A Quick Review of How to Buy a Business
Hopefully, you’ve read the previous two articles: If I Buy a Business, What Down Payment is Required and How Much Can I Pay Myself? and Want to Buy a Business? How and Where to Begin. If you’ve done so and have taken action, you’ve already considered your strengths and weaknesses, your goals and interests, the minimum you need to earn from a business, the maximum amount of down payment you are willing to invest and you’ve used that criteria to search and filter through the business-for sale websites, such as www.bizbuysell.com, to identify businesses that might be of interest to you.
It’s Important to Gain Experience in the Process of Buying a Business
It is very important to step into the buyer process and gain some experience in evaluating businesses. Seldom will a buyer look at one business and be ready to pull the trigger to acquire it. We’ve often seen first-time, inexperienced buyers who had not properly prepared themselves to move quickly on a business of interest to them and the business was acquired by someone else before they decided to make an offer.
Although there are many, many businesses listed for sale, there are not that many that are truly quality businesses available for acquisition. The buyer demand for good businesses far exceeds the availability of good businesses. Often, the high-quality business listings sell very quickly. To succeed in acquiring one, you must be prepared to move quickly.
The only way to be prepared to move quickly is to gain experience in the buying process. You must be able to rapidly evaluate your interest in a business and assess its true value. First-time buyers usually have no idea as to how businesses are valued and what is truly of interest to them. You can read to increase your knowledge about the process, and we encourage you to do so, but you also need to look at businesses and meet with owners to gain the experience of evaluating them. As you probably know, theoretical knowledge doesn’t always prepare one for the reality of situations and that definitely holds true when searching for a business.
Truly Good Businesses Are Hard to Find
There are many variables in the presentation of existing businesses for sale. The quality and experience of business brokers handling seller representation varies greatly. Business brokerage is easy to get into (but hard to be successful) and in many states, including Missouri, does not require a license. Better brokers will prepare comprehensive, confidential information packages with fairly-stated cash flows and reasonable asking prices. But some brokers, perhaps a majority, may “stretch” the cash flows with invalid or questionable add-backs and accept business listings with unreasonable asking prices. Their philosophy is to let the market establish the true market value of the business. We disagree with that approach. We think it is important to set and manage seller expectations. But, that requires a broker with significant experience.
If you are determined to buy a business, often you have to filter through inadequate and poorly prepared marketing packages prepared by the sellers themselves or by inexperienced business brokers. Acquiring a business that is poorly or inaccurately portrayed will be difficult because it usually means the seller has unreasonable expectations. It’s never easy to convince sellers to alter their hopes. But, it’s always possible that a great business is hiding behind a poor presentation. Truly good businesses are hard to find, so you have to filter through business listings to “separate the wheat from the chaff”, and that is best accomplished by inquiring about businesses and obtaining the confidential marketing material prepared for prospective buyers.
Once you have the confidential business information, you can analyze the information yourself and draw your own conclusions. If the business appears overpriced or has overstated cash flow, it shouldn’t necessarily stop you from requesting a meeting with the owner to learn more about the business. By doing so, without being confrontational in an initial meeting, you can try to gain an understanding as to how and why the seller’s expectations were set and how they are being managed. And, just as important, setting aside the financial aspects, determine if the business is of interest to you.
Inquiring about businesses that meet your preliminary criteria will not only prove to be educational, it will also help you whittle down and better define the aspects of a business that are important in your decision-making. After further exploring three or four businesses (including meetings with owners), you will develop more confidence in your ability to quickly evaluate businesses that meet your acquisition needs. When you begin the business-buying process, you’re in a learning mode. When you develop a better understanding of the business-for-sale world, your confidence in your assessment skills increases. That enables you to move from the learning mode to the decision-making mode.
You Must Be Prepared to Move Quickly When You Find the Right Business
When the right opportunity arises, it’s important to recognize it. You can only gain that level of comfort, knowing it is the right business for you, by looking at other businesses so there is a basis for comparison. Rest assured, if you think a business looks great, so do other buyers. When you do find the right business, it’s not only important to recognize it, it’s important to move quickly because there will be other buyers in pursuit of that business. The old saying “ the early bird gets the worm” is very meaningful when it comes to acquiring a business.
How to Buy a Business? Let’s summarize. There will only be a limited amount of truly good businesses available for acquisition that meet your criteria. Buyer demand for good businesses far exceeds the availability of good businesses. Therefore, it’s important to be able to recognize the right opportunity and move quickly. Unless you’ve previously looked at a number of other businesses, you will be ill-prepared to recognize the right one, much less move quickly. This may be the most important advice we can provide: don’t hesitate to inquire about and meet with owners of a lot of businesses – especially when you are just beginning your search process. You need the education it provides to prepare you to recognize the right business and to move quickly before other buyers can wrap it up.
This series of articles will continue with How Buyers Should Work with Business Brokers.