Narrowing Your Search When Buying A Business

A few years ago we did a survey with over 1000 prospective business buyers classified as those who were actively searching to buy a business. One of the questions we asked was to identify the single biggest concern they had. The answer choices were: finding the right business, getting a good deal, arranging financing or not finding out certain issues before closing the deal.

Before revealing the results, what’s your single biggest concern from the choices offered?

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Set Reasonable Rules When Buying A Business

One of the biggest problems that many prospective business buyers have is to set unrealistic or too many hard rules about what business they will consider. While a buyer must have guidelines, it’s equally important that these criteria can be met.

For example, if you determine you will only buy a business that has been operational for ten plus years, or has shown at least five years of growth, or has only had one owner, or retirement is the only acceptable reason for selling, you’re going to be disappointed.

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Don’t Fall For The “Other Offer” Trick When Buying A Business

This is an important lesson in negotiating you have to keep in mind while buying a business. Let me give you an example of what happened to me recently in a very similar situation and I will explain how you may need to employ a similar strategy.

I’m in the process of looking for retail space for a company I invested in recently. It’s been a real pain simply because we need a larger space in a specific demographic area. Last week, I found a very solid potential location. I visited the space and met the landlord’s broker. The space has been vacant for two years however; that’s of no concern because we don’t need the plaza to drive business.

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“Looking” To Buy A Business Rarely Results In A Purchase

One of the big problems with buying a business is that it costs nothing to look. There are hundreds of thousands of businesses listed for sale, lots of business brokers and countless other resources one can tap into while in the stage of looking for a business. In addition to online resources, one could network with accountants, attorneys, bankers, investors, chambers of commerce and on and on the list goes.

Unfortunately, many prospective buyers get into the trap of turning the goal of buying a business into an endless search process because it is so easy to do. Simply looking at business for sale listings is not buying, and one’s attitude towards the entire business buying process and overall urgency will dictate whether or not you ever close a deal.

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Consider Seasonality When Buying A Business

Very few businesses have steady and equal activity each month of the year. As such, it’s critically important to understand the seasonality of any business you may be buying. The obvious issue of course is the working capital requirements when you take over a business.

First, let’s define “Working Capital”. In accounting terms, it’s the company’s total current assets (i.e. cash, accounts receivable) less its current liabilities (payables). The only problem with this formula however is that in most small business purchases, the seller takes the receivables and pays off the payables at closing to deliver the business “free and clear”. Or, in numerous businesses, there may not be much in the way of current assets.

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The Importance Of Making Offers And Purchase Agreement Details When Buying A Business

When the time comes to making a formal offer on a business, you will do so via a Letter of Intent (LOI) or a formal Offer to Purchase Agreement (PA). The one you will use depends upon several factors including deal size, what terms have been agreed upon thus far and the buyer’s goal with the offer.

Generally, smaller transaction may skip the LOI portion, however my rule for an LOI versus a PA has always been: if the seller’s asking price and my valuation are far apart or I want to lock up the business quickly, or, perhaps I may be using the offer to access additional documentation from the seller, I use an LOI. It’s quick, non-binding (most clauses) and inexpensive to have an attorney draft.

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Reality Check – What Many Buyers Are Looking For Doesn’t Exist

“I want to find a solid business where the owner wants to retire and doesn’t have any family members to take it over. I want to offer him a way out and cut a deal where I don’t have to put much down and over the next few years he’ll teach me the business.”

What a wonderful idea!

Brilliant in fact!

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