Buying an existing business is an excellent option that is often overlooked by entrepreneurs, but it does have advantages. You will have an established name, existing customers and an immediate revenue stream. However, searching for a business to buy can be difficult, and finding the right one to buy is tougher yet.
The process can be time consuming, costly and frustrating. Even the most skilled businessperson may find this experience challenging. To provide some “structure” to this very complex decision, the following process-oriented steps may serve as a checklist to help you go through the process.
Personal assessment and criteria
Based on what you know about yourself and why you are interested in this business, you must constantly assess if the concept and the business is right for you. Does it fit with your interests and your resources? Cash, credibility, skills and contacts: do yours match what this business will demand?
Ask for the business plan
Does the seller have a current business plan? Do they have any business plan? The business plan—or its absence—may tell you a lot about the business, its history, the owner’s view for its future, and their interest in selling.
The seller
If you should purchase the business, you are going to be dependent on the seller for information, contacts and resources. Based on what you know now, what do you think your relationship with the seller is going to be like? Can you expect that to be a positive experience? If you see signs of a “difficult” person in the initial purchase investigation stages, it may become more stressful for both parties as things progress.
Figuring out the numbers
Regardless of the response to the business plan question, access to the “real numbers” behind the business is crucial. This may be more challenging that one might expect. Business owners are often reluctant to share operating and financial data, often for tax and competitive reasons, even when they are in a “selling mode.” Ask if the financials that you will review are “recast financial statements” and, if so, what adjustments have been made to these statements? Be as specific as you can when you gain information about the source of these statements. You may not receive any meaningful financials until after signing a confidentiality agreement and proving you have the financial ability to make the purchase.
The help of professionals
You may decide to approach a business broker to help you find the right business for you, but remember that the broker’s loyalty may lie with the seller. You will want to retain a Certified Public Accountant and an attorney who is knowledgeable in business acquisitions. A CPA will to help guide you through the financial analysis process, and you may benefit from legal counsel as agreements are drafted and signed. Their expertise and the emotional separation from the process can make the costs for their services your wisest investments in the entire process.
Business valuation
Ultimately, negotiations will lead to a business valuation to determine what the business is actually worth. There are several ways to estimate the value of a company, such as the value of the company’s assets, how much debt does it hold, and from what sources are the company’s current revenues and profits? All of these are going to have a different impact on the value of the business. Other factors to consider in the valuation process include:
- Level of risk: How volatile is the business?
- Competition: What is the competitive environment like—sleepy or cutthroat?
- Growth: Is this a growing or declining industry, how does that compare to the trend of the business, and what are profitability trends?
- Organizational stability: How established is the business itself in terms of infrastructure and personnel?
- Management team: Is there a competent management team in place and will they stay? Will that be an issue or opportunity for you?
- Overall desirability: Will the business be desirable for the “next” buyer?
The structure of the deal
The phrase “it’s all in the terms and conditions” applies here. Based on a valuation that you find acceptable, the specific arrangements of the financial transaction may determine if this is a “go” or something to walk away from and feel good about. For example, a one-time cash offer is going to result in a radically different figure than an arrangement where a down payment is followed by a seven-year buy-out. Ideally, the structure of financing will meet the needs, resources and interests of all parties involved.
Adding value
Determine if you are going to be able to add value to the business or if your goal is simply to keep “the machine” running. Once you have purchased the business, what are your objectives? Are you planning on owning the business for the next twenty years, or growing it over the next five years and then looking for the opportunity to sell? This will impact the intangible assessment of what the business may be worth to you and help assess the potential challenges ahead. Beginning your business plan will help to clarify your objectives and the business potential ahead.
The bottom line
- Take your time.
- Be methodical about gathering all the information you can.
- Pay attention to the details.
- Get help when needed and leverage available resources.
- Continue to “test” to see if the business and its demands fit who you are and what you want your business to be.
- If the deal doesn’t feel right, keep looking.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
