The Uncertainty Principle When selling or buying a business
The Uncertainty Principle, according to Wikipedia, is a variety of mathematical inequalities used in Quantum mechanics. As I have almost no understanding of Quantum mechanics I am unable to use it effectively except I heard it paraphrased the other day with an explanation that “the more precisely you study and learn something, the less you know.”
I think the Uncertainty Principle is so adapt as I work with sellers and buyers of a business, that is, the more precisely a seller studies and learns their business as they try to sell, the less they know. This equally applies to buyers; the more they learn and study the business with the intention of buying it, the less they know.
This applies especially to small business owners. Consider the following:
- A small business initially starts as an idea or concept. The business owner takes that idea to market and if the market likes the idea, buys its product and/or services. If the idea is sustainable, the market rewards the business owner by continuing to buy its products and/or services.
- When the business goes to market, the business owner hopes they are not breaking any laws so they file for a business license and any other obvious necessary licenses or permits.
- When the business grows, the business owner will give limited thought to how to grow their idea be it by borrowing money, financing the opportunity or alternatively, offering equity in exchange for money to put back into the business.
- When the business starts becoming successful, the business owner completes their tax return for the business and hopefully has enough left over to pay the right taxes.
- When the business grows and needs employees, the business owner hires the necessary help and hopefully is able to pay the necessary payroll taxes.
- Other items to consider include insurance(s), buying and managing fixtures, furniture and equipment, training and all the other intricacies required to build and run a business.
At a simple level, each and every one of these steps and more are taken with the faith that it will all work out, or as I am suggesting, based on the Principle of Uncertainty.
Now it’s time for the business owner to go and do something different and put their business on the market. To be successful, it initially means the basics of the business are summarized and made available to potential buyers. If the buyers are comfortable with the information they sign a Confidentiality Agreement and receive much more detailed information. If that information proves satisfactory, the buyer moves into due diligence and generally has a CPA and/or attorney help with the process. If this all works out, the buyer and seller then close the sale and the business moves from current owner to the seller. So many steps in the process to sell a business with this description I’ve just provided is a very simple version of what actually happens.
This is because the more the buyer finds out about the business, the greater the chances the Uncertainty Principle will have the buyer second guessing themselves and deciding if “the more precisely you study and learn something, the less you know.”
This happens repeatedly in transactions. As the buyers get more information about the customer base, any legal matters the business is dealing with, the complexity in transferring licenses, legal contracts, leases, tax issues, questions about financial statements, getting finance approved by a third-party and more the greater the chances of the Uncertainty Principle kicking in and the transaction not closing.
If you are the owner of the business wanting to sell, make sure you bring all the information together about your business in as much detail as possible. If you are looking to buy a business, prepare your resume including your management experience, personal financial statements to show you have the ability to buy a business, a prequalification letter to show you would qualify for a loan and your credit report is up to date with the best credit score.
There is tremendous uncertainty in buying and selling a business. The uncertainty is not only for the buyers and sellers but the third parties including landlord, third-party lenders, suppliers, employees and more.
At the end of the day, the success comes from managing all the uncertainty and making sure all the parties come together so everyone is successful. The best way to reduce the uncertainty is by good preparation and continuous communication.
If you would like more information about selling a business, buying a business, buying a franchise or a related service such as valuing a business, please visit my webpage Services and choose from the drop down menu the information you would like.
For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.