Archive for the 'Business acquisition' Category

Nine first questions to ask when you’re buying a business

So, you’re planning to buy a business and think, “Hey, I’ve made big purchases before – a sofa, a car, a house – this can’t be that different, right?”

Paraphrasing Mark Twain, the difference between making a large consumer purchase and buying a business is like the difference between lightning and a lightning bug.

Every business sale is a totally unique transaction, which is the opposite of buying a commodity, like a car. And besides being the most complicated transaction you’re likely to ever undertake, with all of the components that make up any business, there’s one more, huge factor in buying a small business: it’s someone’s life. Consequently, the education process for such a transaction is quite involved.

To help you get started, consider a few questions to ask a prospective business seller, suggested by my friend and business-buying expert, Russell Brown, each followed by my thoughts. And while I’ve numbered them, you aren’t likely to ask them in this order.

1. Why are you selling?
This isn’t abrupt or inappropriate as long as you work it in at the right time. Regardless of the answer, it’s information that may contribute to your decision about whether to buy, and how to negotiate.

2. May I see the last three years of financials?
You’ll use their numbers as a base from which to “recast” and project your future business, adjusted for how you’ll run it. If the seller refuses, either he doesn’t have any, doesn’t want you to see how bad they are, thinks you aren’t a credible prospect, or you’ve asked for them too soon.

3. What are the industry trends and greatest future challenges?
The answer will inform you, and/or tell you how much the seller understands the current marketplace. In the 21st century, market challenges and competition comes in many forms and from many directions. You’ll need both pieces of the puzzle to determine how much unclaimed opportunity can be realized.

4. How can I increase sales/profits?
You might think if the seller knew he would just do it. But often he knows the answer, but doesn’t having the expertise, capital, or even desire to take that next step. This would be especially true regarding new technologies and 21st century marketing strategies.

5. Will you finance part of the purchase price?
Russ says that 80% of all small business sales in the United States involves seller financing. Even if you don’t need it, ask for it and use it if availble. Any terms from a seller will usually be better than the bank. Plus, it shows how confident the seller is about the business’ viability. Do not be afraid to ask this question.

6. Will you stay with the business for a while?
In most cases, you want the owner to agree to help you make the transition, which could range from a couple of weeks to months. Be cautious of any deal where the seller won’t spend any time with you. The proper amount of time is the day after the seller goes from being helpful to getting in the way.

7. Who knows the business is for sale?
Mishandling the news of any business being for sale can harm its viability, especially with key stakeholders: employees, customers and vendors. The trick is timing the breaking news with closing the deal so that gap doesn’t create problems.

8. Who will I negotiate with, and who will make the decision?
In selling or buying a business you must know who’s the decision maker. Otherwise you can waste a lot of time dancing around with a surrogate who can’t pull the trigger. As a business buyer you need to be talking to the real decision-maker as soon as possible.

9. What’s your timetable?
One of the biggest impediments to putting a deal together is when the buyer and seller are on different time frames. When you ask this question listen for the time AND the reason – they usually travel together.

Notice that most of these questions have a dual purpose: to get specific information and find out how savvy, sophisticated, and motivated the owner is. When buying a business, ask lots of questions and listen for the six interrogatives: who, what, when, where, how and why. In time, you’ll start noticing what isn’t said.

Write this on a rock … This is the equivalent of your first hour of class on the way to acquiring a four-year business-buying degree.

Four things you must know before buying a franchise

Over the years, I’ve met many people who want desperately to own a business, but 1) just don’t know what it should be; or 2) lack the entrepreneurial vision and/or desire to start a business from scratch.

Enter one of the great inventions America has given to the world: the franchise.

Purchasing and operating a franchise is entrepreneurial coloring inside of the lines.If you don’t have a problem playing in a sandbox someone else built, a franchise may be just the ticket for you.

The franchise universe is broad and diverse, with arguably thousands of options, which is both good and bad news - so many choices begets lots of intimidation. But fortunately, the fundamentals you apply to conduct franchise acquisition research, regardless of the one you choose, are basically the same.In his excellent book, Franchising and Licensing, my friend Andrew Sherman identifies a number of key components in any relationship between a franchisor (the developer of the franchise), and a franchisee (the purchaser of the franchise). From Andrew’s list I’ve chosen what I think should be the first four to help you narrow your search, followed by my thoughts.

1. A Proven Prototype
When you lay money down for a franchise, the model must be proven to work, because you’ll have to replicate the product over and over. Indeed, the prime expectation of any customer seeking out a franchise product is that it’s a known quantity. McDonald’s may not have the best hamburger in the world, but whether you’re in Moscow or Moline, it’s supposed to taste just like the one you had in Meridian.

2. A Strong Management Team
When you buy a franchise, not only will you need to seek periodic advice and instructions from the franchisor’s staff, but you want to have confidence in that support. There should be virtually nothing you can ask that they haven’t experienced and anticipated. Here’s a tip: If you aren’t getting overwhelmed with support and answers when considering a particular franchise, don’t expect much more once they have your money. I’d move on.

3. Comprehensive Training Program
In order to make that “hamburger” look and taste just like the last one you delivered, you must be able to learn how to do it yourself and teach your people how. That training MUST come from the franchisor. They will demand that you follow their rules, so you have a right to demand the best training.

4. Sufficient Capitalization
Franchisors are just like all other businesses in that they must have the capital to: a) Grow - you want your franchisor to expand their footprint; b) Innovate - to continue to offer relevant products and services every year; and c) weather the inevitable marketplace storms. When they ask about your financial condition, tell them “I’ll show you mine, if you’ll show me yours.”

Before you buy a franchise, you must talk with two people: 1) Someone who’s operating a franchise like the one you’re considering - ask what it’s like doing business with your franchisor prospect; 2) Someone who’s failed with a franchise - ask what happened and what they wish they knew before they started.

Remember that while owning a franchise is operating a business based on someone else’s idea, it’s still running a business. Other than being a single parent, there is no harder job. If you don’t love working, if you don’t value sweat equity, if you don’t appreciate deferred gratification, if you don’t have a lot of energy, if you like to sleep late, or if you’re a whiner, don’t buy a franchise - or start any business. And if you aren’t good at coloring inside the lines, like me, don’t buy a franchise.

Finally, in addition to Andrew Sherman’s book mentioned earlier, I also recommend one by another friend, Joel Libava, Become a Franchise Owner.

Write this on a rock … Franchising isn’t for everyone, but it might be for you.

Acquiring a small business: Should you buy stock or assets?

Acquiring a small business that is already established in the marketplace and has customers coming in the door is an excellent strategy that serves two different purchasers:

1. A start-up gets a jump-start on small business ownership by not having to start from a blank sheet of paper.  The existing location, customer list, even the phone number, has real value.

2.  An established business can use the growth-by-acquisition practice to provide an accelerant to augment the more deliberate organic growth.

Either way, both buyers have to take the same steps in making such an acquisition, including the due diligence, which includes making the decision of whether to purchase the company by buying the stock or allowing the existing business to dissolve and merely buy the assets.  Both have their own particular merits, but in the main, buying assets is typically the more likely choice.

Recently, on my radio program, The Small Business Advocate Show, I talked about how to make the “stock versus assets” decision with one of the resident attorneys in my Brain Trust, Cliff Ennico. We discuss specific examples of when you should buy just the assets of a company and when you should buy the stock. We also talks about when to incorporate and when to use a limited liability company (LLC).

Cliff Ennico specializes in legal and tax issues for small businesses and is a popular instructor at eBay University. He is a frequent contributor to Entrepreneur magazine and the author of The ebay Seller’s Tax and Legal Answer Book and Small Business Survival Guide.

I hope you’ll take a few minutes to listen to my visit with Cliff, and be sure to leave your own thoughts. Listen Live! Download, Too!




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