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 am discussing all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 5.
This blog/podcast is about what you, the individual buyer, might want, what you should expect to get, and how you should go about doing it, if you decide this unique and special “buying-a-business” path is for you.
Those of you who are individual buyer prospects are usually looking for a business that will employ you as owner/operator. Because you are investing your hard earned money, you want to know that it’s worth it. You want to “run your own show,” an unparalleled personal growth experience. In Maine, especially, we buy businesses that improve our lifestyle. In some cases, it’s more than lifestyle—it’s a personal mission! We intend to leave our mark.
Can you reasonably achieve these objectives with a business purchase? Can you do it now, during a recession?
Yes, you can!
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. In part 3, we discussed the five essential questions. In part 4, we touched, once again on valuation and, specifically, on rules of thumb.
Now, it’s time to make an offer, make it contingent on doing your homework, prepare to negotiate, and fast track the process so you can get to a closing on time!
Make A Contingent Offer
It all starts with an offer. Sellers and brokers can’t do much until you, as a buyer prospect, make one.
A “contingent” offer is one that is subject to the completion of some step that has not yet been taken. It allows the buyer making the offer to get out of the transaction if something goes wrong.
Before you complete your investigation of a business, you may be asked to make an offer. This is normal. Sellers can’t be expected to give you absolutely everything until you prove that you are serious. Making a contingent offer is an acceptable way to do that.
A startling fact is that only 2% - yes it’s only 2% - of business buyer prospects ever actually buy a business! Sellers want to limit disclosures to someone who will definitely buy their business. They are looking for proof in the form of a serious contingent offer.
Most offers made to business sellers are contingent upon the buyer’s completion of homework. Buyers need to verify that representations made are accurate. Buyers need to investigate. This process is called “due diligence.”
Buyers also need to make offers contingent on getting financing. Sometimes that just means working on a detailed proposal for seller financing. Other times that means making applications to lenders.
Offers can be made in two basic ways: a “purchase and sale” contract, or a “letter of intent.” To avoid wasted effort on a proposal that might not be accepted, we usually recommend just drafting a “letter of intent.” It is simpler. You can find samples on the Internet, or you can get one from your lawyer.
A letter of intent just spells out the basics: identities of the parties to the agreement, price and terms offered, details of what assets of the business will be acquired, contingencies needed and a timetable for dealing with them, proposals required for training or non-competition, and a deadline for response to the offer.
A letter of intent can often be in a format as simple as a bullet-point term sheet delivered by email. It doesn’t always have to be a formalized document. Some sellers and buyers are quite comfortable dealing with this informally.
Prepare to Negotiate
Offers are usually met with counter offers. There are some things that shouldn’t surprise us. This is one of those things. Don’t fight this process. It is normal.
Just like you, the seller is fearful of making a bad decision! You have that in common. This can be a tense time.
If there is a broker involved, use the broker. Get the advice of the broker. Consider taking any good advice given. Brokers of businesses usually represent the seller, but they also don’t get paid unless there is a meeting of the minds. They want both of you to succeed in putting an agreement together.
Make offers that are reasonable. Make offers you can afford. If you think the seller has overpriced the business, make your case rationally with evidence, not emotion. Decisions are made emotionally, but only after they are rationalized with evidence. If you don’t understand what the business is worth, and aren’t prepared to present the evidence for what you believe, you are not ready to make an offer.
Sellers often respond to well-reasoned proposals. Sellers normally can be expected to compromise a little. But if you want them to compromise more than a little, be prepared to make your case. Then open your mind to their case. That’s what an effective negotiation involves: listening carefully and reasoning out each little point.
This is good practice. When you own a business, you’ll be doing it every day – with vendors, employees, clients, customers, and – yes – even with your own family members.
Fast Track the Process
After your offer has been accepted, you now enter the real period of verification, investigation and financing, the “due diligence” and lender application phase.
The accuracy of everything you’ve been told about the business needs to be verified. Everything else that’s important to your success needs to be investigated. You really need to take a close look at where the money is coming from and where it will be going.
You may need help here. This is usually the time to get legal and financial advice from professionals. Form your team now, unless you are very experienced at this already. Lawyers, accountants and even bankers have lists of what you need to do at this time. You can also find checklists on the Internet.
There are usually two processes that have to be completed simultaneously at this point – the business due diligence and the lending applications. You will take too much time if you do them sequentially, one after the other. Even though it costs money, you won’t be timely unless you proceed down both paths at the same time. Get your facts and financing together in efforts that proceed in tandem.
Arranging the time to go over the business’ accounting records and review them thoroughly takes coordination. Market research, business plan preparation, lease negotiations, equipment condition inspections, license applications, business entity formation for your new company will take you time. The lender may also require appraisals, inspections and credit reports that take time to order, receive, verify and correct if needed.
Get to the Closing On Time
As you form your team – lawyer, accountant, banker and maybe another family member or close advisor – make sure they know your wishes and the date you need to finish the transaction. That’s called a “closing.” It needs to happen on time.
Advisors left alone and undirected to manage their own part are likely to slow the process down, sometimes because they don’t know the urgency, sometimes by intent because they don’t want to be held accountable for advising you to take a risk. You should be your own team captain. Set the agenda clearly.
You are the risk-taker, not them. Give them permission NOT to be negative. But, don’t expect them to be cheerleaders. Attorneys, accountants and bankers make lousy cheerleaders! Their job is to warn you of danger. Your job is to make the business judgment about risk.
I hope this five-part series has been useful.
I would also point my readers, again, 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
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Ruth
http://pianonotes.info