How Much Risk Are You Taking in Buying a Business?

Any seasoned business buyer will tell you that buying a business
can be very risky. The word, “risk” is most often quantified
monetarily in business purchase terms, however, before you
start your business purchase program you need to calculate ALL
your risks associated with buying a business.

Many business buyers unfortunately pay a heavy price for not
investing in appropriate business acquisition expertise and
counsel after they’ve bought a business. They clearing bought
the wrong business or the right business for the wrong purchase
terms and now they end up paying dearly financially and
personally. Some business buyers, without adequate contingency
funds, loose the business altogether!

Financial Risks and NON-Financial Risks to Buying a Business

Whether you are a veteran business buyer or someone who
purchases a company once in a lifetime, you need to take the
time upfront to think about what really is at stake in any
contemplated business purchase. It is most enlightening for
business buyers to evaluate an acquisition from a financial and
a non-financial perspective. Let’s take a deeper look at these
business buying risk elements:

Financial Risk Elements:

* The $ you personally invest in the business purchase

* The “$ finder’s fees” you pay to locate the business

* The seller’s $ business brokerage fee you indirectly pay

* The lost $ income while you are searching and evaluating a
business to buy

* The $ acquisition counsel fees paid, (CPA, Attorney, Market
research, Consultants)

* The $ cost of personal guarantees for acquisition debt and
asset leases

* The $ interest on acquisition debt

* The $ you overpaid for the business, (determined long after
closing)

* The capital needed post purchase for “business surprises”

NON-Financial Risk Elements:

* Your time away from other things important to you

* Your stress levels, negative health consequences

* Your additional marriage stress

* Your self confidence/ esteem damage

* Your reputation

* Your personal credit rating

* Your future employment prospects

Obviously it is much easier to put a monetary value on the
financial risk elements than the non-financial. For that
matter, putting a monetary value on your personal risk elements
may not be appropriate for this analysis. However, it may be
insightful to put some numbers next to the financial risk items
listed above to give you a better feel of what really is at
stake.

Concepts to Consider to Reduce Your Own “Business Buyer Risk”

There are many noteworthy tactics you can consider and implement
to reduce your risk levels in buying a business. Some of these
concepts listed below may warrant further consideration:

A 3rd party business appraisal that comes in significantly below
the seller’s asking price should be leveraged in any way
possible to reduce the company purchase price, buyer down
payment levels, seller financing interest, buyer debt payment
time frames … whatever you can RE-negotiate!

Do what you can to eliminate personal guarantee’s. This is best
accomplished within the business purchase terms. The business
buyer will undoubtedly appreciate this concept if the business
has to close its doors later.

If you hire the “right” business acquisition advisor you can
eliminate over half of your common business acquisition “sunk
costs”, even legal and accounting fees!

If you can utilize low or no cost means to find viable
businesses for sale that do not include a seller intermediary
cost augmentation to the purchase price, you can save thousands
of dollars and/ or significantly expand the seller’s ability to
negotiate.

If you can maintain your current source of income AND search,
qualify and negotiate a business purchase you can realize
substantial financial risk reduction.

If possible, structure acquisition advisor compensation formats
based on actual first year, post closing business results. This
concept will intensify advisor involvement and almost guarantee
continued support during the most challenging first months of
ownership.

Make a conscious effort not to try to do everything yourself.
Allocate funds to utilize high value expertise and reduce the
time required to either finalize or kill the deal.

Lastly, and probably most important, if you are heavily
leveraging personal assets and you are married, communicate all
the risks and all potential positive and negative consequences
of buying a business to your spouse. The personal risks of
buying a business are truly the most important!

This article is not intended to demotivate business buyers but
to give them another viable perspective about business merger
and acquisition risk and reward relationships before limited
human and financial resources are further invested in a pending
business purchase. As you can see, the risk of buying a
business starts at the moment you invest any of your time to
pursue a business.

If you correctly purchase a profitable business or obtain “a
deal” on an undervalued viable business, you should expect your
company’s annual profits and your owner’s compensation to total
at least 5% of total net revenues. Remember, best of all, that
your personal net worth will increase as you retain your
business profits, consistently pay off debt while your
company’s market value increases over time … this is the
“reward” part of the risk / reward perspective!