While the entire process of buying a business is not difficult, expecting to buy a good one with the right deal terms is darn near impossible if you are new at it and do not educate yourself first. It still amazes me how many buyers get derailed so early in the process and generally flounder for months. The result is always the same: they either give up or end up buying horrific businesses and overpaying for them. Then again, any price is usually too high for a garbage business – right?
Today, I want to briefly discuss five areas where prospective buyers get easily trapped or have misconstrued ideas and often these come early in the process and leads them down the wrong road from which they never exit.
The “No Money Down” Concept
The chances of buying a good business for no money down are close to impossible. The fact that there are even a couple of books that allegedly show you how to do it only exasperates the problem. I have been in this sector for more than two decades and I can recall only a handful of times when I have seen it happen. It would be great if it did, but it doesn’t, so if that is your strategy; find a new one. If you do not have any personal financial resources to use as a down payment, you should either find investors or a partner because without them, you will simply spin your wheels or waste your time and everyone else’s.
Do not confuse this with the strategy of getting seller financing – that is a realistic plan and especially in today’s market where third-party financing is nearly non-existent. Qualified buyers armed with the right know-how certainly can get motivated sellers to agree to finance a large percentage of the deal but the key point here is knowing how to present and structure it.
Finding the Right Business
This is undoubtedly the most common challenge for prospective buyers. It is made even more confusing by the sheer volume of businesses that are available for sale. The simplest tact and most effective one initially is to pick a few general categories of business types and several in each and then investigate them. Doing so will enable you to eliminate some categories and narrow down your criteria for others. It is helpful to utilize a business broker or search firm but you can only expect those resources to work with you if you if you either prove that you are qualified and serious (we will discuss this in a moment) or you compensate them for their time.
Present Yourself As A Qualified Buyer
Prepare an initial list of what criteria you seek in a potential business and be realistic. You also have to be flexible. Do not go overboard – do not for example expect to have access to ten years of audited financial statements or insist that the seller provides mountains of confidential information early on in the discussions. Compile a personal financial statement and make it available to the other side in the deal. After all, if you want to look at their numbers to determine if the business is financially sound, so too should they have the right to know if you are financially qualified.
When you initially contact a seller or broker simply state your interest in the business and let them know you will execute the necessary and standard non disclosure agreements so you can obtain more information. The first communiqués should be benign in nature. Everybody needs to get to know each other. In other words, do not be the proverbial bull in the china shop. Regardless of how the market may be today, sellers are always apprehensive about buyers and confidentiality is a massive concern so be empathetic. At the same time of course you do not want to be a “pushover”.
Dealing With “Ass-Backwardness”
Yes indeed folks, the process of buying a business can be completely illogical at times. While not always the case, it is unfortunately quite common to have inexperienced prospective buyers dealing with first time sellers and incompetent brokers. It’s the perfect storm of the absurd, so be prepared. How can a buyer possibly be expected to make a viable offer on a business if the seller won’t release any information? They can’t – that’s how, but it happens, and at times, a buyer has to play the game and make an offer simply to be able to access the information.
How do you deal with a seller of a declining $500,000 business who is using $100 million businesses as his basis for the asking price? Again, not easy, but you have to be ready to do so and educate the seller over time and possibly by making an offer or letting them sit with an unsold business for a year.
Then there are buyers who want complete access to confidential financial data without demonstrating how they plan to finance the deal or ones who expect sellers to relinquish their businesses for a fraction of its value.
Of course there is the usual scenario of someone putting up their business for sale without having any books and records whatsoever, yet they are steadfast in “assuring” you about how much money it makes – amazing. Obviously, these are the ones where the buyer must either walk, or buy it strictly under the terms of an earnout. If you do otherwise and the business turns out to be a pile of crap, don’t blame the seller or the broker or your attorney or accountant; look in the mirror.
A common frustration is dealing with business brokers who never reply to emails or calls. It defies logic doesn’t it? But again, it happens, so you have to potentially move on or become more aggressive with them.
While the examples above are not necessarily the norm, they absolutely do occur frequently enough based upon the sheer numbers of buyers, sellers and brokers who are activelyt engaged in this sector at all times and so if you spend any time in the business for sale arena you will encounter the nonsense – guaranteed.
The Answer Is…
Be prepared!
Do not set lofty expectations of having this be a seamless, painless or effortless process.
Educate yourself.
Buying a business is definitely within anyone’s reach, but, there are bumps in the road. You cannot get to the finish line successfully without equipping yourself with the right knowledge before you dive in.
The process is flawed; deal with it. This is always the case whenever there are multiple personalities involved and a dizzying array of intangibles (i.e. who really can state with absolute certainty what a business is worth?).
While there are lots of incompetent business brokers and inept sellers, there are plenty of helpful and effective intermediaries and many motivated and willing business owners serious about selling.
There are some who never complete the journey to buy a business because they do not have the knowledge or experience to handle the imperfections in the process. There are others who thrive on it. The process, while anything but perfect, is, in my opinion, the greatest breeding ground for enterprising individuals because these challenges are precisely the pressures and typical stream of obstacles that every business owner faces.
The successful buyers, just like successful business owners, are able to navigate their ways to the finish line by dealing with all of the twists and turns one scenario at a time and by placing the burden of their success on their own shoulders instead of blaming others for any failures.
Get on the right path today and become a knowledgeable buyer. Take a moment and visit my website at Diomo.com – there is a ton of helpful information available for you.
Richard