- If I sell my business, what will I do (will I have to be with my spouse 24/7)?
- Will I have enough money for my next great adventure in life (retirement, another business, etc.)?
- How much work will it take to get my business to be worth what I want it to be worth?
- What if the seller isn’t telling me everything about the business (and they wouldn’t withhold something good now, would they?)?
- “A raise? They should feel fortunate to have a job.” That statement, or anything similar, tells you a lot about the company’s culture, i.e. its culture sucks. You’ll find a place filled with people going through the motions because the pain of going out and finding a new job (or not finding one) is greater than the pain of the current situation. One can just imagine the talk over Friday post-work beers.
- One of the things I’ve learned to look at when analyzing a small business is the pension contribution. If the pension contribution is 90% to the owner and 10% to the employees I know the seller’s emphasis will be on how high the price will be, not on the future success of the company, or the buyer. It’s called greed.
- Another item I’ve learned to look at is asset replacement or should I say the lack of asset replacement. Sure profits were high the last few years. But everything is wearing out. My favorite example is the owner who was too cheap to buy a new printer. His accounting staff waited and waited for reports to print. The buyer got a new printer, wasted time was reduced, and I’m guessing based on the pay rate for accounting people it paid for itself in a week or so.
- An essay like this one wouldn’t be complete without mentioning one of my favorites, “Sure I lie to the IRS but I’d never lie to you.” Recently I was referred to a small contractor, too small for me to work with. When I asked about his sales and income he shared whenever people pay in cash they get an unnumbered invoice, hmmm. As regular readers of this newsletter know, I believe it’s just as dishonest when owners blend their personal and business checkbooks. It tends to also tie into some of the above topics because they don’t give raises or replace equipment because they’re so busy taking out every last penny personally.
- Tied to the last point is the topic of benefits. I will state I am not a fan of the current system but it is what it is. I believe there’s a moral obligation, with today’s system, to provide medical insurance when a company gets beyond startup phase and is profitable. I’m reviewing information on a 60-employee plus company with no benefits and asking myself if we should adjust profits for the cost of benefits or the cost of the federal penalty. It’s even funnier when the cost of benefits is “added back” to profits because the benefits are discretionary (the same logic often applies to annual bonuses that haven’t been missed in a decade). Every business buyer lives for the day they can take over a company and tell the company’s most important asset (the people) they are taking something away* -:)
- Another big one, which tied directly to the value of the company, is when the owner makes him or herself the most important cog in the operations. It’s called a dependency and buyers, bankers, and appraisers watch out for this. The lack of delegating takes it toll on the culture, “nobody can do it as well as me and I let them know it,” and is a huge red flag to buyers, especially if they don’t have the same skills. It also leads one to think the staff isn’t all that qualified (to help grow the business).
- Finally, when it comes to buy-sell deals the secretive owner is to be feared. If everything is so good why not have an “open kimono” policy? After all, full disclosure will raise the price of the business. Similar to this, and I seem to see or hear about one of these every year, is the owner who won’t sign the purchase and sale agreement with a representations and warranties clause (the buyer and especially the seller guarantee everything they have told each other is true and correct with most of this information attached to the contract). I always wonder what they’re afraid of? It can’t be good.
- Business sellers (and advisors) who want an extremely high price based on one good year, unsustainable growth, a market peak (think construction), or similar.
- Business buyers who want to discount everything the business has done, assuming nothing is sustainable so why pay for it based on historical results.
- Owners who believe they don’t need to have their company prepared to sell because it’s their baby and therefore such a special business buyers will want to (over)pay them for it.
I have been involved in buying and selling business for more than twenty years as an owner-operator, advisor and investor. Over the past ten years, I have worked with thousands of prospective business buyers through the various guides my company publishes. From these experiences, I have seen a number of common mistakes many people make over and over again; all of which are easy to avoid, if you are properly prepared.
Choosing the Wrong Business
This is undoubtedly the biggest challenge prospective business buyers face and it is remarkable how many end up buying the wrong one. First and foremost, buyers have to take a brutally honest look at their individual skills and weaknesses. When choosing a business, this is not the time to fool yourself. In order to be successful, your strongest skills must match the precise needs of a specific business. in other words, whatever you do best must be the single most important driving factor of the revenues and profits of any business you consider purchasing.
Conversely, a business cannot suffer from your weaknesses, nor should you attempt to learn a critical skill the business needs on the job. Certainly you will have to learn the workings of a business, but talent-wise, you have to be able to step in and operate it. For example, if your skills lie in marketing, or sales, or operations or production, you need to acquire a business where that specific skill is the driver of the business.
Overpaying For A Business
I can write an entire book on valuations (actually I have) since it is such a comprehensive component of the business buying process however, I shall endeavor to highlight the most important considerations.
Most prospective business buyers have never conducted a detailed valuation and so they rely upon the seller’s asking price, or a broker’s input, or an accountant’s perspective and all of these often leads them down the wrong road.
Buyers must keep in mind that valuations are an art; not a science. Next, the seller’s asking price of a business has no bearing on the final purchase price and terms and therefore one must consider the deal structure as well. Valuations must be based upon provable financial data while factoring in the potential return on investment. A very important point is regarding assets since many inexperienced buyers place far too much emphasis on the hard assets they will be acquiring. While important, assets serve two main purposes: first, they are solely a means to generate revenue and second, they can be leveraged to finance the deal.
Although it is always recommended to use a number of methods to get some general valuation parameters, the income multiplier formula is the most effective methodology to establish a valuation of a small business.
Spending Endless Hours Searching Listings and Never Finding A Good One To Buy
The Internet is the greatest blessing and curse for anyone who wants to buy a business. There are hundreds of thousands of businesses listed for sale and it does not cost anything to look (and look and look and look). That is precisely what most people do and ultimately, they do not achieve any results.
Yes, online listings of businesses for sale can be a very helpful tool. However, ones search must be streamlined. Targeting specific sectors and narrowing the scope of the type of business you want to buy is critical. Sure it is good to be open-minded, but to a point. The quicker you can focus into a particular industry – the better.
Also, do not limit the search to online business for sale listings. Most businesses that are sold never get listed for sale. There is a wealth of opportunity available by directly soliciting potential business to buy so again, spread the search and cover all bases.
Hiring The Wrong Advisors – If You Have a Toothache Don’t Call A Plummer
It amazes me how petty and foolish many buyers become when they need to outside assistance whether legal, professional or advisory. Regardless of the size business being acquired, surround yourself with the best possible team of advisors you can afford.
The good news is that an attorneys role can and should be limited within the process (the lesson here: lawyers do not make deals; they break them, so use them only for what they are skilled in doing). The same holds true with accountants – they have their role for the financial review period and for tax matters, but they are not, in most cases, valuation experts.
If you do not have a wealth of experience in this process, your first step is to invest a bit of time to prepare and educate yourself about each step. Next, align yourself with an advisor who will solely represent your best interests and can assist and guide you through the various stages. This is not a business broker who is being paid a commission by the seller; you need someone on your team who is experienced at buying business and can dispense unbiased advice to you. Their sole agenda is to make sure you buy the right business at the right price and terms.
Richard Parker is the author and publisher of, “How to Buy a Good Business at a Great Price,” the best “how to” publication available on business buying. He can be reached at www.diomo.com or email@example.com.
A year or two after we started “Partner” On-Call Network someone got the URL for Partners On Call (plural) and held us up for (what turned out to be) a small payment (plus legal fees). I was reminded of this when I read a recent article about a company called The Kitchen, which is in a trademark battle in the farm-to-table restaurant category with Wolfgang Puck after Mr. Puck’s company supposedly stole the name and is using it as The Kitchen By Wolfgang Puck.
What makes it more interesting is this happened after the two owners met and Mr. Puck provided some “practical advice” on growth.
More than ever you have to be careful of what you do or say. I’m not judging on the above story but if it’s as the article states it seems like a case of “that’s a great name so let’s use it.” (The article didn’t mention the details of the trademark or its registration.)
The Internet brought on our “Partner” On-Call incident; I doubt it happens 20+ years ago. More and more we all have to be careful with ideas.
Heck, just a few months ago we found a website for someone claiming to represent business buyers with copyrighted and trademarked language lifted verbatim from the “Partner” On-Call website and my website.
In any kind of business where advice is given you have to be careful about giving the “What” but not the “How.” In some cases you have to be just as careful with the “What” given the lack of respect for copyrights, trademarks, and intellectual property.
“There just isn’t any pleasing some people. The trick is to stop trying.” Robert Mitchum
I was working with a client on the acquisition of one of his vendors, a very small company. He’s worried about losing the product as the owners are in their mid-70’s, their company is not growing, and haven’t had any product improvements in years.
Then we hit a roadblock. The owners can’t see themselves leaving. Buy the company and we’re done in a few months? No way! We want to be around helping run the business for a few years. Well, that won’t work because a couple 75 year olds with a business in slow-motion won’t fit in a growth culture.
Oh the precious baby syndrome struck, and struck hard. Here’s how to avoid this:
- Figure out what you’ll do if you sell your business. It doesn’t matter if it’s travel, golf, grandkids, a new and different startup, or volunteer work. Know what you’ll do.
- Consult with your financial planner and figure out what kind of lifestyle or investment capital you’ll have post-sale (your next great adventure in life).
- Maximize your company’s value. This means show multi-year growth, have solid and growing profits, and eliminate any dependency on you, the owner.
And expect buyers to be skeptical if you’ve had one good year out of three to five years, as they’ll think it’s a spike not a trend.
“The purpose of a business is to create a customer.” Peter Drucker
Earlier this year I received an economic update email from a major bank. The gist of the article was:
The majority of business owners feel their local economies have worsened and the national economy is heading the wrong direction. But, an overwhelming majority feel their business is strong and they are confident about its future.
This is similar to:
- Politicians are lousy sleaze balls but my congressperson or senator is pretty good.
- I don’t think much of insurance agents but I have a great agent.
- Lawyers aren’t generally ethical so I’m glad I have a super attorney.
We like what we have and don’t think much of what many others have. Where do I see the most optimism? It’s with business owners who want to sell their company. Had one good year out of the last three or four? Well, pay me based on the one good year.
Timing is everything. In my 20 years in the buy-sell world I’ve never seen so many construction related businesses for sale as I’m seeing now. In 2006 all the predictions in the Seattle area were for at least five very solid years for commercial construction. Oops, that lasted about two years and the cranes started disappearing like old trees in a windstorm.
I sense a lot of owners are, remembering 2006-2008 and also looking at industry stats showing a strong couple years and then a big drop-off. So they want to sell now at either a high price or wanting a share of the next couple strong years. Timing is everything.
Buyer beware, especially if you don’t know if it’s a spike or a trend.
It’s good to have optimism. It’s better to have knowledge and common sense. Others don’t always see what we have as being as good as how we think it is.
“We have to change truth a little in order to remember it.” George Santayana
- Get in trouble with your client.
- Build a bad reputation.
- Risk a lawsuit.