Buying a business starts with the buyer
If you are thinking of buying a business and want to do it as quickly and easily as you can, don’t make a list of things that are important to you and use that as a start for your search. The more important place to start is with you and how you will be received when you first approach a business seller. That is, put your feet in the shoes of the business seller and try to see things from their perspective. Selling a business is a harrowing experience at the best of times as there are so many moving parts, what gets disclosed to who and when, how much finance does the buyer have to buy my business and more.
According to the company Firm Gains, 90% of business buyers will never complete the buying of a business. I think that number is too low as the number of business owners in the United States is between 1% and 2% of the US population. Quite simply, business ownership is difficult and demanding at so many levels and as a result, it suits so few people.
If you are a serious buyer you need to prepare before you start looking. There are many businesses for sale. If a business owner is trying to sell their business on their own that’s probably a red flag. Almost without exception, a business is probably the most important asset of the business owner. Not only are they emotionally attached to their business as it provides all their emotional and financial support, they are so close to the business that they are not familiar with all the steps to sell a business. I was recently working with a business owner that thought his business was worth between $1.8 million and $1.9 million. After putting a business valuation together for him, the business value came in at $700,000. A business owner that has a motivation to sell normally use a professional to help them through the process such as a Certified Business Broker as the process is very complicated and takes a lot of time which pulls the owner away from running their business or the very asset they want to get for the maximum price.
If you have the motivation to buy a business expect to be asked a thorough set of questions so the other party not only knows that you are serious, but that you also have the ability to close the sale. According to Firm Gains, fifty percent of the deals that are agreed between a buyer and seller will never close; whatever the reason.
Here’s a very basic set of questions you can expect to be asked. Your answers will determine how seriously you are taken as well as how much time and effort will be made to try and help you close the transaction.
1. Who are you?
This may seem very basic but make sure all your full contact information is correct and up to date. I recently had a buyer present a signed offer to the seller with an accompanying credit report and the credit report was not in the name as the offer from the buyer. The buyer had a last name with two words and for ease had chosen to drop one of his last names. However, he’d made that decision after records were kept of his shortened name and so it was confusing to the sellers and whether or not to take the offer seriously.
2. Prepare a resume.
A good buyer asks the seller lots of questions to know this is the right business to buy. A good seller and their professional help want to know the same thing about the buyer including their previous industry and management experience. Having a resume that can readily be presented is a great tool. It’s also a great ice-breaker as it shows places lived, companies worked, positions held and more which allows each party to talk about their history and build a good relationship.
3. How long have you been looking to buy a business?
A good buyer question for the seller is how long the business has been on the market. A good seller question for the buyer is how long the buyer has been looking to buy a business.
If a buyer has been looking to buy a business for more than 12 months it’s unlikely they will ever buy as they have simply developed a routine of looking for businesses to buy in case the “perfect” business comes along. There is no such thing as the ‘perfect’ business as it will not make it to the market of businesses for sale as it will have already been bought. The longer a buyer has been looking to buy a business the less likely they are to buy.
4. How much is your down payment?
The first thing a motivated buyer wants to see is the financial statements of the business to know how well it is doing. The first thing a motivated seller wants to know is how much downpayment a buyer has available and is that downpayment in cash or need to come from an investment that needs to be liquidated.
I recently had a buyer who said he had a genuine interest in buying a business, any business, as long as he could buy it with no downpayment. No seller with a good business will sell without any ‘skin in the game’ from the buyer. It’s the ‘skin in the game’ that makes the business owner get out of bed and go to work every day to pay their bills and make some extra.
5. How much do you need to meet your immediate financial responsibilities?
Everyone has bills to pay, the immediate need of money to put food on the table, buy gas and pay rent or the mortgage to name a few expenses. A good business buyer will understand their immediate financial needs so they know if the business they wish to buy can meet those needs. If not, it’s time to look for another opportunity.
6. When do you want to be in business?
If a business owner has their business on the market, the chances are high that they wish to sell as soon as possible. That is, they are a motivated seller.
If the buyer is unable to explain how quickly they would like to be in business and why, they will not be perceived as a motivated buyer and not taken as seriously as they may like.
7. Why do you want to buy this business?
A good buyer question is why the seller is selling. A good seller question to a buyer is why do you think you would be a good owner of this business? If the seller does not like the answer they will not be interested in disclosing any confidential information about their most important asset.
8. What changes do you plan to make?
Once the seller knows why you want to buy, they often want to know what changes you plan to make. The answer to this question reveals how serious the buyer is thinking about buying the business, how much they know about the industry the business is in and if the ideas they are thinking, in the sellers opinion, will work. If the changes are dramatic that may worry the seller. If the buyer sees no need for any changes, that too may worry the seller.
9. Do you plan to keep the existing employees?
Different sellers will have a different reaction as to whether the buyer plans to keep or change existing employees. If the changes are too many it may make a seller uncomfortable.
10. What do you expect from the seller after the sale closes?
One of the first things most sellers plan to do is take time off after the sale closes or the business transitions to the buyer. If a buyer is so nervous they need the seller around for an extended period of time, the seller will also get nervous to the point of not being willing to provide more information as they expect the deal will not get done.
11. Have you bought a business before?
This is not a critical question but the answer can help a seller or make them uncomfortable. Doing anything the first time is hard. Buying a business is certainly in that category.
Some sellers like there to be a personality fit with the buyer. If the buyer and seller have different personalities that can mean the end of the deal. One of the most basic ingredients of any deal getting completed is trust. If trust is missing the deal won’t get done as it takes too long and there are too many items that both buyer and seller need to agree upon.
For more immediate help with buying a business you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.