Buying a Business Requires Time, Money, and Patience

If you ever start going down the road to business acquisition or buying a business, where third party debt or equity is required, then there are some things you should likely be aware of.

First, outside of a start up, the financing of a business purchase is arguably the most difficult type of business related financing there is.  Why?  Because there can be lots of moving parts to try to understand each of which can have either a positive or negative impact on the business.  The goal of the buyer and third party financier is to accurately assess the current health of the business to make sure it has the ability to grow and prosper in the years ahead, versus being on a steep decline with little hope for the future.

Second, because each situation is somewhat unique, any financing secured will be customized in some manner to fit the situation.  Customization always takes longer than something you just pull off the shelf which means you’re going to have to allow for probably more time than you anticipated to get business financing in place.

Third, while its possible to secure debt or equity financing with little or no money down, its not highly probable in most situations.  Statistics will show that unless the buyer has a significant financial risk, there is a greater likelihood of business failure due to the fact that when the going gets tough someone with less to lose personally is also less likely to fight through the adversity to achieve a better result.  With little to no down payment in the deal, the walk away costs are not very high, creating the opportunity for the buyer and now new business owner to fold the tent quickly if things are not going well with the business.

Fourth, when goodwill is involved, there is an expectation by lenders and investors that the vendor will cover all or part of the sale price pertaining to goodwill.  Without this involvement by the vendor it will be much harder and perhaps impossible to secure third party financing of any sort.

Fifth, because capital may be required from a third party source, the vendor, and the buyer, it can be quite difficult to come up with a comprehensive financing plan that works for all parties.  Lots of patience is typically required to work through everyone’s requirements and manage through the trade offs and compromises that will inevitably be required to complete the deal.

Also, many times things just won’t be a good match among parties, so you also need to access the goodness of fit quickly and if its not likely going to be present, then cut off negotiations and move on to the next potential deal.  This is another form of patience whereby the buyer needs to never get hung up on any one deal, but focus on their buying criteria and the deal quality for all parties.

This may require looking at several deals over a period of time, working through them one at a time in order to get a good result.

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The Key To Successfully Buy or Sell A Business

How To Increase The Chances Of A Business Sale Being Completed

I’ve been on a roll lately talking about business acquisition financing and many of the things that need to be considered to secure this hard to pin down form of financing.

Even if business financing is not required and the buyer can pay in cash, there is still no guarantee the deal will be finalized, although its going to be significantly easier to close without having to worry about securing capital.

So putting sources of funds aside, what is the key to closing the purchase and sale of the shares or assets of an existing business?

In all the deals I have been involved in or observed, I can easily come up with what I believe is the #1 key to success, and that is for the buyer and seller to jointly project manage the deal to its successful completion.

While that may seem a tad obvious to some, here is a better way to describe what I’m trying to say.

The Buyer And Seller Have To Become Blood Brothers.

There I said it.  As corny as that may sound, its the best way I can describe not only how important their interaction is with each other, but also the degree of comfort and trust that needs to develop between them during the buy/sell process.

Once the Letter of Intent is signed, they need to get out the hunting knives, draw out a little blood on their palms, and bond the deal.

What this ritual symbolizes is the understanding that has now been forged between the two parties which can be summarized as follows:

• Unless there are unforeseen issues or disclosures that materially impact the deal, both sides are committed to do what it takes to complete the process.
• Both the buyer and seller will retain the decision making power throughout the deal.
• Both buyer and seller agree to discuss the outstanding issues on a regular basis and get involved where necessary to assure progress is being made.

Putting aside issues related to financing or unforeseen events and disclosures, deals fall apart because there are too many cooks brewing the stew.

Both sides will have advisers such as accountants, lawyers, financial advisers, business consultants, insurance agents, etc.  The larger the team, the less likely the deal will close without the buyer and seller staying engaged in the process.

Both sides will likely have to deal with a certain number of outside parties dictated by the composition of the deal.  This can include licensing agencies, bonding companies, appraisers, environmental consultants, suppliers, customers, employees, unions, and so on and so on.  As the number goes up, probability of success goes down.

In essence, the buyer and seller need to project manage their deal to completion.  Too often one or both sides do not appreciate what this can entail and the result is the deal can get away from them.

By definition, a project manager understands all the tasks required, how they inter relate, any interdependency among tasks or events, time lines, and so on.  Unfortunately for many deals, buyer, seller or both do not get very involved after the initial negotiations have been completed and if anything tend to step back and let the advisers take over.

Aside from project management, both sides also need to remain the decision makers.  Deals tend to have a certain amount of twists and turns as the details get pounded out.  With every curve in the road, there may require an adjustment or compromise on one side or the other.  Advisers can be very good at providing their opinions for issue resolution, but their advise may also end up killing the deal.

As decision makers, the buyer and seller need to receive all valid input regarding various issues and decide if any particular issue is something that can be worked through or an outright deal breaker.

A good example of this is during the drafting of purchase and sale agreements.  Each side’s lawyer’s job is to protect their client and get them the best deal possible.  When the lawyers from both sides are taking a win/lose approach, trying to out due the other side with clever clauses and demands, the deal tends to go back and forth until the eventual impasse is created.

Its at this point where the buyer and seller have to look at the areas of disagreement, consider all advise, and make their own decision as to how an issue or issues will be resolved.

I’ve seen sellers overly disconnected with the process through up their hands and say, “I’m not a lawyer, so if my lawyer says it has to be this way or that, I have to go along with what he says”, basically making the lawyer the decision maker.

A blood brother to the deal would seriously consider what their lawyer has to say, talk to the other side if appropriate as well as other advisers that could add value to the situation, and then make their own decision whether to proceed or not.

If buyer or seller agrees to proceed against an adviser’s advise, the adviser involved must then find a way to make the deal work (be a deal maker) in keeping with the wishes of the person paying their bill.

This is one of the more common points where deals blow up, but there can be many others.  As the number of people involved goes up, so do the levels of inaccuracies and misunderstandings that occur not to mention the lengthening of time lines.

And remember, most if not all the advisers are getting paid whether the deal gets done or not, so it truly is in both the buyer’s and seller’s interests to stay on top of what’s going on.

Obviously no amount of involvement can guarantee success, but the odds are greatly increased when the coordination of the overall project details are being well managed, the misunderstandings are kept to a minimum, and the advisers are directed to find ways to make the deal work versus blowing it up.

First 5 Things To Consider Before Buying A Business

If You’re Thinking Of Acquiring A Business, Start By Going Through These 5 Questions

The process of buying or acquiring a business can be a grueling and dragged out process with many false starts occurring before a deal is actually consummated.  So before you even get to an offer to purchase, or even a letter of intent, go through these five questions to determine quickly if any prospect should be ruled out before too much time and money is spent.

1.  Who’s in control of the deal on the vendor’s side?  Many times its hard to tell who’s really in charge on the vendor side of the deal.  Between brokers, and lawyers,  and accountants, and business managers, the process can get very convoluted.

While you would think that the atual owner of the business would control the deal, in many cases this is not the case due to their inexperience in the sales process.  If you can’t quickly identify and get comfortable with the decision maker, stop the process and move on.  Too many cooks will likely spoil the soup and just have you running in circles.

2. Is the Vendor Willing To Partially Finance The Deal?   Especially in business sales were there is goodwill factored into the purchase price, most third party financing will not consider the goodwill portion.  Also, vendor financing provides a quazi buyer indemnification fund, helping to assure that the vendor is completely transparent during due diligence and ownership transition.  Having a vendor loan in place is going to further motivate the seller to make sure the buyer  is going to be successful long after the transaction is completed.

3.  Is the historical financial performance of the business supported by 5 years of  at least review engagement financial statements?  Without review engagement or audited statements, you have very little if any verified financial data to go by.  There are ways around this, but its going to take more time and money to verify the accuracy of results.

4. Do your source(s) of capital support the deal being proposed?  If you are using your own cash, then you can obviously do what ever you like with it.  However, most business acquisition transactions involve third party financing, which can have restrictions on the type and structure of a deal.  Too often, purchasers think that if they can get a deal worked out that the financing will be the easy part and too often a good deal falls apart at the very end because the financing process started too late in the game.

5. Are you buying a standalone going concern business, or someone’s self employed status?  A business can be very successful, but also near 100% dependent on the owner.  If the owner has not developed systems and management and structure that can live without him, then it may be time to find another opportunity.