Advice to Business Buyers
- By
Stephen J. Kerr
Good planning
before purchasing a company and not making the wrong moves when negotiating
to buy it are not easy for even the most seasoned business acquiror.
You can come armed with the most detailed evaluation process and fail
at your objective, and you can start out totally unprepared and come
away with a wonderfully successful investment. The trick is not in your
level of education or how much money you have...the secret lies in being
prepared and understanding the needs of the seller... and then meeting
those needs under your terms.
OBJECTIVES AND OPPORTUNITIES
At first you must understand that there
is no shortage of businesses available and ready to be acquired. Even
companies that you might never think would be available, might be. So
do not let your objectives be clouded by reluctance to contact every
business that meets your criteria. That brings up the next point -- you
must have specific objectives and criteria spelled out when seeking an
acquisition for yourself or your company. Vague goals are of little good
to you or your broker. Draw up a very specific acquisition profile on
your candidate business and stick to it.
FINANCE AND REALISM
Make sure that your acquisition profile is of a company that you can
afford to buy. Set aside a pool of funds that are specifically earmarked
for buying a business. If you must rely on outside funding sources, make
sure that they have committed their funds in writing as well...just
to be sure that when you find the right business, the money is still
there. It can take months or years to find the right company, so you
cannot rely on vague promises from backers, friends relatives or bankers
-- in our experience, these promises often come with unrealistic expectations,
last minute demands or simply vanish at the time you are trying purchase
a business. When you are not dealing with your own money, you are at
the mercy of others. Get some training on business valuation from your
broker, accountant or other professionals in the field. This is so that
you can get a handle on how much business you can acquire for your money.
Be careful not to presume a seller's willingness to help finance you
into his business.
MEETING THE SELLER
When meeting with sellers (or would be sellers) , it is best to follow
the lessons that your mother taught you when crossing the road, look,
listen and proceed with caution. Listen to what is said, and what is
left unsaid. Be pleasant and respectful. You are in their kingdom, and
they are still the king. Make the seller your friend. If you act like
the know-it-all bigshot, you will either get stuck for twice the price
or have little chance of buying the business at all. People do not
sell businesses to people that they do not like. Be sensitive at
how difficult a decision selling a company is to an entrepreneur. This
is their baby and they have much of their life tied up in that company.
MEETING THE SELLER'S OBJECTIVES
Do not assume that money is the overriding objective for business owners
when selling their company. While money is important and essential to
the transaction, how the new owners plan to deal with the loyal employees
of the business, handle future relationships with the customers, carry
on the goals and aspirations of the company and employ or not employ
the seller after the transaction all weigh heavy on the seller's mind.
Also, primary concerns of the seller are his or her tax consequences
resulting from the sale. Many deals live or die on how the tax issues
are handled by the buyer. Sometimes the seller will take less or otherwise
help you to acquire his/her business if they feel that you are willing
to meet most or all of their objectives. If you are paying top dollar
and paying cash, you may not have to worry about the sellers other motivations
and objectives. But, even then, you should.
BUY A BUSINESS THAT YOU CAN RUN
Many smart business people fail within a few years at businesses that
were beyond their ability to run and prosper at. Just because you were
successful on Wall Street does not mean that you will not fail on Main
Street. Buy a business that you understand and have some background in
running. Ask yourself, "What assets am I bringing to this business besides
money"? The communicating businesses that our firm specialize in like
publishing, video, printing and advertising companies are very difficult
for a novice to run. What do you know about the industry you are buying
into? This is no time for on the job training. And the seller can never
teach you what they carry up in their head and have spent a lifetime
learning. If the seller is to stay on for a protracted period after the
sale, as a company officer or consultant, make sure that they feel that
you will listen to them and respect their knowledge.
RESPECT CONFIDENTIALITY WHILEINVESTIGATING
THE BUSINESS
It is essential that you keep all dealings with the prospective purchaser
completely confidential. You must not discuss the possible sale of the
company with any employee, customer or group that has not been approved
by the seller. You can do irreparable damage with even innocent discussions
with the wrong person. Having said that, you still must make sure that
you have fully investigated the company before making an offer. Besides
reviewing the books and records, use some ruse to talk to people in the
industry about this company, the quality of their work and their status
as a competitor. Remember that you get what you pay for. Look for relationships
between the seller and his customers and the seller and his employees
to make sure that you can hang on to both or either after the sale is
final. Non-compete agreements cannot keep key elements of the business
from disserting the ship once you are the new captain. Another good reason
to make a friend out of the seller.
MAKING AN OFFER
When making an offer, be sure that you have addressed most of the seller's
concerns, while protecting your own. You do not want to totally miss
the mark on your first and best shot. The offer is most often embodied
in a "Letter of Intent", which you draft and give to the seller. This
document usually gives you 30-45 days to conduct due diligence without
being committed to purchase the company under the terms and conditions
of your offer. Sometimes the seller will request a deposit during this
period, but we have found that if you resist, the seller will often waive
this request. Remember that in your offer, there are many ways to
skin a cat. Your offer might include some payment in cash, a promissory
note, a non-compete pay out, an earn out, a consulting agreement, a royalty
override, an annuity, a trust agreement, a swap for real estate, assumption
of personal or corporate debts, or any possible combination of the above.
Keep your mind open to the possibilities and ways to structure the transaction.
TIMING AND LUCK
I cannot overstress the importance that timing and a little luck plays
in finding, negotiating and closing the sale of a business. A month or
day too soon, or a month or day too late and you can easily have missed
the perfect company for you. That's why you have to be looking all the
time. The best company's are probably not listed with a broker at this
moment. And if they are, you might not see the ad or be in the right
place. That is why your CBC broker throws the widest net and contacts
every possible candidate in an industry to flush out the one seller who
is ready and willing to sell their company, today.
Finding and purchasing a company can take a year
or more. But, if you get your financing together first, set your objectives
clearly, negotiate openly with the seller(s) and be flexible -- you will
succeed.
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