How to buy the right business

By Dave Driscoll

Finding the right business to buy is a full-time job

Locating the “right business for you” to buy takes time…many, many hours of research, and discussion with a minimum investment of 12 to 24 months to complete the purchase. Data shows that before signing an asset purchase agreement, an average buyer will have reviewed more than 100 sterile (public) listings, selected 15-20 for preliminary investigation, and signed two to four letters of intent.

The search is full of emotion and many buyers give up because:

They did not ask themselves these fundamental questions: Do I really want to do this? Can I tolerate taking the financial risk? Do I have the full support of my significant other?
They have not devoted the necessary time to the search due to their current job.
They never clearly identified the type of business that matches their individual profile of skills, interests, and risk tolerance.

Additionally, many prospective buyers fail to reach out to multiple business brokers to gain the market coverage necessary to find the right business. Buyers must get on the radar of the business broker community. Best practices include:

signing up for email distribution of listings,
visiting in person with brokers to discuss your interests, abilities, and financing,
staying in touch as your situation evolves.

The key is to be remembered by the broker when the right opportunity comes along.

Entrepreneurs who want to buy a company become impatient. After months or years of the search process, prospective buyers become frustrated, biased, and neglect to heed some warning signs when evaluating a business for sale.

Buying a business just to end the search is bad business!

Understand the motivation and emotions of the seller

Owners have strong emotional attachments to their companies and will be concerned about the business’ future under new ownership. When first meeting the owner, buyers should be respectful. When a successful owner has reached the point of selling, they are not impressed by a prospective buyer telling them what they would do differently. Be humble, sincere, listen more, and talk less. The goal is for the owner to feel comfortable with you and envision you owning the business.

Work to understand the owner’s motivation to sell. Learn about the fundamentals of the business to better relate to the seller’s concerns. If you really listen, you may be surprised at what you find; money may not be the trigger to getting a deal done.

Connect with the seller in terms of your business values. Many businesses do not require a Harvard MBA to operate successfully. Demonstrate you can relate to many walks of life and be authentic rather than arrogant.

Understand the essential business drivers. How does the business make a profit?

Understanding why a business generates a (hopefully) healthy profit margin is not always obvious. Gaining the seller’s trust will reveal the secret sauce necessary to turn continuous profits. The formula for success is not always visible through the numbers on a profit and loss statement. If possible, visit the business when in operation to see the processes, including the movements of people and materials, and watch the customers. Before visiting, create a believable alternate identity (such as an insurance or banking representative) that will not jeopardize confidentiality – remember, employees and customers will not know that the business is for sale.

The seller’s job is to make the business look attractive, including managing earnings to present the best scenario. Short-term performance gains may be impressive but historical business performance is what really tells the story.

As a prospective buyer, be sure you are realistically evaluating the whole picture in terms of your own objectives and abilities, as well as the business’ performance and potential.

Dave Driscoll is president of Metro Business Advisors, a mergers & acquisitions, valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at [email protected] or
(314) 926-1091. www.MetroBusinessAdvisors.com