Continuing my series on buying a business, here are a few points when considering this ownership option. Thanks to Russell Brown’s “Laws of the Business Buying and Selling Jungle” for the inspiration.
In the securities industry, full disclosure is the coin of the realm. But in the marketplace, caveat emptor — let the buyer beware — is the fair warning standard. If a seller misleads or misrepresents something, legal redress may be available. But business purchases that don’t work out are born more from inept buyers than from seller malfeasance.
—What’s a business worth?
Many metrics and factors are used to divine the value of a business, including strategic elements outside of the empirical. But primarily, you should focus on the business’s ability to generate earnings — net profits. With the exception of strategic factors, if the prospective business isn’t creating acceptable earnings and you don’t know how to change that, don’t buy the business.
—Disregard unreported cash.
If a prospective seller tells you about unreported business income in order to justify the asking price, that’s at least strike one against continuing to pursue this seller. Do you really want to buy a business from someone who admits to breaking the law and then tries to trade on it?
—Match questions to the process.
Ask a seller too early about something you’ll discover during the due diligence process and you’ll likely get hyperbole or a lie. Then when the due diligence produces the truth, you’ll have an embarrassed seller and perhaps a deal that goes south.
—Beware the desperate seller.
With the exception of death, illness, disability, etc., an owner desperate to sell probably has desperate circumstances. Sometimes this converts into a buying opportunity, but often it manifests in a sale price that can’t be justified by the performance of the company. Translation: The seller needs someone to solve his financial problems and his price is based on the extent of the problem, not on the true value of the business.
—Don’t bring lawyers in too soon.
You’re going to want an attorney to help put your business acquisition together. But when lawyers are introduced into the process too soon, the chance of having a deal that won’t get done is greatly increased. Lawyers are like medication: They can save your life, but they must be administered properly.
When buying a business, information orderly process, and patience are your friends.
Check out my latest segment from The Small Business Advocate Show® where I talk more about buying a business.