How to Buy a Business
… and honestly I’m getting a bit frustrated with business brokers to say the least. Over the past two and half months, we have contacted seven different brokers in [our state] about listings of interest to us. Each time we were made to feel as if we had to jump through hoops to be taken seriously enough for even just the briefest of information. What advice can you give a buyer on dealing with brokers? We’re not doing this to waste anyone’s time.
This is a common experience had by most first time buyers. Having been a broker for ten years, I know that I’ll get flack for this at the next annual conference, but here’s my advice for business buyers looking at buying a small business. Avoid businesses listed by brokers.It’s that simple.First, let me say that business brokers bring tremendous value to the business seller. They do this by letting the owner focus exclusively on managing the company so that the trailing 12 month average numbers are climbing (or at least declining as little as possible in this recession). Any seller who tries to sell his company without a business broker risks having that critical 12 month trailing average take a nose dive which then leads to a drop in valuation and final price.One of the key functions that a broker performs is to screen out the 99 lookie-lous who never get past the window-shopper stage. This often means that some real buyers get thrown out with the bath water as well.
My recommendation is to first learn the process of buying a business through a course or books and find an adviser who has experience with business sales. This could be an accountant or lawyer. What you want is someone who will sit in the background and advise you, when asked. You do not want someone who will try to lead you around by the nose.
Then once you have done your homework on the art of buying a business and found an advisor, go direct to the types of businesses you want to buy. The best way to make contact is with a letter to these companies asking if they know anyone in their industry who is interested in selling.
Why do I recommend this route? Because by the time you have done what I advise, you will know far more about valuations and the business buying process than any owner you are likely to come across.
I will post a list of recommended resources shortly. In the meantime, if you want more information on buying a business subscribe to my free newsletter.
Got a question on how to buy a business or need help with the process? Send me your question. My address is on the About page at top left.
The first reader question asked “should I use a broker to help me find a business to purchase?”
Having gotten my broker’s license back 2000, I’m reasonably qualified to answer this one. The best answer is “it all depends on your situation.” Let me elaborate. If you contact a broker about a listing he has keep in mind that he always represents the seller’s best interests. He is legally obligated to do so. If you decide to conduct due diligence on a listing, you will find yourself in constant contact with the broker. Over time you may begin to feel that he’s an objective and impartial intermediary between the seller and yourself. While he’s most likely to be objective, he’s never impartial as his responsibility lies in representing the seller’s interests not yours. Never forget that. So don’t make the mistake of confiding in him. If you do it will all get back to the seller.
If you’re a first time buyer without a strong personal or business financial statement (which the broker uses to screen out buyers who don’t appear to have the financial resources to buy the listing), stay away from deals listed with brokers and use other methods to contact business owners. If you’re new to business buying but have enough business experience to come across as credible buyer, it’s best to create situations where you’re dealing directly with the seller and no go-between is involved.
How do you create such a situation? Simple: contact business owners with a letter (i.e., the old snail mail kind, not email) asking them to contact you if they are seriously interested in selling their business.
The down-side to not having a broker involved is that there’s no one to talk some sense into the seller if he’s badly deluded about how much his business is worth. This is often the case. Even a broker considering representing a seller will first determine if the seller is realistic about price and terms. If he isn’t, the broker will pass on the listing as there’s no point in wasting time on a deal that won’t sell.
It’s also possible to retain a broker to work on “the buy-side.” This means that he works for you by searching for and identifying potential acquisitions. He will then usually handle the valuation and negotiations as well. This all sounds great but it comes at a price. You will be expected to put up a retainer for this type of service. Brokers quickly learn that about 99 out of every 100 buyers are are little more than window-shoppers. On average only 1 in 100 buyers actually has the nerve to pull the trigger at the end and actually buy a business. So you can’t blame brokers for using retainers to screen out the not-so-serious from the serious.
If you have a question about buying or selling a business, please feel free to email it to me. See the About page at top left for contact details.
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.
