The Four Biggest Mistakes Business Buyers Make by Richard Parker

Guest Column:

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 rparker@diomo.com.

The Internet and IP Scams

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

My Baby, Oh My Precious Baby

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

My Company is Better than Your Company

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

Not Your Expertise? – Jump on it or Run Away?

Recently a professional association newsletter covered the subject of stepping outside your area of expertise (the advice was, “don’t do it, no matter what the fee”). There are very few people who haven’t learned this lesson the hard way. Smart people only need to learn it once.
I realized early in my consulting career I’m not good with startups, business plans, or raising money. So, I don’t do it. In my buy-sell world I don’t work with clients looking for deals on micro-businesses, such as dry cleaners, delis, C-stores, etc. I also don’t work on middle-market deals as the investment bankers have much better resources than I do for them (and they are great referral sources for deals too small for them).
I wish someone had told this to a Bellevue law firm where it appears they have absolutely no experience with buy-sell deals but yet are advising clients on a deal (I use the words “it appears” to be nice, this firm is incompetent when it comes to buy-sell, I think most of their contract language was copied from a text book).
At the same time I’m doing some pro bono work, helping a friend who wants to buy a sports pub. While it doesn’t appear the business is “on the market,” there is a commercial real estate agent (supposedly) helping the owners with the sale. It’s obvious this is not his field, as he has NO idea what the heck he’s doing.
The only thing he’s done so far is send over a handwritten note stating what the sellers “best and final offer” is. Oh, he also forwarded one year’s financial information, when asked for it, after stating the price. When asked about the financials he told me, “I didn’t look at them, I just put them in an envelope and gave them to you.”
Did he think all he had to do was send over the price and some financials and get a deal, i.e. just walk us through “the property”? BTW, I don’t mean to insult competent commercial real estate agents by implying all they do is show a property and get a deal. They do a lot more.
There’s a lesson here, isn’t there? Do what you’re not qualified for and you will:
  • Get in trouble with your client.
  • Build a bad reputation.
  • Risk a lawsuit.
So why do we all keep running into people who take on things they shouldn’t touch with the proverbial 10-foot pole?
The answer is simple; it’s the lure of the lira, the glitter and the glory of the guinea, the romance of the ruble, the feel of the franc… (credit to Monty Python and their Money Programme skit).
Translation, to some people any client/customer is a good client/customer. Well, no, absolutely not. The only thing worse than no customer is a bad customer (a paraphrase of my buy-sell line, the only thing worse than no deal is a bad deal).
No matter what your business, keep this in mind. Realize you have to screen customers as much or more as they screen you. In the long run it’s worth it.

The 1099 Bind

A few months ago Inc. Magazine had an article titled, “The 1099 Bind.” The lead example was about a (now closed) on-demand housekeeping business in the Bay Area that ran into trouble, i.e. lawsuits, over “are we employees or are we contractors?”
You’d think a firm with $40 million of VC money would have a legal opinion on this (it’s a popular issue with headlines in local and national publications over the last five years). The IRS and the States are vicious when it comes to the contractor classification.
Yes, I understand management didn’t think they could be competitive if their labor costs were 20 to 30 percent higher. So maybe it wasn’t as good a business model as they thought.
On our “Partner” On-Call Network “Initial Disclosure Form,” which I ask business owners to complete as one of the first steps when I meet them and want to know more about the business, there are the following two questions (along with over 20 more):
  1. Are there any federal or state licenses, training, education requirements, etc. to operate this business (other than normal business licenses)?
  2. Do you have any people working as independent contractors who could possibly be considered employees? If yes, please explain if you have an opinion from your CPA or attorney stating if your independent contractor status complies with Federal and State law.
Venture Capital firm people tend to be smart and know what they’re doing. So I’m guessing the ROI looked pretty good and maybe they felt it worth the risk. Perhaps they should have asked some common sense questions, like the two above.
A lesson for all of us the old adage, “If it sounds too good to be true it probably is.”
“If we knew what it was we were doing, it would not be called research, would it?” Albert Einstein 

To Sell or Not to Sell

In a recent Inc. Magazine column Norm Brodsky wrote the following about what he tells entrepreneurs who come to him for advice:
“One, always build a business to last forever. Do what’s best for the business long term. And two, build the business so that it can be sold for as much money as possible – even if selling is not part of the plan.”
He also writes most business owners don’t follow this advice. No fooling! Eight years ago the Wall Street Journal had an article with the statistic, “10% of businesses are ready to sell (for maximum value).” True then and today.
The problem is time flies. Think about what you were doing 10 years ago. Doesn’t seem that long ago, does it? Now fast-forward 10 years, what will your business (or your clients’ businesses) look like? The right answer is, pretty much what they look like today. Sure, sales will be higher, but so will costs.
There are reasons why I did the video, “Everybody’s an Exit Planner.” Because from CFO groups to pay-for-a-designation operations to consultants desperate for work there are a lot of (supposed) experts on exit planning. And guess what, there’s a need for it. Not that most owners pay attention. Once something hits them or their business they get interested in selling and often it’s too late to do anything (other than hope someone will pay what it could be worth).
The more catastrophic the event the more urgency there is to sell and the more (good) planning the higher the price.
Someone recently asked me if, given the projected high number of baby-boomer owners selling there would be more sellers than buyers. I replied there will always be more buyers than sellers for good businesses. The question is, where will the line be drawn between good and lousy businesses? Owners, make sure you’re above the line.
“Maybe stories are just data with a soul.” Brene Brown

Unappreciated? Time for a Change

One of my best friends is a great salesperson and business developer, in the event and media industry. He’s unhappy with his job, even though he’s doing very well at it.
Why? Because he’s not appreciated by his (small company) CEO and COO. For example:
  1. He set up a major promotion, had the prime contact, got the deal and then was told he’s not needed (even with meetings with his contact) as the CEO and COO would handle it.
  2.  For an even larger event he secured the appearance of a major political figure, a personal friend of his, and the same thing happened. “Thanks, we’ll handle if from here” and then, as I understand it, they changed the agenda regarding what the politician agreed to do.
So now my friend is going to get through the summer and reassess if he wants to stay or find a new job. He’s not a needy, pay-attention-to-me type of person. He wants to contribute and then make sure it’s handled correctly, as his name is on the line.
Employees want to be recognized for their good work. They want to feel part of the team. Customers want to feel important. They want to believe you care about their success not just “make a sale.”
It’s funny how easy it is to forget this. The good news is it’s easy to recapture. It’s not hard to go out of your way to make someone feel appreciated. If you don’t they just may end up buying a business!
“Who discovered we could get milk from cows, and what did he think he was going at the time?” (Comedian) Billy Connolly

Your Employees are Like the Presidential Candidates

Seattle Times headline – “Sanders urges crowd to defeat rigged system.”
Magazine headlines – “Stopping Trump,” “Unstoppable Force,” and more
Sanders and Trump supporters have a lot of commonality. According to reports both groups are:
  • Disgruntled
  • Disenfranchised
  • Feel left behind
  • Wanting things
  • Wanting to get rid of other things
Sanders is playing on the “I’ll give you” theme including free health care, free tuition, and more. Trump is sowing seeds of dissatisfaction to people who want things the way they were.
Trump’s supporters want to believe he will rid them of immigrants, foreign business threats, and other obstacles to old-fashioned jobs. Sanders’ supporters want to him to get rid of the big banks (and I’m sure other big companies, except where they work).
Both groups seem to show a disdain for “the rich,” other than their candidate.
So what does this have to do with your business, buy-sell deals, and business in general? These are the people who work for us, buy from us, and supply us. If they’re not happy in general how happy can they be on the job?
  • General example – Gallup studies show up to “70% of US workers not engaged at work.”
  • Specific example – The Chicago Bears recently signed free agent linebacker Danny Trevathan who, within about a week of signing his contract, said he wished the (Bears top rival) Green Bay Packers had called him because he’d love to play for them.
Where are your customers and employees in relation to the above?
With a group of clients recently we talked about some of the little things business owners do to create and maintain their culture. This included the intangibles like smiling, paying attention to the employees, having fun events (beer Fridays, games, happy hours, etc.), and being part of the team (versus being locked in the office). The tangible items included free soda pop, fancy coffee machines, donuts, lunches, and more. Because once you have good people you want to keep them.
It’s why so much time, money, and effort is spent on culture, team building, communication, and similar. So what if your customers aren’t doing this? Will it affect your business? It could have a huge impact on your business and at some point your company’s value.
  • A client is looking at a company that’s experienced a lot of employee turnover. He’ll need to know what it means going forward, is this cultural problem so deep it can’t be fixed, or can he change it and improve the business?
  • Another client had the buyer leave her company, the relationship had to be reestablished, and my client was pretty nervous about the possibility of losing the business. And he had every right to be nervous, as the following story illustrates (and it’s one of my favorites).
  • A panicked owner called me because his top customer, over 80% of his business, disappeared. Not as in a magic trick, as in the business suddenly went elsewhere. A new person took over as the buyer and brought in a supplier they knew. The owner figured since his company started with and helped the customer when they were a startup he was owed something. It turned out to be a quick path to the door.
The owner in the last example called me because he was hoping someone would buy his business, or at least the shell of his business. I’m guessing his personal net worth took an immediate tumble.

Business Buyers Have Multiple Mindsets

My eight-year-old granddaughter brought something home from school about “growth mindset versus fixed mindset.” It’s an interesting concept and I find it enlightening they are teaching this to kids.
In simple terms, someone with a fixed mindset believes they are what they are and that’s it. If you look at the old European class system this was prevalent. Born in a coal mining town to a coal mining family and if male you’ll be a coal miner and, if female, a mother/housewife.
A growth mindset has one believe they’re a work-in-progress, challenges are learning opportunities, and there’s always more improvement on the way. Growth mindset people are happier and achieve more.
Entrepreneurs are growth mindset people (company founders, operators, buyers, etc.). Owners see the upside, believe more potential is right around the corner, and don’t doubt the value they provide their customers.
Business buyers are both, and sometimes if tough for business sellers to understand this. Buyers get interested in a company when they believe:
  • What the company does can hold their interest (they’ll want to go into work every day).
  • Their skills match what the company needs (to grow more).
  • They see the overall upside.
However, buyers have a fixed mindset because they (and their bank) want to pay based on historical performance. Part of this is skepticism (and if a buyer has no skepticism they aren’t a serious buyer). Part of it is reality; historical profits have to pay for the business because if it doesn’t grow like the growth mindset part of the brain wants it to there will be serious problems.
Interesting concept, glad their teaching it to kids, and I’m glad I don’t have a fixed mindset.
“The key is not to prioritize what’s on your schedule, but to schedule your priorities.” Erica Jong