Tag Archive for 'Buying a Business'

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.

Consider these four factors when buying a business

Continuing my series on buying a business, here are summaries of four more critical factors to consider when acquiring a small business.

Old sellers are the best sellers
One of the best opportunities to acquire an existing business is when you can buy one from an owner who wants to retire from a business that’s still viable. Two good reasons are: they’re less likely to change their mind before the transaction is complete, and they’re more likely to finance a larger part of the sale price to get monthly income.

But notice I said, “still viable.” Sometimes the end of the current owner’s career coincides with the end of the life of the business. Don’t buy a business that should also be retiring.

Assume skeletons in the closet
Every business has baggage. Every business! If your due diligence doesn’t find any, you didn’t look hard enough. Or even more dangerous, you want the deal so much you rationalize what you found as “not so bad.”

When you find the bad news, let the seller explain why it’s there. If you think you can live with it, try to turn it into negotiating leverage. If you can’t, walk away.

Cold feet at closing
After no small investment of time and money putting a small business acquisition together, many deals derail before consummation—sometimes literally at the closing table. Last minute reluctance doesn’t have to kill the deal if you’re prepared. The key is to anticipate this possibility and be prepared to take appropriate communication, negotiation, and contractual steps along the way to protect yourself.

Oh, by the way, you might be the one with cold feet.

When to stop negotiating
Once both parties have signed the purchase contract, what’s left is to execute the transfer. There are many steps in this process, including legal, financial, physical, and organizational hand-off. What should not be done is any further negotiation.

The signed contract stipulating the terms of the deal is now a legally binding document. Any subsequent negotiation will likely corrupt the work that has gone before. Don’t sign the purchase contract until you have no more deal points to negotiate.

Finally, buying a business is likely the most important transaction you’ll ever make. Do it for the right reasons, be patient, resist the urgency of others, conduct proper due diligence, negotiate the best deal for yourself, and be prepared to operate what you’re buying.

Just like in marriage, no one should enter into the state of business ownership inadvisably.

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Check out my latest segment below on The Small Business Advocate Show® where I talk more in-depth about the four factors of buying a business.

Four factors to keep in mind when buying a business

When buying a business, consider these business principles

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.

—Buyer beware – of himself.

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.

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Check out my latest segment from The Small Business Advocate Show® where I talk more about buying a business.

Six principles to practice when buying a business

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