How to buy a business (Part II)
There are many ways for an entrepreneur to get started, but many believe that the best yet way is to identify a good business and buy it. This is sound approach from many points of view; however in order to do this successfully, you will need to learn the ground rules.
Russel L Brown (1999) has written a book on this approach and according to him when an entrepreneur gets down to buy this business, he/she should be prepared to fight for it just as in a jungle. It is so tough. According to him there are twelve mainframe laws and these are briefly described hereunder:
Avoid lawyers at all costs: Inspite of the common belief, lawyers will actually not get you a better deal; they will most likely, kill the good deal in their zest to get the best deal for you. As long as the lawyer is there to advise you on the legalities of the matter, thing will stay fine and on the track. There are however many instances where lawyers feel it is their duty to mediate this best deal; unfortunately in order to have a win-win situation both parties should get the 'best deal'. But since the lawyers are not meant to think that way, they will most probably try to negotiate better point for you - the other party seeing that he/she has to lose more than gain would then drop the deal altogether.
Caveat Businesses EmptorThis literally warns the buyer to beware! Of what? Of absolutely anything and everything that he/she does not see as black and white. This is because the business broker who brings you the news of the business-for-sale is bound by the law to do the best for his client - while of course trying to provide you with accurate information about the business. However, he will definitely try to downplay the pitfalls and overplay the advantages merely as a salesmanship tactic. This is why, it is better that you believe and decide only upon the facts that can be verified and available in black and white.
A business is worth simply the amount it is offered at any given timeBasically, buyers and sellers will always be at opposite ends of a deal. While one would like to pay as less as it is possible, the other would want the exact opposite. How do you really come down to a price that is the most suitable? You will need for this to veto all the banking and business laws you know and look at it from the layman's perspective. How much does the business give you today? Usually the price is worked out by adding the capitalization cost (the cost that forms the future earnings of the business) and the value it dictates in the market at the time of sale. The best price would be anything between plus two to five times earnings in gross.
The selling price is actually the future earningsWhat you are buying is the machine to make money. The machine will work in a certain way - and that way is actually the earning stream. Without that, your business is nothing. This is why the price will be, often, more or less representing what the business is likely to make for the buyers.
The truth is only what you see - ignore all unreported incomeThere are in many cases, unreported sales - unreported to IRS so as to avoid tax. In this case the law applies firmly. What is written is true - the rest can be just a beautiful story. Do not get influenced by any of the 'extra income' that is not declared because that cannot be substantiated.
To be a successful seller, you need to have the ability to paint black into whiteThough this is not cent per cent true, the fact remains that the way a seller earn is by the margin of profit they make. The profit they make is the result of a higher than deserving price which someone becomes willing to pay. Hence, by sheer definition, the seller's interests are bang opposite yours. So, the best policy is to insist that all claims are substantiated with documents - or you simply discount the report or claim.
Why should one sell a completely good business?This is one rule that almost always applies. If he/she wants to sell and everything is hunky-dory, why do they want to sell in the first place? This is why it is so important for you to know the facts. The only viable reason for the sale of a successful business is the impending retirement of the owner. Any other reason should be seen with suspicion. Always check it out to the last detail about the truth of the reason of the sale. It might save you a lot of headache in the long run.
Only 1 per cent of potential buyers actually buy a businessA seller may not see or be able to see his/her way through the vast majority of people who are 'interested' in buying the business. Out of the whole lot that knock at your door 99 percent will not be the actual buyers. Hence, the best path is to engage a broker who will shift the chaff from wheat and allow you a better margin of negotiation.
Proceed with the assumption that there might always be some surprises (not necessarily pleasant ones)There is no such business in the world which does not a skeleton in the closet. And obviously the seller will not go overboard pointing out to you. This is why it is important for the buyer to ensure that everything that he/she is told is the truth. Whatever be the case, the negative aspects will definitely be visible when the business is analyzed at close quarters. And if at that time the buyer 'discovers' any cover ups, the sale will definitely suffer because the trust of the buyer is lost.
One of the parties might always develop cold feetIn sales closing the deal is the actual feat that will require the best effort. The same is valid for the deal of buying-selling businesses. 9 out 10 cases right at the closing time one of the parties will have serious doubts whether they are doing the right thing. You will have to be prepared for such an eventuality and proceed on one-step-at-a-time basis to overcome the crisis.
All negotiations must cease once the papers are signedIt will always be that you 'forgot' to ask or mention some aspect where negotiations can restart. However, once the papers are signed, there is actually no further scope for negotiations. Doing so is not only bad taste but also has a great danger of totally collapsing the deal. So there should be limit to the negotiations.
You are the owner of the business - do not jump into making changesThere is only exception to this rule, i.e. if you are turning around a flailing business. Other than that, you should not immediately start changing rules. You wait and watch and understand the business before starting to implement any change. What seems to you as a simple solution may not be so once you go into it deeper. The best time to start any changes is after observing it for about a semester (three months)