.  Through this program, the SBA guarantees an impressive 75% of the loan amount.

Of course, the buyer still has to put up 25% of the money in order to buy the business, but for those looking to own a business without having to put up collateral, the SBA’s 7 (a) program is an impressive option.  Perhaps best of all, the cash buyers used can come from investors or even a gift, helping to make this program a potentially great one for first time business owners.

2. Think about Seller Financing

Another option is seller financing.  Sellers frequently get involved in financing.  When a seller is motivated to sell, due to retirement or some other factor, things can get interesting.  Most sellers do agree to offer some degree of financing, so asking for selling financing is not unheard of or insulting to a business owner.  Prospective business owners may even be able to combine seller financing with the SBA’s 7 (a) program.  Correctly used, this path could provide a powerful and useful option.

Speaking of retiring, according to The International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project, 33% of deals now take place when owners are retiring.  This clearly demonstrates how it is in the best interest of many sellers to consider seller financing.

While the SBA’s 7 (a) program is potentially very useful to buyers, it is important to note that under the program, the seller cannot receive any payments for two years.  Working around this potential problem may very well require some creativity and effort on the part of the prospective buyer.  In the end, it may be necessary to offer the business owner some incentive in order to justify waiting two years for his or her money.

Attempting to buy a business without collateral may, at first, sound like too large of an obstacle to overcome.  However, these kinds of purchases really do happen all the time.  By staying focused, persistent and understanding your options, you will increase your odds of success.  Finally, get as much professional help as possible.  Prospective business owners should consult with S.C.O.R.E., experienced business brokers and others to learn the best way to buy a business without collateral.

Copyright: Business Brokerage Press, Inc.

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