Buying a business is different from buying anything else. Understanding how business brokers think and operate can help you to be a better buyer. Here are some truths that we operate from:
BayState Business Brokers Blog
When you are making an offer on a business, don’t be surprised to find that there are other bidders. In many of our business sales, we are receiving multiple offers. This is a common occurrence in sales of larger businesses by investment bankers and the buyers are familiar with how to handle the situation. Many individual buyers that we deal with are not.
The first thing that you need to know is that you have a lot of competition in your search for a business to buy. If the extent of your search for a business to buy is looking at Internet ads, it’s likely that when you find the right business, you won’t be successful buying it. That’s because other buyers will be more prepared to take the steps needed to buy that business. The first piece of advice I would give you is to be prepared to take action when you find the right business to buy. How can you be prepared? Here are my suggestions:
Last night I had the pleasure of hearing Ed Pendarvis speak at the monthly meeting of the New England Business Brokers Association. Ed Pendarvis started Sunbelt Business Brokers, a chain of franchised business brokerage offices. After selling it, he started Business Buyers University to help buyers learn how to buy a business. It offers online courses that buyers can take to learn more about how to buy a business.
Think about the other large purchases that a person is likely to make in their lifetime – buying a car or home. No one would make a decision by only reading a brochure or looking at an advertisement. Buyers understand that they need to test drive a car to see what it feels like before making a decision about buying that car. You need to walk through a house and really look at the yard and neighborhood to know whether you want to live there. You need to do the same with a business
A business is much more than a financial statement. By going out and talking to the owner and seeing the business you get a better understanding of what that business is all about. You're going to be replacing the owner and by talking to him you get a much better idea of what it takes to replacing his skills in that business. A business owner will be more open about his business with a buyer who takes the time to meet with him. You will learn a lot about the business by seeing it.
Another benefit of visiting a business and meeting with owners and interviewing them is that you get experience in doing it. When you find the right business, you'll have other businesses and owners to compare it to. You’ll also have a better idea of questions to ask and you can do a much better job of evaluating that business and that owner. You also show people, like business brokers, that you're a serious buyer because you're taking the time and effort to meet with business owners and look at businesses.
I'm not suggesting that you should go out and take a look at every business for which you sign a Confidentiality Agreement. I don’t want you to waste your time. What I am saying is that the Confidential Business Review should just be a screen for you to determine is this is a business that you might be interested in buying. If it is one that you might be interested in buying, take a look at the business, talk to the owner, and learn a lot more about it.
In most sales of businesses, the business broker represents the seller. This is particularly true when a buyer is dealing directly with a business broker that has the listing for the business for sale. This business broker’s primary responsibility is to look out for the interests of the business owner and business being sold. Even if you are working with a business broker who is co-brokering the sale with the listing broker, the business broker may still be representing the seller, not you. Who the business broker represents should be spelled out in the confidentiality agreement or non-disclosure agreement (NDA) that you normally sign before you are given confidential information about the business.
People are used to negotiating over price and trying to get the best price. In the case of a real estate investment where the mortgage costs are a large expense and based on the price paid, getting a good price is very important to making money on the investment. When buying a business, the price of the business is important, but buying a good business is more important and paying a little more to get one makes economic sense. Typically, the extra price paid is recouped in a relatively short time.
When a good business – one with good financials and priced reasonably – goes on the market, we get many inquiries from buyers on it. Part of our job is to screen buyers so the seller and us work with the ones that are the most likely to buy the business. Here is what we look for when we do so:
If you have been looking for a business to buy and can’t find one, there is a good reason. It has been estimated that up to 80% of the businesses for sale are not on the market. Many of the potential sellers do not want to make it known that they are interested in selling their business. They don’t want to list their business for sale with a business broker or have it advertised for sale. While there may be many reasons for this, the primary one is probably a fear that their competitors, customers, or employees may learn that the business is for sale. If they did learn this, it could hurt the business.
Analyzing financial statements. An accountant can compare the target company's financial ratios to industry averages. This can put the target's financial statements into perspective and show you how well the company is doing. An accountant can also show you the trends in the financial statements over time to give you a perspective on the direction the business is going financially.