Considering Buying a Business?
Looking For New Business Opportunities, Southeast Michigan?
Buying a business is not a simple task. While you can go on and on and on about the effort that is necessary to get a business ready so it can be listed for sale, as a buyer, you have to be prepared and do your homework too. The buyer in business transactions is often the side that takes on most of the risk.
As the buyer, you are investing. You are paying a large sum of money with the expectation to grow and provide returns to you or your existing business. If you choose the wrong business opportunity, it can set you back financially and in other assets such as your time. It becomes critical that you give yourself the best chance to succeed after your close.
Unlike investing in the stock market or investing in assets such as real estate, when you purchase a business, you not only have control of the process of selecting where you invest your time and money, but you also have control over the outcome. As the owner of the business, you have the ability to control the future of that business and make a true impact on the appreciation of your investment. This is why it is critical during due diligence to vet the business opportunity fully. Once all the information is gathered about the business, you can weigh the risks you will be taking on, what you believe the business’s future is, and whether you can see your skillset fitting with what the business needs. That is where the true decision to purchase should come from.
Questions You Should Be Asking When Buying A Business
- Is the current owner working more as an owner or an employee? You want to buy a business and not a job.
- How dependant is the business on its top customers? There can be a great risk if the top-2 or 3 customers leave, and a significant amount of the revenue leaves as well.
- Are key employees encouraged to remain after the closing? Employees can get nervous about a change in ownership, and if key employees leave, it can greatly hurt the business.
- What type of potential claims could be brought against the business? Even with great indemnification provisions in the purchase agreement, ongoing Public Relations problems can hurt the business.
- What type of growth potential does the business have? If a business is in a limited market, you might not grow the business much beyond its current abilities.
- What type of contractual relationships does the business have? This can be positive or negative because you can renegotiate bad contracts to help the business out, but you might be stuck with them.
- Does the companies structure need to be overhauled? It’s not uncommon for businesses to add employees and new departments without thought. If a change needs to happen, it might be a risk to production and employee turnover.
Acquisition Due Diligence
Due diligence is different for a buyer than it is for a seller. A seller can be overwhelmed by all the business details being investigated. The buyer has to take the approach that they need a detailed look to find what the seller may be hiding. As a buyer, you want to feel confident in what you are buying, and sometimes the seller is too close to the business to realize what needs to be disclosed.
Get More Information
Confidence in your purchase comes from finding out all you can about the business you are trying to buy. This ranges from the obvious things like financials, projections, marketing, and operations to other not so obvious aspects like contractual terms, potential claims, and compliance issues. Having a good acquisition, due diligence checklist can ensure that you cover as much as is needed.
Sellers are generally entrenched in the daily operations of the business. They have done things their way in many cases for years. While this may not currently be problematic, these actions and behaviors can become huge issues for a buyer. Think about a seller that has used the same customer agreement for over 10 years. If there is a term in that agreement that leaves the seller potentially liable, even though the seller might have never had an issue, you will inherit that potential liability if you buy that business and assume those contracts. A solid acquisition due diligence checklist will ensure that you don’t overlook something vital down the road.
Negotiating The Deal
After the due diligence period, you may start to get nervous about certain aspects of the business. Maybe some uncomfortable business relationships are vital to the business. Maybe the owner is really a crucial employee, and it is unknown what the business will look like without the current owner there. Or maybe the business has just been mismanaged, and it’s going to take a lot of work and change to get it where it needs to be. Whatever the reason may be, you may want to negotiate or renegotiate the deal.
You may be a seasoned negotiator, or you may be a rookie that has never negotiated a thing. Whatever group you fall into or if you are somewhere in between, this is an area that you have to enter cautiously. While the deal might have some drawbacks, you are still interested in buying a business, and the seller is still interested in selling. You don’t want to kill the deal because of some issues that might end up being very small in the long run.
While you can come in with a hardline position that you want to lower the purchase price or come in with a softer method that you think something needs to give because there might be some issues, the important thing is not to kill the deal. Having someone with experience working on many business transactions can be really beneficial in these situations.
One of the keys to these types of negotiations is to be critical of the problem but not of the person. This means that you need to stay laser-focused on solving the issues. This might mean that you try and get the purchase price lowered but oftentimes, finding innovative finance options is all that is needed. Being creative and providing terms that tie the purchase price to the performance of the business after closing will reduce the purchase price if certain events occur after closing are often the easiest way to reduce the buyer’s risk. The most important thing is not to scare a qualified seller off.