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Buying A Business – Part Two

In Buying A Business – Part One, I gave an overview on identifying the type of business you want to buy, searching for available businesses, and then a not-so-subtle tip that it will take time and hard work to actually close on the business you are pursuing. There are a few more areas in the process that I’ll cover in this post. As a reminder, these posts are not meant to be an all-inclusive primer on buying a business, but a high-level overview on some of my learnings as I’ve gone through the process multiple times.

Circle The Wagons

As soon as you start the process of buying a business, you should begin to identify your trusted advisers and vendors. Here is a short list of some of the most important connections for you to make. Each transaction is different, so you will want to evaluate your situation and identify any others you may need.

Accountant   An accountant is a great person to review your opportunities. They have seen many successful and unsuccessful business over the years and are well-equipped to give you advice on the financial health of the business. Also, you should decide if you are you going to do your own bookkeeping? If not, you will need to identify who is going to do it. If you are, it’s still a great idea to have a trusted financial adviser in your corner to help review your efforts and possibly prepare your necessary tax submissions. This is a critical area for the long-term success of your venture and is not an area to take shortcuts or try to save a few dollars.

Attorney   A strong deal lawyer is worth their weight in gold, especially if you can find one that will protect your interests without flooding your deal in paperwork. One of your decisions could be whether you want to go with a big or small firm. The benefits of a large firm are they can throw a lot of resources at a deal and make things happen quickly, which you will pay for. The benefits of a small firm is possibly a lower bill and personalized service. There are pros and cons to both options and I’ve seen success using both. The best advice I can give you is to get referrals from trusted advisers and go with the lawyer you connect with and understands what you are trying to achieve.

Financing   How are you financing your deal? Are you considering an SBA loan, a conventional loan, or other alternatives for your deal? There are many options for deal financing. Some will make more sense than others, depending on your financial situation, deal size, and type of business you are acquiring. Like other areas, the more homework you do ahead of time, the better. The worst time to start looking for financing is after you have made an offer. I highly encourage you to do a lot of homework in this area as soon as you start looking for a business. Until you know what financing you have available you will not know what price range to look at or what to offer. The other thing to keep in mind is that financing should not be a cookie cutter approach – financing a deal can be an art and use a lot of imagination and creativity.

These are just a few of the important connections you should make when you start your search. Depending on the type of business you buy you may need other resources like Information Technology, Marketing, Banking, etc. These will be valuable resources even after you close on your business.

Bow To Your Partner

You’ve found the business that meets all the parameters you previously established and you want to move forward. Now comes what I call “The Dance”. Depending on your personality, this could be the part of the process that really gets your adrenaline pumping or elevates your stress level. Usually you will be given the opportunity to meet with the Seller and ask them questions about the business. This is a great opportunity to learn about that specific business, but an even better opportunity to learn more about the Seller. Why are they selling? What type of deal structure do they prefer? What does their ideal Buyer look like? If there are multiple offers, what will they base their decision on? Don’t be afraid to ask specific questions about a deal. If it’s a question they don’t want to answer, they or their Broker will say so. If you are polite and genuinely interested, a lot of times they will give you some critical information. The key objective of this meeting is to give you enough information to decide whether you want to continue to pursue the opportunity or not. The secondary objective is to give you key information that will help you draft an offer that gives you a higher chance of acceptance, if you want to go down that road. Like other aspects of buying an acquisition, there is a little bit of an art to these meetings. If you do your homework and prepare quality questions for the meeting, you will do great.

Once you have decided to pursue the opportunity, you will need to submit a formal offer to the Seller. You will need to determine what price you want to offer and the broad terms of the deal. Depending on the Seller, the size of the deal, and a few other factors, you will probably present the Seller with a Letter of Intent or something similar. Each opportunity is different and your approach may need to be different for each one. If you are responding to a business that has been listed by an Aggregator or Broker, you will probably be competing with a few qualified buyers. You may go back and forth a few times or you may, but hopefully you will come to an initial agreement that allows you to move forward towards the actual purchase.

The Homestretch

The Seller accepted your offer. Now it’s just a matter of picking a closing date and getting the keys, right? No. You’ve still got a lot of work ahead of you. There are major things to do beyond just picking a closing date. Here are a few of the major things you will need to do to get to the closing date.

Due Diligence   You will need to perform some due diligence on the Seller’s business prior to closing. Depending on your financing, they may require some proof of this. At a minimum, you will want to do this for your own benefit. You will want to verify the validity or existence of key items that the Seller represented to you. This could include reviewing the Seller’s prior years’ tax returns to verify revenue and expenses. It could also include reviewing existing customer contracts to verify that they can be transferred or assigned to your new entity. A thorough due diligence process is vital to closing the deal and assuring you the business you are buying is worth the amount you are paying.

Finalize Financing   Your financing partner should be working closely with you at this point to make sure you are gathering the right information they need to approve your funds and make sure everything is proceeding in a timely fashion. I highly recommend communicating often with your financing partner to make sure everyone is on the same page during this whole process. You don’t want any last-minute surprises or delays that could derail your deal. Generally, these partners have a lot of these transactions under the belt and will be a huge asset to you completing the deal.

Closing Documents   While you are doing due diligence and working on your financing, you should also be working on all of the closing legal documents. In addition the the sales agreement, you may also need consulting, non-compete, and lease agreements. Whether the Seller’s attorney or your attorney is drafting these documents, you will want to thoroughly review them to make sure they encompass everything you want and need to transition the business.  If the Seller’s attorney is preparing them, you will want your own attorney to give them a thorough review. Don’t be afraid to ask for changes if you need them. This is another area that may cost some money, but you should not try to cut corners.

The process of buying a business takes a lot of flexibility, patience, and endurance.  You will be juggling a lot of different balls at the same time, but it can be one of the most gratifying and exhilarating things you go through. In my next post I will cover the important things that should happen after you take possession of your new business. That’s right – there is more work to do! In the meantime, if you have any questions or want more details about my experiences buying businesses, don’t hesitate to contact me.

 

Buying A Business – Part One

Over the last few years I have had the pleasure of going through two different searches to find and purchase a business. I’m not sure which was more exciting to me – the hunt or closing on the deal. I learned a lot from both searches and wanted to share my experiences, in case you are considering something similar.

What Do You Want To Be When You Grow Up?

For me, one of the hardest things about buying a business was trying to identify which type of business I wanted. Since I grew up in service-oriented companies, I naturally gravitated towards them. Beyond that, I wasn’t sure what I wanted. I went through the SIC directory to see if any specific type caught my eye, but it really didn’t help much, except to identify some industries that I wanted to stay away from. After a lot of time and headaches, I decided that not knowing exactly what I wanted was not a bad thing. Actually, for me, being open-minded helped me buy two of my businesses.

Release The Hounds

Finding the right business to buy is a combination of skill, persistence, and sometimes luck. Once you have narrowed down what you are (or are not) looking for, the really hard work begins. The first thing you should understand about “the search” is that you will probably have a lot of competition. Depending on the market you are searching, many times there are more buyers and sellers. It’s important for you to understand this dynamic in your market. If there are a lot of pursuers for a business, many times you will have to pay a premium for the business or be creative with your offer. If you know people who have recently bought a business in your market, ask them how the process went and what the competition was like. The more informed you are about your market, the better your chances. Here are a few options on how to find available businesses.

List Aggregators

An example of a list aggregator is BizBuySell. They provide lists of companies available for sale that you can filter by location, type, etc. If you register, you can also get updates emailed to you. I would sign up for these lists whether you are seriously looking or just thinking about starting a search. You should definitely understand that this is a volume game and that you and a gazillion others will be looking at the same information. However, there is a plethora of great information on these websites. Once you find an industry you are interested in, you can look at different locations outside your market and see how they are priced. This is helpful insight for you when you are contemplating offers.

Brokers

If you are serious about buying a business, you should absolutely reach out to the brokers in your market. Before you send your first email or make your first call, reach out to your network and find out who the best brokers are in town. You might also find out who you should shy away from. Once you have your short list, reach out to each of them and take the time to introduce yourself and begin developing a relationship. I highly recommend you meet them in person. I’ve always believed that you can build a relationship stronger and faster if you meet in person. Each brokerage will have a slightly different approach to working with clients. Some may offer to help you perform your search – for a fee. While I have not gone with this approach, I know others who have had great success with it. This is a decision you will need to make based on what you are looking for, how fast you want to find your business, and your budget.

Networking

If you are in a position to share the news that you are searching for a business, by all means do so. Leverage the network you have built over the years to help you find the business of your dreams. You may be surprised and find the business of your dreams through your network. I would leverage your connections and even look at groups on LinkedIn to identify opportunities. Think of searching for a business like fishing. The bigger the net, the more fish you will catch, and hopefully find one that is a keeper.

Law Of Large Numbers

I hate to be the one to tell you this, but it may take longer than a few days to find the business of your dreams. I’m also sorry to tell you that you may bid on the business of your dreams and lose – multiple times. I will tell you that if you are persistent, you will find more than one of these golden opportunities. I don’t know how many dream businesses I lost or even walked away from (actually, I do), but I picked myself up and kept working hard. Eventually, it paid off.

In my next post I will discuss what happens once your offer is accepted. The fun of due diligence and contract negotiations begins. You also will need to start developing key relationships with your trusted advisers. These are the critical people that will help you finalize your transaction and get you started on the right foot.

If you are thinking about starting the exciting adventure of buying a business, or in the middle of a search and would like to get some valuable feedback on the process, don’t hesitate to contact me. I would be happy to share my successes and failures with you.