by Glen Cooper, CBI, CBA, BVAL
Buying a business is the right thing to do for some people.
In this series of five blogs/podcasts, I’ll discuss all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 3.
In part 1, I discussed the five things most buyers want in a business purchase and the five things they get. In part 2, we examined the resources a business buyer needs, the background he/she needs, and the home front support such a person needs, too. We also mentioned the knowledge, skills, preferences and passions one needs to get this process to work.
This blog/podcast is about five key questions you need to ask when you begin your search. These are the questions that must be asked of brokers. These are the questions that must be asked of individual business owners who are trying to sell you their business. Although I don’t specifically get into franchises, these are also basic questions you need to ask about any business opportunity, including franchisors and agents who represent franchisors.
5 Questions to Ask
Over many years of hearing buyer prospects ask questions of me, and of the sellers I represent, I see five questions as being vital and basic to all such inquiries.
So many times, buyers waste time asking the WRONG questions, squandering their opportunity to get insights quickly. Or, they don’t even ASK questions, but TALK instead!
When looking for a business to buy, you are looking for something that will work for you. But, the amount of research you need to do is very time consuming, and the chance of wasting that time is very real.
You don’t have time to waste! You can ask the more detailed and less important questions later, if you’re still interested. First, you need to narrow your choices as quickly as possible.
Here are the big five:
What’s for Sale? As you begin to look for a business for sale and respond to an ad or offering from a broker or seller, the first question you need to ask—on the first contact—is “What’s for sale?”
How this question gets answered tells you how organized the broker or seller is, and whether or not they actually understand what they’re selling.
Every business has tangible and intangible assets to sell. The tangible assets are the “things” that make up the business: furniture, fixtures, equipment, vehicles, inventory and real estate. The intangible assets are the “goodwill” or “going concern value,” the seller’s agreement not to compete in the future, and/or to consult with the buyer in the business transfer process.
Searching for a business is always about finding the one what works for you. It all starts with getting a clear view of just what you’re being asked to buy.
What’s the Opportunity? Buying a business should create a new opportunity for the buyer. So, that’s your next question: “What’s the opportunity for me if I buy this business?”
Again, the answer tells you something very valuable. Does the seller really understand where the business can go from here?
Many sellers put their business on the market because they are “burned out.” This “burn out” often creates the very opportunity a buyer wants. Sellers are sometimes so tired that they don’t see market opportunities that are right in front of them!
That is particularly true in this time of rapid advances in science, technology and communications, when older sellers don’t understand what younger buyers can see easily. Recession, too, discourages sellers, making them realize that the business needs a new start under new leadership.
A competent business broker will often be able to make up for the seller’s lack of vision, but not always. If a broker or seller, however, can make a good case for the “upside” opportunity, you are in good shape—ready to go on to the next question.
How was the Price Determined? This is often where the person responding will fail the “sanity check.” It is also the beginning of your negotiation.
The answer that you don’t want to hear is: We added up the losses for the last ten years and that’s how much we want for the business!
While this is obviously intended to be a humorous representation of what actually happens, it often seems that this is, indeed, a valuation method commonly used.
The preferred answer always has some relevance to market information—what buyers pay for such businesses, based upon what is actually a fair return on a buyer’s investment.
We have covered this issue in past blogs and podcasts, and we will cover it again. Right now, the important point is to find out if the person you’re dealing with has any grasp—at all—of this subject. If they do, you’re in luck! On to the next question!
What Financing is Available? A business can’t sell—and you can’t buy—if there isn’t a good source of money to do the deal: either your money, a lender’s money, an equity investor’s money, or the seller’s money.
Prepared brokers and/or sellers have considered this issue carefully. They should be able to explain how much cash down payment you will need, and perhaps how much working capital they also expect you to provide. Then, they should know how much the seller is willing to lend, and how much they expect from a bank or other source. If not, watch out!
Financing a business acquisition is difficult if it requires the use of a third party lender. Banks and others are not excited about business loans to novices that have never run a business before, even if they have a great credit score. Yes, they make loans to businesses—just not too many acquisition loans to inexperienced business buyers!
Equity investors – especially your relatives – can be a good source, but are usually not a reliable one. They tend to back out at the last minute. We brokers understand that better than buyers and sellers. So, if you are the buyer, expect to have to prove that this source is solid if you intend to use it. If your dad, mom, or favorite relative is going to loan you money to buy a business, we’d like to see that money put into your account early on in the process, so the rest of us don’t hear how it’s NOT going to happen later.
The road ahead is much smoother when the seller offers reasonable financing from the beginning. Seller financing is common, seen by buyers and lenders as a seller’s “bond for performance” that the business is healthy. Buyers should also assemble their cash resources before starting the process.
Why is the Seller Selling? Finally, you need to ask about the seller’s motive for selling. It should be something you can understand. If you don’t understand, keep asking this question until you get an answer that you do understand.
Seller’s who are “burned out” are often reluctant to disclose this. First, it is often just personally embarrassing. Second, the sellers might assume—perhaps with good reason—that what they say will frighten you away!
Sellers who can’t see a future opportunity are also reluctant to share their lack of vision. Some other reasons to sell—like divorce or health issues—are also very difficult for sellers to talk about.
If you have gotten this far—to the fifth question—because the answers to the other questions were all acceptable to you, then maybe it’s time to begin the bonding process with the seller. Only then, after you begin a relationship which involves mutual trust, will you get the “real reason” the seller is selling.
When you and the seller finally trust each other enough to tell the truth, then a good deal is possible. You’ll begin to see the real opportunity a successful transaction offers each of you. You will get the business you want and it will likely be a good deal for both of you.
In the last two blogs and podcasts in this series, I will tell you how to follow a VALUATION STRATEGY that will put you in charge, and what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.
I would also point my readers to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.
Tags: business opportunity buying, Buying A Business, buying a company, for sale maine business, how to buy a business, maine business brokers, maine businesses for sale, why buy a business
