What are the keys to success in your opinion in buying a business?

If you’re buying a small business, which we will define here for the sake of argument as having one million in sales or less, make sure that you buy one whose core driver directly matches your key skill. To illustrate this point, let me offer a few negative examples. Suppose your key skill is marketing and you buy a small architectural firm. The firm’s core drive will be its architectural expertise. What is your level of risk as owner if the architectural staff leaves? The answer is that it’s as high as it can get because you can’t step in and take over their work until replacements are found. Their departure stops the revenue flow. What if you’re an accountant who buys a small machine shop repairing valves for a local refinery and your machinists leave? Again, unless you know how to operate the equipment, you’re dead in the water.

To answer your question, the business you buy should have as its core driver a function you excel at. This doesn’t mean that you have to perform the function any longer. It just means that you need to be able to step in and keep the business going if a key employee or group of employees leaves. Think of law firms where senior partners often become rain-makers and delegate all actual legal work to subordinates. In the event that subordinates were not available, due to the Swine Flu for example, the rain maker could roll up his sleeves and work the files until they returned or were replaced in order to keep the firm going.

This type of risk becomes less of an issue as the business grows and acquires more employees. However, with a small business just the loss of one key employee can kill it–unless you can step in and take over.

Any employee who provides a critical skill that the owner can’t has power over that owner.

Leases can be deal killers when buying a business

Let me share a real life lease horror story with you. A few years ago an entrepreneur I know “had come into some money,” as the old expression goes. While I won’t say how much it was it enabled him to buy almost any small business selling for $2 million or less. After looking at business for sale opportunities for a few months, he found a three store chain selling to the tourist market. He contacted the two owners and began his due diligence on the company. Everything looked pretty good during this phase, so he decided to make an offer on the company.This led to a counteroffer and the negotiations phase was in full swing.

As the deal looked like it was going to go through, both parties decided that it was time to let the landlords know about the proposed sale. The landlords were two businessmen who had acquired substantial holdings in the downtown core and owned the three buildings that the three stores were located in.

This is when the nightmare began. After reviewing the buyer’s personal financial statement the landlords decided that he would increase their risk because as an individual he didn’t have the net worth of the two current store owners. This resulted in the sale being canceled. The store owners pleaded with the landlords to let them sell off the stores. After running them for over two decades, they were ready to retire and enjoy their sixties. However, the landlords wouldn’t hear of it.

After a frustrating month of attempts to meet with the landlords and offer additional ways of increasing their comfort levels, the buyer finally gave up and walked away from the deal.

I know that the stores didn’t sell for another two years because I kept tabs on the situation out of curiosity. After that, I lost track of the business die primarily to ceasing my trips to the city they are in.

This is an example of what can happen with leases. You have a motivated buyer and seller who have agreed on a price, want to do the deal, and a third party kills it.

The takeaway here is to have a thorough understanding of the lease early on whether you’re the buyer or seller, lest you waste several months like my friend did.

How to find businesses that are for sale

My brother and I have been looking for a small business to buy since early March. We have talked to local brokers and followed the listings on the big business buying and selling websites.  The listings are really disappointing. Is it the economy? Are only mediocre businesses available for purchase these days?

Your main problem is that you are looking in the wrong places. Online listings tend to be stale businesses which didn’t sell in the usual ways. What you need to do is look for fresh prospects which includes businesses that aren’t technically for sale. The best way to find these is to compile a list of local businesses that interest you and then call the owners or drop by in person if there’s a chance that you can meet them. What I mean by that is that you stand a far better chance of meeting the owner of a retail business than the owner of, say, a manufacturing business. One will most likely be on the shop floor while the other will be hidden away behind a barrier of gate-keepers.

Once you start talking to them butter them first by telling them that you have heard good things about their business and would like to one day own something similar. Then ask them what advice they can give you in your quest to own and operate such a business. Be prepared to have the owner start asking you about your qualifications as a buyer. This is a good sign as it may mean that he’s suddenly considering the possibility of selling the business.

Who knows where such a conversation will lead to?