Buying a Business is a ‘Numbers Game!’

“A needle in the haystack!” or “A diamond in the rough”, both
popular saying’s apply to what’s involved in finding your
ideal company to buy! Any seasoned business buyer will tell
you that finding viable companies that can be purchased for
reasonable terms is a “numbers game”.

Thousands of company purchase candidates defined, that lead to
hundreds of contacts to be made, resulting in tens of
acquisition conversations that hopefully lead to ONE company
acquisition! Many merger and acquisition veterans will tell
you “It takes 100 potential opportunities to get one good
deal” … a numbers game.

At any point in the business buyer’s purchase process, for any
number of valid or invalid reasons, either the business buyer
or the business seller can call off the potential deal. Most
potential business mergers and acquisitions pursuits do fall
apart. The human and financial costs to both parties involved
can be significant, sometimes devastating.

What Is a Business Buyer to Do?

From a business buyer’s perspective, there are four fundamental
stages to finalizing a business acquisition: searching for a
business, qualifying the business, valuing it and negotiating
with the seller. This article will highlight how a business
buyer can eliminate many of the major, common mistakes buyers
make within these business purchase steps:

THE BUSINESS SEARCH STAGE:

As a business buyer you want to use as many means possible to
position yourself to get the first shot at a viable business
that can be purchased. Preferably your goal should be to find
a purchase opportunity where you have no other purchase
competition. Herein lies the most noteworthy justification for
being as creative and diverse as you can be to locate
acquisition candidates.

Often the more “creative” you are to find companies to purchase
the quicker you’ll find the “right” deal. This is particularly
true if you seek to locate quality candidate companies that
are not officially “for sale”. The level of buyer competition
is often most intense relative to quality companies who have
NO KNOWN justification to consider a merger or acquisition
offer. If the business owner has no compelling reason to sell,
knows he has a company of extraordinary value, in great
purchase demand, more often than not, only creativity will get
you in front of that potential seller.

THE BUSINESS QUALIFICATION STAGE:

As a business buyer you not only need to know how to
effectively qualify a business financially and non-
financially, but you must present your financial and management
capabilities to the business seller in a most professional
manner.

Often business buyers have not prepared in advance a formal,
written: resume’, identification and qualification summary of
their “purchase team” or validation of their financial
resources, to be provided to the business seller at
introduction. To an owner of a quality business, getting this
information early in the mutual buyer/seller evaluation
process is critical, especially if there are multiple buyer
candidates.

THE BUSINESS VALUATION STAGE:

As a business buyer you need to know “what you don’t know”! Do
not try to do everything yourself, especially if you are not
familiar with the task requirements at hand.

When it comes to determining the market value of a business, a
business buyer must hire a proven business valuation expert
for two key reasons:

1) This step in the business purchase process can be very
complex and warrants utilization of proven expertise, and

2) When it comes to presenting a market value to a business
owner who has invested significant time and money to “build
his baby”, you as a business buyer want to make sure the
business valuation analysis and final valuation number comes
from a “3rd party”. It is much easier to negotiate a purchase
price with the business seller if you weren’t the same guy who
established the opening “low ball” offer!

THE BUSINESS NEGOTIATION STAGE:

As a business buyer you essentially want to purchase
controlling interest in a viable business for a fair price,
with favorable purchase terms, financed with as much of other
entity’s money as possible.

The negotiation portion of the business purchase process with
the business seller, or their representative, is where most of
this purchase objective can become a realization. Effective
negotiation skills are not innate. They are developed, acquired
and honed over many years of “verbal warfare”. Plan
and practice you negotiation strategy prior to meeting with
the owner and hire a professional if you have any doubt about
your desired outcome. This is NOT the point in the business
purchase process to start to minimize your acquisition costs!

The odds of a business buyer finding and effectively buying a
quality business are against him before he even starts his
business purchase program. Ultimately the business seller
knows EVERYTHING about the business for sale but the business
buyer theoretically only knows what he asks about or
determines to be valid via his due diligence …”buyer beware”!

Buying a business is truly a numbers game … a game that can be
consistently won if the business buyer truly understands his
challenge at hand and has the discipline to know when to stop
the purchase pursuit and utilize proven business merger and
acquisition expertise.

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!

Develop a Business Purchase Plan!

Businesses are bought and sold everyday. Each transaction is
unique, yet there are fundamental elements to the purchase
process that are common. The purpose of this article is to
highlight the sequential components of a typical business
purchase plan. Whether you are a first time business buyer, or
a veteran business acquisition specialist, it is imperative to
understand the evolution and eventual structure of a business
purchase transaction.

Purchasing a business is an iterative process. There are logical
and cost effective steps that need to sequentially followed to
maximize eventual purchase success and minimize cost. For the
business buyer the ultimate goal is to find and purchase a
viable business for a fair market price, acquired via most
favorable purchase terms. Following these sequential steps will
get you there:

1) DEVELOP YOUR PURCHASE CRITERIA:

Define all relevant criteria to qualify a business for purchase

2) ESTABLISH YOUR “BUYING TEAM”:

A variety of skill sets and expertise will be needed to cost
effectively locate, evaluate, structure, valuate, fund and
negotiate an equitable purchase agreement

3) DOCUMENT YOUR PROFESSIONAL “CREDITABILITY”:

Providing a written summary of your professional skills,
experiences and successes of your entire buying team will
fortify your image with any business seller you approach

4) FINALIZE AND DOCUMENT YOUR FINANCIAL RESOURCES:

Every business seller will want to quickly qualify your
financial wherewithal early on in the mutual evaluation
process. Secure your finances and document your capabilities.

5) EDUCATE YOURSELF ON BUSINESS PURCHASE TERMS AND CONDITIONS:

Take the time prior to your first business pursuit to educate
yourself on as many common business purchase terms and
conditions as possible. Understanding your purchase deal
structure alternatives will maximize your negotiation
effectiveness.

6) DEVELOP A COST EFFECTIVE MEANS TO LOCATE VIABLE BUSINESSES
FOR SALE:

Decide if you are only going after businesses that are “for
sale” or those that can be bought. Establish a variety of means
to define these businesses.

7) UTILIZE NON-BINDING LETTERS OF INTENT:

If you find a viable business you like, document your
intentions, intended deal structure and what exact information
you need to start your purchase due diligence.

8) EFFECTIVELY ANALYZE ALL DOCUMENTATION PROVIDED BY THE SELLER:

Analyze all financial and non-financial documentation provided
as a response to your Letter of Intent. For subjects that are
beyond your level of expertise, acquire appropriate
professional assistance.

9) IMPLEMENT A STRUCTURED DUE DILIGENCE PROGRAM:

Validate provided information, research appropriate target
markets, gather data on key customers, employees, patents,
legal encumbrances, leases, purchase contracts, pending
legislation, key suppliers and technology trends.

10) UTILIZE PROFESSIONAL, 3RD PARTY BUSINESS VALUATION SERVICES:

Contract with a certified business valuation consultant to
define a fair market value, and equitable purchase term
structure for the business you seek to buy.

11) INVESTIGATE ALTERNATIVE FINANCING ALTERNATIVES:

Based on a valid business value determination, seek and define
as many ways you can to purchase a controlling interest of the
business with as much of other people’s money as is reasonable.

12) PRESENT YOUR FINDINGS TO THE SELLER AND NEGOTIATE A DEAL:

After your due diligence is completed, document your key
findings, organize your information and present your case to
the business seller. Hire a credible 3rd party negotiator or do
it yourself.

13) DOCUMENT THE AGREED UPON PURCHASE TERMS AND CONDITIONS, SET
A DATE:

Put everything agreed to in writing. Finalize the purchase
agreement, have your legal counsel review it. Both buyer and
seller sign a Letter of Intent, committing both to the agreed
upon purchase terms and to set a date and time to close the
deal.

14) SIGNATURE OF FINAL PURCHASE DOCUMENTS:

If the deal is an equitable one and both parties have conducted
themselves in a constructive and honest manner, this should be
a “joyous” occasion for both parties and their representatives.

Today’s successful business buyer is a disciplined person using
a definitive process to find, qualify, value and negotiate for
purchase viable business acquisitions. If a business buyer has
a written purchase plan, any number of other supportive people
can effectively participate, understand their role and
contribute to the buyer’s overall business purchase process and
objectives.

If you understand the fundamental steps involved in a typical
business purchase process you are well on your way to being
able to effectively write a plan you can use to meet your
personal business acquisition goals.