BizQuest's Business for Sale Blog

Business Buyers Should Share Personal Information With Sellers

I am not certain why the subject of buyers not wanting to disclose personal information to sellers or brokers comes up so frequently. To me, it is one of those “no-brainer” issues. Often times, I see blogs and postings whereby a prospective buyer is questioning why a seller has asked for a buyer’s financials.

The buyer’s rationale is generally that if the seller knows his financials, their negotiating leverage will be diminished and the seller should not have any need to know the buyer’s financial situation at this early stage of discussions.

Although I respect the buyer’s position, their perception is completely skewed. A buyer who can demonstrate qualified financial resources actually bolsters their position with the seller on many fronts. Most importantly, it demonstrates that they can in fact execute the transaction. With the market being flooded with lookers versus buyers, financial strength is a massive asset for the buyer.

Leverage-wise, it makes no difference. Ultimately, a buyer will offer the price and terms they are willing to pay for the business; regardless of their net worth. Even if a seller knows the buyer has more capital to invest, it makes no difference nor should it influence an offer – end of story. If the seller believes that a buyer will pay more for a business simple because a buyer can, they are in for a huge surprise.

Additionally, sellers will gravitate towards buyers who they know have been successful in the past and have the financial statement to validate this experience. This is especially true if the seller is going to consider financing part of the transaction or in situations where a buyer may only be acquiring part of the business. It is also a major consideration in deals that include an earnout component. The seller has to be confident the buyer has the skills to operate the business and prior successes are often most clearly identified by the buyer’s net worth.

It is common for inexperienced prospective business buyers to want to disclose as little as possible to a seller. However, this philosophy simply does not make sense given all of the reasons stated above. Furthermore, if a buyer expects a seller to disclose confidential financial information and sensitive details about the business, shouldn’t they be willing to do the same thing? Of course they should!

Remember to visit our website for up-to-date helpful articles and valuable resources to help you buy a good business at a great price.

Have a great week.

Richard Parker
Diomo.com

Buying A Business With A Partner

As financial markets continue to remain tight, individuals who are considering buying a business may look to doing so in conjunction with a partner. In addition to the financial benefits of dividing the down payment requirements, partnerships can be excellent business structures when done right. By done right I do not mean the actual legal structure of a partnership but rather by having the right person as your partner.

Partnerships are very similar to marriages except that there is money involved at every stage and so business partnerships can in fact take even more than matrimony to be successful.

For the purpose of this blog, I will discuss partnerships where both individuals will be investing and each planning to be involved in the daily running of the business being purchased.

There are five major considerations to keep in mind if you are going to buy a business with a partner:

Shared Vision:

Before two individuals get into business, it is critically important that they each articulate their visions for the business and how they see themselves and the company over the next few years. Sharing their individual hopes and dreams with each other to be certain the parties are in concert is the only way to ensure their plans are aligned. It is natural for there to be small differences of opinion however; if, at the onset, the partners are not in perfect harmony about how they envision the future, it is likely that the two individuals will never be on the same page about how the business should operate. Before the reality of the business sets in, partners have to feel as though they can conquer the world together. Trust your gut: if the future relationship with the potential partner does not feel right in your gut, you probably should not walk down the aisle with them.

The Foxhole Syndrome:

Every business will go through various stages of growth, decline, good periods, legal issues, cash flow challenges and other difficult situations. It is generally easy for partners to get along when things are going well, but what about when the going gets tough? Is your potential partner someone that you would want in your foxhole? Will they be someone that will put the interests of the business before their own? Will they fight the enemy together with you? In other words, will they have your back?

Divide and Conquer:

A full assessment of the individual partner’s strengths and weaknesses must be undertaken. The ideal partnership is one where each party brings “need” to the deal. The goal is to have one plus one equal three. The skill set of the partners should compliment each other, not be duplications, so that each one can focus on separate disciplines within the business (i.e. one handles sales, the other operations) and therefore the business can thrive by having an owner in charge of various areas of the company.

It is so important for the two parties to be open and honest with each other so that realistic expectations are set between themselves to avoid any unnecessary friction in the future.

Future Capital Needs:

In the event that the business requires additional capital in the future, are both partners in a position (at least at this point) to contribute additional funds? If not, that will potentially impact the corporate structure. There is a standard mechanism to deal with this issue which we will discuss in a future blog, but for now, it is a point that the individuals must address before they jump into business together.

Understanding The Difference Between Employee and Shareholder:

Business partnerships have two specific components: 1. the individuals each own a certain percentage of the business and 2. the partners can be employees of the business responsible for performing certain job functions. The two categories are, and must remain, completely independent of one another. Situations happen where one of the parties is either unable or incapable of doing their job and may have to be dismissed as an employee. That does not mean they necessarily have to sell their equity in the company. As such, while both partners may share in the profit distributions commensurate with their holdings, only one of the partners may in fact remain operational in the business and therefore entitled to a salary for their work. Having an understanding of these two separate disciples is crucial for the partners and moreover, having a very concise mechanism to deal with this possibility is fundamental to any partnership agreement.

As mentioned above, in a future post I will discuss the legal components to partnerships and the most effective remedies to deal with some of these matters, but for now, focusing on the intangible aspects of getting into business together is undoubtedly the first step to be examined. Looking at the relationship from a perspective of “what will life look like” after the partnership begins is a wonderful and critical exercise for the parties to conduct. Partners have to be brutally honest with each other just as a future husband and wife should be BEFORE they say “I do” because just like a marriage that breaks up, a business partnership that fails can be very costly and painful.

Have a great week!

Richard Parker
Diomo.com

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The Transition To A New Owner Is Key When Buying A Business

Although many people have great hopes for growth when buying a business, more important is to be certain that the company can, at least in the near-term, remain stable. In keeping with this, a major concern for prospective business buyers, and rightfully so, is the question of whether or not the business can succeed under new ownership. Any buyer, who does not have this as their top priority when analyzing a business for sale, needs to adjust their thinking.

It is critically important that buyers match their best skill to a business that requires that specific expertise to not only transition to new ownership, but to thrive in the future. Since most small business sales involve a seller exiting and the buyer basically filling their role, the matching of skills to the business is obviously the most important criteria.

During the analysis stage of the business buying process, understanding why customers buy from the business is a crucial factor a new potential owner must analyze if they are to effectively determine whether or not the business will transition well to them after a sale. Certainly, there are many cases where the seller is “the business” but that does not necessarily mean they cannot be replaced and quite often, the owner’s impact is overestimated by potential buyers. Unless a seller has deep personal relationships with clients and or suppliers that cannot be transferred, the answer to why customers buy is almost always related to the company’s products, services or location. By simply continuing to provide the same products, services and support, most businesses will continue to enjoy the same results after a sale as they did immediately before (another reason why buyers must almost never make any drastic changes immediately after a sale but that is a subject for another article).

While I would never suggest discounting the seller’s impact on a business, a closer and more objective look at the real factors generally reveals that they can be replaced. As such, the question every buyer must address is whether or not they can sustain the business after the seller leaves. This is especially critical in the near-term. It is common for a business to go through a short-term decline after it changes hands and similarly, it would be easy for a new owner to panic and second-guess their decision. Usually, this dip is more a result of a new owner’s ramping up period than it is a measure of the business’ actual viability.

It is incumbent upon a buyer to visualize what life will look like after they complete the purchase and how they will operate without the seller. I have long believed that if a buyer feels the former owner has to remain on board for a lengthy period after a sale (i.e. more than a few months), it is likely that the buyer isn’t suited for the business. One exercise I suggest buyers conduct is to determine what would happen if the seller got hit by a Pepsi truck shortly after the sale. If the business would, in their mind, immediately deteriorate without the ability to resurrect it, then it’s not for them.

Interestingly enough, most new business owners will state that within a month or two or taking over, they are surprised how easily they have assumed the former owner’s role and how comfortable and confident they are operating the business. It is the old adage of fearing the unknown.

In summary, it is certainly understandable for a prospective buyer to be concerned about taking over a business, and they should be. That concern, if channeled in the right way, will force a buyer to conduct the most thorough pre sale review possible. Every buyer needs to understand that there is always going to be some level of uncertainty going into the deal. But, when you understand precisely what the seller does everyday, what truly drives the revenue and profits of the business, and whether or not your skills match what the business needs to transition well and ultimately grow, then most of the other worries are simply normal anxieties that you must learn how to set aside in order to pull the trigger and complete the purchase of any business.

I really enjoy getting feedback from readers so please feel free to comment on the regular blog posts. Your input helps everyone. Also, Connect with me on LinkedIn and make sure to Like Us on Facebook

Richard Parker
Diomo.com - The Business Buyer Resource Center™

Some People Are Simply Not Meant to Buy A Business

Every once in a while I get a call from someone looking to buy a business that just makes me shake my head in amazement. This week, someone contacted me off our website and three things became abundantly clear two minutes into the conversation: 1. He was looking for free advice and had no desire to invest any time to learn how to buy a business; 2. No matter what I suggested to him, he had a reason why it wouldn’t work (that persona drives me crazy); 3. I would bet my kids’ college money against him ever buying a business.

By way of a brief background, he told me he has been aggressively looking to buy a business for four years. He told me there aren’t any good businesses for sale. I immediately asked how many sellers he had met over the years. Surprise, surprise, he had never had a face-to-face meeting with any seller. Instead, he confidently stated that “none of the businesses listed for sale were worth going past the listing”. In fact, all he had done for four years is to peruse online business for sale listings and never contacted any sellers.

He also mentioned of course that “every broker is a liar”. I was initially inclined to just end the conversation, but I was so flabbergasted by his absurdity, I had to find out how he could be so delusional.

Now you know why I was willing to bet he will never complete a transaction.

Four Very Important Lessons:

First, you cannot buy a business based upon an advertisement. That is not the purpose of scouring listings. The objective is to focus in to a specific category of business type but a buyer absolutely must go beyond a listing and contact the broker/seller. No listing can justifiably explain the business. If there is anything, and I mean ANYTHING about the listed business that piques your interest, contact the seller.

Second, anyone who is truly serious about buying a business and goes about the process correctly can easily accomplish their goal within six months. In the seminars I used to do, I would tell the audience that I could be parachuted out of a plane anywhere in North America and within 90 days I could find a good business and buy it at very attractive terms. It all comes down to being prepared and knowing exactly how to proceed.

Third, this caller also mentioned that “every” business was entirely dependent upon the owner and a new owner was “guaranteed to fail”. That was another head-shaking moment. Yes, it is true, many small businesses are dependent upon the owner and in many cases the assets of the business leave at night when the seller closes shop.

However, as someone who has met with thousands of business owners over the past two decades, I can assure you that very few of them are geniuses. The successful ones have been able to build a business through hard work, good staff and sometimes a bit of luck. But very few of them started off with any significant business experiences. They either started or purchased a business that they were reasonably capable of operating and over time became more competent at running.

They brought certain initial skills and adapted them effectively to the business. They learned everyday and most importantly, they continued focused upon finding new opportunities to build their companies. Operating a successful business takes tenacity and commitment as much as it requires certain skills. There are tons of business types that can successfully transition to new ownership as long as the buyer understands their core strengths and makes certain that they match their skills to a business that needs those specific attributes to not only be sustainable, but to grow as well.

Fourth, business brokers want to sell businesses as badly as serious buyers want to purchase them. Their job is not to make decisions for the buyer – their role is to facilitate the transaction and they can be very helpful. Certainly, like all industries, there are good and bad ones, but again, any buyer who blames a broker for their failure is simply looking to shift the blame from their own inadequacies.

Every Prospective Business Buyer Has Two Choices:

They can search the Internet to perpetuity looking to find a once-in-a-lifetime opportunity or, they can roll up their sleeves, realize there is no such thing as a “perfect business, properly prepare themselves for the process by educating themselves, and meet with enough sellers so that they can identify the right business once it surfaces.

The business-buying process is simple. Purchasing a good business and negotiating great deal terms is easy to do once you know how. But, if you adopt the strategy of only looking for reasons not to buy one, I promise that is exactly the result you will achieve. If you truly want to control your own destiny by purchasing a business, then take control over the process and recognize the fact that it is you, the buyer, who must create your own success.

Have a great week.

Richard Parker
Diomo.com - The Business Buyer Resource Center™

The Importance of Confidence When Buying A Business

I had several interesting situations arise over the last few weeks with business buyers which emphasized the importance confidence building that both buyers and sellers must have regarding themselves, the business, the deal, and each other, in order to successfully complete a transaction.

The Confidence to Run A Business

It is easy for a most buyers to look at a business for sale and identify areas they believe can they can easily improve as the new owner. A buyer emailed me this week and provided a history of all the businesses they looked at over the last six months. Within the recap of each they stated: “I can easily run the business”. Yet here it is, six months later and countless businesses having been reviewed, and still, they haven’t bought any. Although they provided reasons for each, much had to do with their level of over confidence and questioning why the business had not grown exponentially when it was, in their mind, “so easy to run”. .

While having this level of confidence in one’s own ability is certainly a good thing, buyers have to be realistic about their skills and moreover, to recognize that you don’t just walk into a business and expect to make changes that will have immediate positive effects. In fact, the opposite usually holds true.

Before anything significant change is considered, a new owner needs to learn the inner workings of a business in order to make effective decisions. Often times, the current owner does not possess the acumen to make quantum leaps and so opportunities do exist however, buyers need to understand that few businesses are really easy to run. Some are more complex of course, but they all come with their own unique challenges (just ask any business owner whose business is not for sale). While it is important to develop potential improvements while analyzing a business for sale, buyers need to keep their confidence in check an not overestimate their own skills.

Conversely, many businesses will transition well and can succeed and grow under a new owner if that owner is the right person for the business. Therefore, it is paramount that one have an objective view of their own talents in order to gain ample confidence that they can in fact run a particular business.

Buyers Can Easily Lose Confidence In A Sellerther

Past blog posts have discussed the importance of buyers balancing emotion and logic throughout the business-buying process. The same holds true for sellers if they are going to finance the transaction; they need to have confidence in the buyer to operate the business in order to make good on the note, but back to buyers for a moment.

I have this buyer looking a particular business which she really likes and, in her mind, is highly qualified to operate. The deal terms were agreed to and the formalized due diligence phase had begun. Due to one area of the business which does require certain licensed skills, the seller has agreed to remain on board for a two year period to oversee the transition of these responsibilities to an understudy who is already on staff, but inexperienced. While this particular disciple is not paramount to the business’ success, it is, nonetheless, very important. The seller has also assured the buyer that they will be available for any post-sale consulting and assistance (they all do).

During the negotiations and subsequent due diligence, the parties met countless times. The seller was habitually late for meetings and even missed two of them altogether. These incidents continued to build up and chip away at the buyer’s confidence in the seller. She began to think that if the seller isn’t reliable enough to remember meeting times, how can he be counted on to provide support once he had her money. As the discussions progressed, the deal was formalized and due diligence began, this habit continued.

As the buyer neared the end of the due diligence period, the seller’s disorganization, forgetfulness and general apathy about meetings caused the buyer to lose all confidence in him and she aborted the deal – I do not blame her at all. The seller was flabbergasted and could not comprehend why this was even important to the buyer. What he failed to recognize however is that confidence and trust are hard to gain but easy to lose. When someone feels a certain way stemming from the actions of others, it is logical in the mind of the person who feels that way and it is nearly impossible to reverse.

Business purchase discussions and negotiations can be very delicate. Both sides have a lot invested financially and emotionally. Building confidence for both parties throughout the deal is absolutely critical in order to successfully complete a transaction. It is an emotion that impacts both buyers and sellers. Confidence needs to be balanced and nurtured because too much or too little of it will can easily derail a deal.

Have a great week.

Richard Parker
Diomo.com

Determining What's The Right Business To Buy

A few years back, we conducted a survey with just under one thousand people who were looking to buy a business, and one of the questions asked them to identify their single biggest concern. While the answers included how to finance the deal, worries about sellers not disclosing true numbers, or hidden problems that could surface later, the overwhelming concern – 74 percent, was making sure they bought the right business.

Given the vast numbers of businesses listed for sale and the ease that the Internet has enabled businesses to be listed, I am certain if we were to conduct the survey again, the results would be similar. So given the wealth of choices, how can a prospective business buyer narrow down the choices?

Being Open-Minded Is Not An Effective Strategy

Many potential buyers believe that being open-minded about what type of business to buy is a valid approach to the process. While this may seem to be a good idea, it is in fact quite detrimental. A buyer’s goal must be to narrow down potential business types as quickly as possible. If not, they will simply become another “looker” who spends an inordinate amount of time searching online business for sale listings and seldom will they achieve any meaningful progress.

Buyers have to look at the search process as a hopper whereby you start off with a wide swath of businesses to consider, but with a clearly defined objective of getting the list pared down quickly to a very limited number of business types to consider purchasing.

Narrowing Down The List

If you are in the majority of prospective buyers who does not know what exact type of business you wish to buy, here is a guideline which is an excellent strategy to pursue:

1. Identify some broad categories of prospective businesses types that are of interest (you may want to first eliminate what you don't want).
2. Contact and visit with 2 to 3 sellers in each of the categories you initially identify.
3. From these meetings and preliminary reviews, compile a list of the key ingredients you want in a business. For example, you may decide you want a business that deals only with other businesses, limited employees, recurring revenues, distinct competitive advantages, etc. The idea is to build a list of five steadfast rules in order to ensure any potential business meets your criteria.
4. From this initial list, reduce it to one or two business types then focus your search on those only while subjecting each to the criteria you have established and again narrowing down the list.

It is very important, and especially if you are working with any business brokers, to be upfront with them about your approach so they won’t dismiss your strategy as a lack of seriousness and better brokers can be helpful if they know that you are (a) qualified and (b) serious.

Ultimately, you want to exit this exercise know the exact type of business you want. Hopefully, you will locate one with this initiative but if not, you can then search more within the category or consider other options like contacting businesses directly which may not be on the market by utilizing search firms or doing it yourself.

The Importance Of Getting To The Right Business Type

Most prospective business buyers are first-timers and generally have no clue what is involved with buying a business nor do many of them want to even spend money or time to educate themselves. Furthermore, their barometer for the business buying process usually (and incorrectly) draws upon the only similar prior experiences they have which is with buying a house.

What buyers fail to recognize is unlike the real estate market (in normal times), where the majority of people will eventually purchase a property, over ninety percent of those who look to buy a business fail to ever complete a transaction. As such, brokers and sellers must be extremely diligent to eliminate the unqualified lookers and so they cannot spend time with prospects who they do not believe will purchase a business.

A buyer who lacks knowledge of the process, who does not know what type of business is right for them or even how to go about making that determination, coupled with not be willing to educate themself about how to even buy a business, cannot possibly expect business brokers and sellers to pay much attention to them.

With so many variables to the process, at the very least, a buyer has to work towards knowing what type of business they want to buy to avoid becoming another “90 Percenter”. By doing so, a buyer will be perceived as infinitely more qualified by brokers and sellers when they do approach them to learn more about a particular business.

Have a great week.

Richard Parker
Diomo.com

Due Diligence Issues That Arise With Any Business for Sale

Continuing last newsletter’s subject of the due diligence stage of a business for sale, this edition we will discuss how to separate minor issues from major ones, what if a buyer has to renegotiate the deal based upon their findings and how to conduct a thorough review given the concerns every seller has about due diligence.

There are always issues and problems with every business for sale as there is no such thing as a perfect business. Actually, there is: it’s the one no buyer has been able to find yet but believes it exists. Anyways, sorry to digress, let’s get back to the discussion on due diligence when buying a business.

How to Separate Minor Issues From Major Ones

This is a huge aspect of the due diligence process. In my experience, it is one area where inexperienced prospective business buyers really get stuck. The due diligence phase is one step closer to the finish line, and fear starts to creep in as an individual begins to realize they may soon in fact be a business owner. They may begin to second-guess their decision and therefore every minor issue gets magnified. My rule has always been to step back and separate problems into one of two categories: incidents or catastrophes. I have discussed these in the past and the key is to understand the difference between the two, and above all, do not treat any incidents as catastrophes nor should you treat any catastrophes as incidents. In other words, focus on problems that arise that significantly impact any part of the purchase deal, or ones that can change the entire business in the future.

Every business has its warts. If you avoid buying a business because of the odd minor issue, you will never complete a deal. Incidents can be a slight variance in the financials, or a minor decrease in customer count, or the inventory levels are not spot-on as originally represented. These can all be dealt with easily. However, one must never, ever overlook major issues that are discovered and these have to be deal with effectively; the ones I call catastrophes. Examples of these can be a huge discrepancy in the financials, customer concentration issues or the non-renewal of contracts or licenses to name a few.

Renegotiate or Walk?

The goal of due diligence is to conduct a thorough and complete review and thus the best strategy is to complete the process before approaching the seller with any major issues which necessitate a discussion or possibly a renegotiation. Obviously, if a buyer discovers something that is beyond reconciliation then of course you would want to abort or halt the process earlier.

Keep a log of all issues that are discovered during the review. Then rank them as either (i) deal breakers, (ii) concession needed or (iii) talking points. Alongside each of these three categories (and especially items one and two), list how you want to resolve them. Then, meet with the seller and go over them. It is always helpful to start the discussion with: “overall I am pleased with the due diligence review but I am not able to sign off on it as there are a few points we need to discuss.”

Keep in mind that when a buyer enters due diligence, most sellers start to see their exit from the business so this sudden change or hiccup can cause them to become disgruntled as you are interrupting or derailing their plans. Unless you discovered something which is so significant it cannot be remedied and you have to walk from the deal, your strategy should be to work towards a solution. Do not enter the discussions with “guns blazing”. Often times, renegotiating a deal is more tenuous than the initial negotiations. Take your time and explain your perspective in a logical manner backed up entirely with factual data accumulated during your due diligence review.

The Sellers Concerns About Due Diligence

The obvious concern every seller has is allowing a buyer full access to their company with the possibility that a deal may not materialize. As such, there are certain aspects of the business where the seller may not want you to access which can include employees, supplies, and customers. The nature of the business will dictate to what extent these potentially sensitive areas may have to be investigated. Sometimes, they do not need any review and in other cases they are paramount.

For these hyper-sensitive areas, the one solution I have found to be acceptable to all sellers is to address the due diligence in stages. For example, you may want to review the financials first and once those are deemed to be accepted, you can move on to the next area (i.e. suppliers). Once that is completed and accepted by you, perhaps you can next meet the landlord. The idea being to do this in steps so the seller does not have to expose any part of the business unnecessarily and without knowing that the buyer has at least satisfied the previous contingency. This approach allows the parties to build credibility with one another and not put either party in too vulnerable a situation in the event the deal does not ultimately get consummated.

Click here to read more about due diligence when buying a business
Have a great week.

Richard Parker
Diomo.com

Due Diligence When Buying A Business

The most crucial stage in the process of buying a business is when the formal due diligence phase begins. This is the time when the parties have come to an agreement and the buyer will have a certain period in which to investigate the business and, if necessary, rescind their offer if they determine the business does not meet their criteria.

While there are a wide array of parameters to establishing the due diligence period which could last anywhere from a few days until the actual closing, there are, nevertheless, some common issues that all parties need to consider which will be discussed over the next few blog/newsletter posts.

Today, I want to discuss the following:

1. When due diligence begins
2. The buyers agenda
3. Basic protections for the buyer

When does the due diligence period begin?

As mentioned above, the “formal” due diligence phase starts once an agreement is executed by the buyer and seller. However, one must set aside the “formal” phase and realize that the due diligence of a business begins the moment it is of interest to the buyer. Since there is a limited time frame allocated in an agreement for a buyer to have full access to the company and its records, a prudent buyer understands that the investigation of the industry, competition and the preliminary financials have to get underway earlier. While many areas can only be reviewed once full access is available, certainly the initial investigation can begin.

It is estimated that fifty percent of all deals that enter the formal due diligence stage never make it to the closing table. This has always been a staggering and disturbing statistic to me but not at all surprising. There are a number of reasons for this dismal statistic, but the common denominator is the end of the period arrived and there was too much uncertainty for the buyer to move forward and close the deal. One key ingredient that leads to this is the buyer's lack of preparation to complete an exhaustive review in the period allocated. Had they addressed these issues from the beginning as I have discussed, often times those unresolved issues could be satisfied and the uncertainly eliminated or diminished.

What should the buyer’s agenda be?

Some buyers go into due diligence looking for problems with the express hope of being able to renegotiate the deal. This is the wrong strategy. Due diligence is the time for a buyer to reconfirm everything that has been represented by the seller and to validate that the business is worth purchasing. Obviously, it is paramount that any and all problems be uncovered including misrepresentations and potential looming threats that could hurt the business after a new owner takes over. That is why it is critically important that a buyer goes through all areas of the business with a fine-tooth comb.

Basic protections a buyer should have in place

A buyer needs to be certain they are not locked into any obligations through to the end of the due diligence period. This means they (the buyer) can, at any time during this period, rescind their offer for any reason (or no reason), and not have any obligation whatsoever to the seller, financial or otherwise.

One clause I have seen in contracts is where the buyer is deemed to have accepted the due diligence period if the company revenues/profits are within a certain percentage of what was initially represented. Well, what if indeed this is the case, but the seller discovers that one client represents 80 percent of the sales, or the company just lost a major customer, or its lease won’t be renewed, or a major supplier won’t supply a new owner, or there is a multi-year major road construction project being planned for the main access way to the business and all traffic will be re-routed? The potential issues that could influence a buyer to not to proceed with a deal are endless so it does not make any sense to be locked into anything until the period is over and the buyer can make a prudent decision either way.

Remember:

Due diligence is the buyer’s period. It is their time to complete the tangible analysis and also reconcile the psychological factors. In other words, it is an exercise of both logic and emotion. Proper preparation is key, but diligence, as the name suggests, in addressing all aspects of the business, is what will allow the buyer to complete their review effectively and ultimately, if the future sustainability of the business can be validated, the deal will, in most cases, get to the closing table.

Next edition we will discuss how to separate minor issues from major ones, what if a buyer has to renegotiate the deal based upon their findings and how to conduct a thorough review given the concernss every seller has about due diligence.

Have a great week.
Richard Parker
Diomo.com – The Business Buyer Resource Center™

The Business for Sale Market in 2012

I am always reminded of the old cliché that time goes too quickly when the end of the year approaches and I write my final blog post until the New Year. 2011 has in some respects gone by very fast, while other events that occurred in the past year seem to have been much longer ago. I think this is probably because there has been such upheaval in domestic and world events, economic struggles, and of course, all of the political nonsense. So now we must turn a page and look forward to a fresh start in the business for sale market in 2012.

In a prior post, I mentioned the great sense of relief I felt from my personal sabbatical of not reading or listening to the daily news and had suggested that you do the same. As our economy sputters along, this approach may be exactly what every stakeholder in the business for sale arena needs to do in the new year.

I have not spoken with anyone in this sector who is overly optimistic about the near term. Most business brokers are struggling, business sales remain in decline, financing of small deals by traditional lenders is not materializing and therefore one can easily adopt a gloom and doom outlook. It is akin to what anyone can perceive on a more global scale when they subject themselves to the daily bombardment of information, most of which is completely inconsequential. Or, as an old colleague of mine used to say: “It’s just a bug on the windshield of life.”

I am, by nature, an incredibly optimistic person. However, I do believe that the alleged downturn we have experienced over the past few years is in fact the new level of an economy and will remain that way for a while. There are simply too many prongs to the carnage for any quick remedy. Given this, the question becomes whether individuals will allow themselves to be held back or will they find a way to successfully work within the parameters. I decided a while ago not to participate in the recession. And so, with that attitude, I have found ways to continue to grow and expand my businesses.

Moving forward to 2012, the successful buyers, sellers and brokers will be those who find a way to get deals done regardless of the external noise and certainly by not paying attention to the naysayers.

Everyone needs to adjust their thinking.

Buyers have to realize that many businesses are not thriving now and so they need to have the wherewithal, confidence and acumen to come to grips with the present status and see beyond to what the business can be with them as the new owner. In order to get deals done, buyers have to be willing to bend and make some deal term concessions. Even in the best of times every business has warts, so forget about the concept of buying that “perfect” business. It never existed nor will it ever materialize.

Sellers have to recognize they cannot sell “blue sky”. Except in very rare cases, their businesses’ value is reflective of the present; not future phantom events that nobody can predict. So to any sellers I say: if you want to sell your business, be realistic with your expectations, flexible with your terms, and when you find a qualified buyer who can get to the closing table – work with them to get the deal done.

For brokers, the past few years have been quite challenging. The ranks of the broker community have shrunk which is a normal evolution in a difficult marketplace and usually a good thing. For the future however, brokers too must toss aside preconceived notions and rigid practices based entirely on legacy. Be open minded with buyers because today, the single most important factor to determine who is a qualified buyer is whether or not that individual has the confidence and fortitude to get to the finish line. All other issues can be negotiated, or at least they should be explored.

I want to wish you a wonderful holiday season and extend my gratitude for your ongoing support of this blog. I hope that I have been able to provide you with some helpful content over the past year.

I also want to thank the Bizquest staff for the opportunity to share my views on this platform and I look forward to do so for many more years.

Richard Parker

Business Buyers Have To Understand The Role Of A Broker

I read an interesting article online last week regarding the use of a business broker when buying a business which I believe was very misleading. For any of you who have read any of my guides, articles or blogs over the past decade, you know that I have a very black and white view about using business brokers, whether as a buyer or seller.

Whenever I am asked by a buyer or seller if they should use a business broker, my reply is always: “yes..but”, with the “but” being mostly related to using the right one. While that is a fairly open-ended statement and one that merits greater dialogue, it is not the subject matter for today, so back to the article I referenced earlier.

In it, the author pinpoints how a business broker can help a buyer avoid making any errors during their review of the business, will help in structuring a deal so the buyer is properly protected, will offer valuation services, can be an extra set of eyes during due diligence on behalf of the buyer, and will steer the buyer away from bad businesses and insure they buy the right one. While some of this guidance may be provided if a buyer hires an intermediary/advisor/business broker and pays them directly, buyers who anticipate this to be the job of a broker are in for quite a shock. This is not the guidance that a broker can nor should offer to a prospective buyer and certainly not if the broker’s fees are paid by the seller, which is most often the case within the small business for sale arena.

A good broker will help a buyer gain access to businesses for sale, they will act as a needed buffer between the parties, and since they have gone through this process before, they serve a valuable function to keep the deal moving along and to get it to the closing table. They may provide some quasi consultative services but they will not make decisions for the buyer.

Brokers are not going to tell a buyer whether or not they should buy a specific business, nor will they work on their behalf to dissect financials, conduct due diligence or approve agreements. That is not their role.

While there is a wide degree between brokers of what they will do to assist buyers, their role is far more of a deal facilitator and that is a crucial function is this process Buyers often times become agitated dealing with brokers (which we have discussed ad nauseum in prior posts so no need to regurgitate why this happens) although certainly there is blame to be laid on both parties for these complaints.

Much of that frustration could be eliminated if a prospective business buyer garners a clear understanding of what a business broker can and cannot do for them. It is paramount for the buyer to never assume that certain functions are automatically part of a broker’s role or responsibility.

I have used a broker in nearly every one of my own businesses that I have sold and there has been a broker involved in most that I have bought. Some of been great, others terrible, but I made sure I knew exactly what I was dealing with early on so there was no confusion later.

Since there is no standard practice in place that all brokers adhere to, a buyer is well advised to simply ask every broker upfront to specifically outline their function so there is no ambiguity. Once done, the buyer will have accurate expectations set and can thereafter work within those parameters. By doing so, the buyer will experience how the buying process can be enhanced with the involvement of a good business broker and will not be derailed when a less qualified broker is part of the potential transaction. Ultimately however, the broker’s influence on the buyer is limited and they do not make the final decision on any matter. It is always up to the buyer to do so.

Have a great week.
Richard Parker - diomo.com