Just like in real estate, we are in a buyers market for the sale of existing businesses.
The demand for buying businesses has weakened as the recession has lingered, while the increasing number of distressed small businesses has created a surplus of owners ready to sell.
Even when the economy recovers, we can expect conditions to continue to favor business buyers as baby boomer entrepreneurs look to exit or cash out of their businesses to fund retirement.
Scott Hill, managing partner of Peer Business Group in Brentwood, offers five key steps, if you are in the market to purchase an existing business.
First, carefully evaluate the impact of owning a particular business on your family’s lifestyle and finances. Evaluate the income and wealth risks by working through worst-case scenarios.
Hill suggests you ask questions such as, “What are my own and my family’s lifestyle priorities, and how will the demands of the new business affect what we have been accustomed to?”
And “beyond the investment, down payment and debt obligations, how many months can I survive if the business cannot pay me for a period of time?”
Hill also recommends that you talk about the risks honestly and clearly with your family to make sure everyone is 100 percent behind buying the business.
Second, ask the owner detailed questions about his or her daily activities. Shadow him or her to get a true understanding of the actual role the owner plays in the business. Determine whether the duties of the owner are consistent with your own priorities, lifestyle and values.
Third, take a critical look at the business and try to uncover any red flags. Never evaluate a business from a perspective that simply reaffirms your desire to buy it.
Hill advises: “Some red flags are really no big deal. But some are deal killers.” Make sure you uncover and discuss potential problems before you buy.
Fourth, make sure you have enough cash to support the business. “Ideally, you shouldn’t buy a business unless you have at least an extra 10 percent set aside for working capital or as an emergency fund.”
Statistics say the buyer can expect as much as a 15 percent reduction in sales after the purchase. The more cash you have, the better the cushion, Hill says.
Finally, make sure to work with experts when buying a business. That includes not only a buyer’s broker, but also an attorney and certified public accountant who are experienced at business acquisitions.
A challenge you will face is that owners often place unrealistic values on their own businesses. Experts familiar with buying and selling can help determine a realistic valuation.
Scott Hill’s firm has a buyers resources page filled with tools and information at this Web site: www.peerbusinessgroup.com/buyerresources.html.
(From my column this week in the Tennessean).
Good article, but I want to add a giant caveat about one piece of advice – using a buyer’s broker. I do a fair amount of small business acquisition/disposition and I have routinely dealt with business brokers . Sadly, the vast majority of small business brokers (as opposed to traditional investment bankers) are at best incompetent, and at worst actively harmful to the process. Similarly, they tend to work with solo attorneys who lack the requisite experience for those types of transactions. And the conflicts issues I have seen make me shudder.
Does that mean that all small business brokers are bad? No, but in my experience they are few and far between, and most buyers would be better served hiring a good attorney and keeping the broker out of the transaction as much as possible.
It is essential to check out all professionals carefully. When working with attorneys make sure that you pick one with M&A experience. If you use a broker and they have professionals they prefer using, check them out independently. If they pick a weak team, they are probably not worth working with. You can tell a lot about someone by the team they surround themselves by!
Point well taken, Chris!
As a solo lawyer, I have to chime in here. I am also a client of both solo and law firms and I have found either arrangement can work depending on the situation.
@Chris, is there anything particularly wrong with solo lawyers? Your point is solid–you need a lawyer with M&A experience, but are you implying that solo lawyers can’t acquire that?
Whether it’s an accountant, lawyer or any other professional, brokers can and probably should suggest all they want, but it’s your team you are assembling and the ultimate responsibility for doing so falls to you, the buyer/client.
I’ts a good article, but instead ob buying business, you should start your own. It’s just like adoption, isn’t it ?
Small business
Small Business owners are largely forgotten. Thats why I only focus on them. I have experience several members of my family file bankruptcy due to small business failures. I also I suffered through 2 destroyed businesses due to failure however, in my failings I have learned some of the secrets to success. (Who can say they know it all?)
What I like about small business owners is that they are not afraid to take huge risks and lay it all on the line. But, I agree they do need a lot of help with their marketing. I think having them go the social media and email route is not only the least expensive but its also the most effective. Thanks for the stats!