BizQuest's Business for Sale Blog

The Wrong Way To Buy A Business

We have begun to receive some of the completed buyer surveys from the first 300 + respondents. So far, there is some astounding data being accumulated. I want to discuss the results in segments over the next few weeks because it is very compelling.

Two eye-opening statistics have emerged thus far: 68.2% of the respondents have been looking for a business for over seven months. In that time however, 66.5% of the same respondents indicated they had either met with or visited fewer than three sellers.

I can promise the entire lot of the respondents that unless you change your strategy, you will still be looking for a business in a year from now, and every year thereafter.

You cannot buy a business sitting in front of your computer.

You cannot buy a business if you are a perennial looker.

To be successful, you have to get into the game! You have to meet sellers, visit business and lots of them. That is the only possible way you can determine the fundamentals you want in a business, and what constitutes the type of business you wish to purchase.

Meeting with sellers allows you to get into the habit of quickly and effectively analyzing a business, compiling a valuation, and above all, gets you over the hump to present offers.

Preparation and practice are critical to buying a business. If you are not prepared, and you are not practicing, you are going nowhere quickly!

Buying a business is an overwhelming process until you get into the various steps and understand what to do at each stage. Then, it is a very manageable one. But one thing is certain, until you get busy, roll your sleeves up, get in front of live sellers so you can ask your questions and drill down into the analysis of a business, I promise that you will become one of the industry statistics of 90% plus who never buy a business.

Until you get out into the market, don't claim that you are trying to buy a business. The only thing you are doing is wasting time.

I trust that by next week's column you will have visited and/or met with two to three sellers. If you are stuck in the mud not making much progress and your experience mirrors the buyers I've discussed here, then learn how to go about this the right way. You can start that by visiting www.diomo.com to learn how to successfully navigate your way through this process.

Next week, we will discuss one statistic from the survey that still has me shaking my head in disbelief.

Have a great week.

Business For Sale Valuations Gone Wild

I have always tried to avoid generalities and instead draw conclusions based upon facts and data. So I am always conflicted by trends - are they really quantifiable, or just a recent turn of events? However, I am going to stray a bit from my usual rules to discuss a situation I see happening more frequently of late in the business for sale arena which is the incredibly creative posturing and thought process that some sellers are using to justify their asking prices.

One of the most important aspects to the business for sale process that allows buyers to complete a deal, is for them to fundamentally believe that the business will transition well to their ownership. The vast majority of small businesses are owner-operated, and thus the assumption is made that the buyer shall take over the seller's role. It is also the reason why small businesses must be valued based upon historical financial data (except in very rare cases), because there is no guarantee that the business will remain status quo from day one after the transition. This is often due to the seller being the main "asset" of the business.

While buyers certainly want to be confident that the business has growth potential, their bigger crieria is to be certain the business can sustain a change of ownership.

In large businesses, where there is a broad infrastructure in place, there is far greater assurances that the business shall stay on course after an acquisition and therefore, it is justifiable to weigh future earnings into the valuation.

However, as a result of the recent downturn where many businesses are experiencing declining sales and profits, we are seeing an usually high number of scenarios where the sellers are basing their valuations on some very aggressive assumptions about the future, and pitching buyers on a lot of "blue sky" theory. While this is certainly an interesting and creative strategy, it's nonsense.

Sellers cannot justify an inflated asking price on the concept of future initiatives a buyer may take to increase the business. How on earth can a seller be entitled to any growth that is strictly the result of a buyer's endeavors? Furthermore, what proof can they possibly have any of these concepts will even work? Lastly, who are they to tell the buyers how to run the business?

As an example, for a seller to believe they should be paid a premium on the business by telling a buyer they only need to hire more salespeople, or attend trade shows, or add new products and services, etc., is a completely illogical argument to attempt to bolster the present-day value of the business. After all, if these initiatives are so simple, why hasn't the seller done them? I reviewed one situation recently where the seller inflated/adjusted his Gross Margins and bolstered the asking price based upon his theory that "a new buyer can get the costs down"...oh yeah, how? And why hasn't the seller been able to do so in the five years he has owned the business?

Another recent  example was a seller of an events marketing company making $150,000 in Owner Benefits who priced his business at $600,000. For years, the company has staged four large events each year with similar profits. The seller believed that any buyer could easily double the number of venues and would then make $300,000 and so the $600,000 was a "very reasonable price" according to the seller. That is complete craziness! To reiterate, I hate generalities, but I have seen at least a dozen similar cases of this ass-backwards strategy for arriving at an asking price over the last month or so.

I guess it's simply a case of when they going gets tough, some sellers get ridiculous.

Now, I do not want to confuse earnouts or performance based deal structures with this delusional valuation ideology. Earnouts are for specific circumstances I have discussed before (i.e. declining business where the buyer needs protection, programs the seller has implemented which will only produce results post-sale, the recent addition or loss of a major customer or supplier, etc) and they have their place, and they are based upon rational thinking.

A small business is sold upon the past historical data. As in most cases, the amount of goodwill represents the largest part of the price, and this is the premium that sellers get for selling an ongoing business. They are not entitled to a "bonus" for the hard work and business acumen that any buyer brings to the business.

When you come across a seller who may be taking this tactic, if you are unable to convince them of their polluted thought process, suggest that they put these so-called "no-brainer" initiatives into place over the next year and if they lead to the results they claim, then they can justify a purchase price inclusive of those results.

Buyers have to be wary of being suckered into this type of pricing model. Remember, it is profit not promises that pay the bills. It is easy to visualize all the wonderful things you can do to the business after you take it over. But keep in mind that if these strategies were so simple, the seller would likely have them in place already (besides, they probably tried some of them and they didn't work). Forget about all the wonderful things a seller tells you that can be done with the business. Instead, focus upon your ability to takeover the business, sustain the present levels, learn it until the business is in your gut, and then put plans into place for growth. With that strategy in mind, clearly, the prior owner has absolutely no right to benefit from your success nor should they have the audacity to think they deserve to be paid in advance for the business skills you have that they clearly lacked.

I welcome your comments and appreciate your feedback. Please feel free to provide your input on this blog. As always, please visit our website if you have any questions about buying a business.

Have a great week.

Business Broker Survey Results - An Opportunity For Buyers

A belated Happy Father's Day to all who celebrated last weekend. I had a brilliant day, and I just love it one when of my children asks "How come there in no Kid's Day'" to which every parent in the world naturally replies "Everyday is kid's day"...know the routine?

The folks at BizQuest and I put together a series of surveys for brokers, buyers and sellers. The first one (for brokers) has been completed, which I will discuss in a moment. For all you buyers, over the next two weeks you will be receiving an email to complete a brief survey, and your participation will be a huge help to everyone in the industry. Plus, it will give you an opportunity to collectively air your concerns and challenges so please take a moment to complete it.

First, on behalf of the staff at BizQuest, I truly want to thank every broker who participated - your input is not only greatly appreciated, but it is a tremendous help to the all stakeholders in the business for sale community.

There were 416 broker respondents, which is an excellent sample size. I am not sophisticated enough to say it is accurate within x percentage points like those fancy political polls. By the way, how do they ever determine those polls of 1,000 people to be accurate within a few points of what 300 million people believe? I guess it is another political mystery. Anyhow, I want to point out a few highlights from the business broker survey, and there will be a link at the end so you can review all the questions, answers and percentages.

Just under 60% of the respondents indicated being brokers for more than seven years, so we are dealing with an experienced group. This statistic alone heavily validates the results.

A question was asked whether business valuations are increasing, decreasing, or stable. I have seen the biggest recent change more in deal terms however, the results from the survey were staggering - 69.2% indicated that valuations are decreasing. While this is not surprising in a down economy, it represents a huge opportunity for buyers.

We asked for input on SBA loans. I have always felt strongly that the impact of the SBA program is grossly exaggerated in small business sales and has nowhere near the impact that it could have, nor is it anywhere near what some in the industry claim it to be. So this was one questions where I am glad I can now add an "I told you so". The brokers surveyed indicated that less than 10% of their past deals have involved SBA financing.

There are two clear conclusions from this data: First, despite all the incredibly hard work the business brokerage community has done lobbying the government to amend the current loan criteria to prior terms, perhaps it is an effort that simply will not yield the results they want, even if the criteria is changed. A better tactic I believe would be a complete overhaul of the SBA 7(a) loan terms in order to have a more meaningful impact on small business sales. Even if the government retreats to its prior conditions, so what? While it will help get some mid-range deals done, it seems to me to be a whole lot of activity for less than ten percent of the deals. Second point is that buyers can be extremely firm in negotiating seller financing, because regardless of what the other side conveys, very few deals are going to get done with SBA lenders.

On the note of seller financing, the data is abundantly clear - sellers have financed over 51% of the purchase price in more than 40% of the past deals of the broker respondents. No surprise to me, but very much in contrast to the craziness I hear from the seller side at times when they claim "we don't do seller financing", or "we want an all cash-deal".  

The final question I want to discuss was the answer to what percentage of the buyers do brokers feel are either "well prepared" or "poorly prepared". Based on some of the great debate and comments this blog has experienced between brokers and buyers, I guess it is no surprise that 76.8% felt buyers were "poorly prepared" and I categorically agree with this result. In fact, I would not have been surprised if it was over 90%. There is a very clear message here to any prospective business buyer - when you contact a broker, if you can demonstrate that you are well prepared and knowledgeable, you are going to go to the front of the line for the best listings. I have been saying this for two decades, and it is the entire philosophy behind my whole business. But of course, there are still going to be those folks who believe they're smart enough to guess their way ahead, and so the dismal statistic that only one in ten people who begins to look for a business ever completes a deal will likely continue until the collective buyer community wakes up and educates themselves before they start their search.

Buyers: Remember to respond to the survey you will be receiving - it shall make for a very interesting counter commentary to the findings in the broker survey. If you want to become a well-prepared buyer, start with reviewing the information on my website at www.diomo.com - read the articles, and ask-the-expert sections, and get a copy of my guide.

To review the complete business broker survey, please click here

Have a great week.

Business Buyers and Brokers Have Very Different Views

As expected, last week's column generated some pretty heated perspectives from business buyers and brokers. I'm not at all surprised - every time I wrote about either one of these, I get some interesting comments.

My objective last week was to bring to the table the issues that have plagued this whole space since for the last 19 years I have been involved in it, and so I assume it has gone on since the beginning. Until the process is standardized, it will remain a broken, inefficient model.

A few things are very clear and some of these were brought up in the wonderful comments received from both sides. The issue of qualified personnel on both sides of the table is problematic. Buyers have scathing reviews of brokers, and brokers clearly articulate and identify the problem of unqualified buyers being at the forefront. So it appears we're looked into a dual of perception.

It reminds me of the great Oscar Wilde quote: "It's not whether you win or lose, it's how you place the blame."

There is no doubt that the business brokerage industry has too many players that should find another career. The emphasis in brokerage has always tilted towards quantity. Send out x number of postcards, get y number of listings, and sell z number of businesses. While success in sales related industries is almost always a "numbers game, I could never understand why anyone would want to devote time to handling listings that simply won't sell. The old adage of "there's a buyer for every business" is sheer nonsense. If that were true, every listing would sell instead of the twenty percent or so that do.

Similarly, I completely understand the brokerage perspective on the majority of buyers who inquire about their listings. I can say this from my own past experiences as a business broker. The average buyer is simply not prepared for the buying process. Of course some are, but that does not represent the majority. I see it in my publishing business. We get tons of emails with the most basic of questions from business buyers, and rather than spending a bit of time and a few bucks to purchase reference resources that will make them smarter immediately, they just try to take shortcuts.

I won't digress to cite war stories and examples of incompetence that I have seen from buyers and brokers, but somehow these issues are intertwined. If the brokerage industry rid itself of the incompetent players it has, and truly serious business buyers took the time to prepare themselves for this process, the frustrations on both sides would dissipate immeasurably. Of that, I have zero doubt. Furthermore, buyers have to realize that aside from the few tangible components in this process, they are dealing exclusively with different personalities at every step. Trying to predict or control human behavior in an industry with no standard rules, and where emotions play an enormous role in most decisions made by inexperienced buyers and sellers, is simply an exercise in futility.

Yes indeed, there are some deceitful sellers and awful brokers, plenty of them. But there are some highly competent folks in this field who take their job seriously. They understand the process. Surely one can understand that if nine out of ten people who contacts them will never buy a business, and furthermore this ninety percent generally has no clue what the heck they're doing, it can become frustrating for brokers as well. That is not necessarily an adequate defense of some of the issues buyers raise, but again, it plays to the theory of a buyer being able to have the acumen to deal with different challenges and personalities inherent at every step of this process.

One thing is certain, the vast majority of brokers overwhelmingly welcome, cater to, and provide the necessary documentation about their listings to the buyers they deem to be qualified.

Having gone through a few rounds of this "he said - she said" nonsense, I truly can only suggest a few realistic solutions.

Buyers aren't going to change brokers. When the brokerage industry as a whole takes a collective stance to pursue quality listings, has regulation in place that forces brokers to obtain their Certified Business Intermediary (CBI) designation, standardizes most of the language of Non-Disclosure Agreements, and implements pre-qualifying documents they need from buyers (i.e. financial statements), then there will be an enormous improvement. I look only to the fact that business brokers in most states do not share listings between each other. That alone indicates the complete lack of faith brokers have with others in their own industry. If they were all working at the same level of competence, with standard policies, procedures, and levels of aptitude, that industry would flourish.

Industry-wide consistency would force prospective buyers to follow the procedures and would completely eliminate the ridiculous obstacles buyers face from one brokerage office to the next.

Conversely, buyers have to realize they are in the process for a limited time. Hopefully, the industry will change - eventually. Getting hung up on what's wrong is not the way to buy a business that's right for you. Yes, you will encounter brokers that make you want to tear your hair out. Yes, there will be sellers who can't prove their numbers. Yes, there will be business listed for sale that expired months ago. Yes, there will be last minute surprises that come up that force you to walk from deals. Yes, there will be brokers give you the car salesman pitch about other offers are on the table. So yes indeed, this is a very broken process, but if you truly want to take control of your destiny, then take control of the process.

One thing I know without question from my experiences as a buyer, seller, broker, buyer's consultant, and from authoring eight guides on buying businesses, writing over one hundred articles, having countless interactions with business buyers through seminars and media interviews, and from the 300,000 buyers who visit my website each year: qualified buyers get through the maze. They have the mindset of "needing" to buy a business. Sure, they come across all the BS that others do but they have the drive to overcome obstacles, and they do not let these little bugs on the windshield of life deter them from getting to the finish line. Above all, every successful buyer shares one common trait -they prepare themselves first, and then they take on the challenges.

Most buyers want to enter the marathon but think they're ready simply because they own a pair of sneakers. If you are not willing to invest the time to first learn what's involved, get your finances in order, understand how to value a business, negotiate the deal, investigate and analyze the business, then you're not going to get anywhere. If you want to shift the blame to others then so be it.

While there are very specific strategies to effectively overcome the "typical" buyer challenges, you have to know the solutions to these obstacles before you begin your search or contact any brokers/sellers. If you try to figure things out on the fly, you will waste a lot of time and like many others, you will become terribly frustrated with your lack of progress and probably never complete a deal.

Buyers can hurl as many indiscretions at brokers as they want, and yes indeed, many are true. But just as business brokerage hasn't evolved and should probably be called "business brokenage", neither have the majority of buyers caught on to what it takes to be successful. No matter what obstacles are in the way, a well prepared and knowledgeable buyer will always successfully navigate their way through the business buying process like a hot knife through butter. So for both brokers and buyers, when you try to guess your way ahead, your lack of acumen is obvious to everyone, except you.

Have a great week and buyers remember to visit my website where you'll learn a ton of helpful tips and proven strategies about buying a business

Standardizing The Process of Buying A Business

The last few weeks I have tabled some concepts of people paying for certain services, information and assistance when buying a business. I received an interesting comment from Leon Parker (no relation), principal broker and owner of New Hampshire Business Sales (www.nhbizsales.com) who stated that he is always willing to assist buyers but it requires a buyer that knows: "what they want and being willing to pay for my services to get it, and my feeling that we have the resources to carry out the assignment." I categorically agree with Leon.

Leon has been a regular contributor to this blog for years and always gets right to the issue. His latest comments summarize a fundamental flaw in the business buying process and that is the typical buyer's complete misunderstanding of the process, and the legacy of procedure amongst brokers that has not evolved at all in the past 25 years. Leon's strategy is the right approach but it is not the norm across the industry.

In attempting to identify the core problem, and specifically why so few "buyers" ever complete a deal, I think we need to review and understand some of the procedural issues which I believe are the foundation to the problem, and also the solution.  

Buying A Business Is Not Like Buying Real Estate

The only experience the vast majority of buyers have had in a transaction has been when buying a home or other property. As such, many believe that the process to buy a business mirrors real estate. This includes their perception of how they will search, inspect and finance the "property". While there is some standardization in the real estate world, none exists when buying a business.

Sure there is a general flow of steps, but the added ingredients of human emotions, and the number of potential personalities in a deal, change the whole dynamic. Furthermore, a business is a living, breathing entity not a pile of bricks.

Moving Parts and Lots and Lots Of Them

My wife owns a title company in South Florida (and I'm happy to report her business is booming right now), however, I like to use her business as an example when comparing a business purchase to real estate.

In her business, she has a checklist of 100 items that need to be addressed in every transaction. While the work requires meticulous attention to detail and follow up, typically, about 95 of the items on the to-do list are repeated in each transaction.

Take the same 100-point checklist concept for a buyer, seller or broker in a business transaction, and my bet is that 95 of the items change in every deal. Again, it comes back to the point that a business is fluid, personalities are involved, the issues in one business are completely different from one next door, and on and on the list goes. Standardization of the process is the only way possible to ever get this be a more efficient model because at present, it truly is mayhem, and all of the dismal statistics indicate it.

Too Much Information Is Making It Worse

I believe the process to buy a business is actually getting worse and the Internet plays a major role in the demise. While having access to business listings online is a phenomenal evolution, the abundance of information available has also muddied the waters. Furthermore, the typical buyer can search endless listings, send sellers/brokers infinite inquires, request abundant information, chase data from one website to another and yet never, ever make any progress whatsoever. If they never get out and meet sellers the whole exercise is useless. It's like spending your time on a driving range hitting balls and taking lessons, but never getting out to play a full round. You cannot claim to be a golfer. You are just a ball-hitter.

We have become so programmed to accumulate data and information, and it is so readily available at no cost, that buyers typically hoard it. Data and information is useless unless utilized to reach answers, or compile a strategy. It reminds me of the self-storage unit I have - I don't need it, I don't need the bulk of the crap I have in it, I have plenty of room at my house to store whatever I need, yet month after month I pay $100 to keep all this "stuff".

Everyone Needs To Be Re-Trained

Getting back to Leon's point, and the ones of prior column, the only way to improve the process is to change it. Personally, I would like to see a combination of buyers having to pay for services in conjunction with an across-the-board standardization to the process. As someone who deals with hundreds of thousands of prospective business buyers each year, it is obvious to me where most fall off the wagon - instead of having a roadmap through the process they zig zag their way to failure.

Since new buyers constantly enter the market, they cannot be re-trained. Instead, the process has to be set for them. In this regard, business brokers and sellers must play a more important role in setting forth a standard procedure for how and what information is required from the buyer and conversely disseminated to them. There has to be consistency between individual brokers and offices and states. Buyers see a business with one broker who has a completely different set of procedures, requirements and documents than the broker office down the road. Brokers share listings in one state, but not the next one. The list goes on to perpetuity and this lack of due process is in fact a major contributor to the overall market inefficiencies. I am not laying the blame solely on brokers, but they are the only stakeholders that can influence the process because they remain in place while the buyers change.

How welcome it would be if the key associations drew up standard policies that would be implemented nationwide. There is no doubt in my mind that well thought out procedures would immediately result in more qualified buyers staying in the process, the "lookers" would be eliminated, and more closed deals would materialize.

Hey "Buyers" - You're At Fault As Well

While I can easily pontificate about how to repair the market woes, unfortunately, it is not getting fixed anytime soon. Besides, brokerage is a legacy business and loathe to change, so buyers cannot count on it. Instead, buyers have to go into the process understanding what they face, and how to hurdle any obstacles. If you simply want to spend time looking at listings, don't claim to be a buyer - you're a "tire-kicker". If you want to be a buyer, you need to get in front of sellers. If you want to see company financials and you are not prepared to furnish yours, don't expect to always get them. If the broker wants an offer before they give you detailed data (no matter how stupid that strategy is), you may have to play their game. If you want to have people help you then be prepared to pay for their time and services. If you want to get valuable information, you have to pay for it. You are not going to assemble an action plan that will explain what to do at every stage of the buying process strictly by getting tidbits of free general information off the Internet.

If you want to successfully navigate this process you need to understand the process itself. Understand that buying a business is not like buying real estate. If you do not put yourself in a position of being well prepared and knowledgeable, then you are going to come off as an amateur to sellers, brokers, and bankers. Even worse, this exercise will prove to be a complete waste of time. Since the current buying process is broken, instead of spending time complaining about it, just recognize the moving parts and have the know-how to deal with them.

Have  great week.

Every Business Is For Sale

There are some truly dismal statistics in the business for sale industry. While the figures vary between sources, the general consensus is that over ninety percent of the people who start out looking for a business never buy one, and only twenty percent of all businesses listed for sale ever get sold. Pretty awful isn't it?

It would be easy to simply conclude that these two statistics are inter-woven. With 8 out of 10 businesses not being saleable, prospective buyers can argue they cannot possibly find and buy one from what is on the market. While there is some validity to that claim, the issue goes deeper, and leads into what I want to discuss this week.

Although I am a huge fan of the online business for sale databases, your search may have to go beyond what is on the open-market with some direct solicitations to businesses. You will find some companies that offer this service and while their rates vary considerably, unless they are ridiculous, it is usually a reasonable fee if you can locate the right business through this initiative. 

If you are going to go the route of a direct solicitation, there are a few things to keep in mind:

A Laser Beam Is Better Than A Spray Can

The more targeted your solicitation, the more effective it will be. In other words, you want to focus on specific business types, and not just set general parameters. Using criteria such as years in business and certain revenue/profit levels are good sub-sets to the industry, but the most important issues is to target a list of specific business types that make sense for you.

Conducting a direct solicitation is usually best after you have had the opportunity to analyze businesses on the open-market. If anything, you will at least be able to get educated about the particular industry. A good way to accomplish this early in your search when the typical buyer has no clue what they want is to pick out a few industry sectors. Search online and find 3-4 potential listings in each sector. Speak to the seller/broker, meet the owner, ask your questions, and do your research and analysis. From this list, pare down the industries to two or three where you can see yourself in that field, and run through the exercise again. Your goal is to narrow down the industry type to one or two that fits your strengths and won't suffer from your weaknesses.

Then, you can consider going about a direct solicitation.

Use A Firm That Specializes In Searching Not Listing

As a business buyer, you want to surround yourself with specialists in all areas of this process. That is why you must use an attorney who is an expert in small business transactions and not your cousin's ex-brother-in-law the patent lawyer. It's also why you use an accountant who is well versed in the financial review of similar businesses you wish to buy, and not just someone you know whose practice is geared solely to asset protection or estate planning. It is therefore also the reason to use a firm that specializes in the search process.

Use a company that can help you identify the right targets, and has a track record of success finding potential opportunities for other buyers. Have them provide you with references of people who used them in the past and contact them. Speak with those who were successful and ones that weren't in order to get a true sense of how effective the company was on their behalf.

A good firm will be patient. Unless you are looking for a perfect business that doesn't exist, they will provide you with a steady flow of potential candidates.

You may come across some business brokers that also offer search services. While it is fine to use a broker, I do have one fundamental issue with some who offer this service. They will conduct a campaign on behalf of a buyer with the understanding that they can solicit a listing for any of the businesses the buyer disregards. Personally, I think that is ridiculous (and yes, I eagerly await all the flame-throwers that will surely tell me I am talking out of my rear-end on this point). I can just hear some brokers saying "Why not? If the buyer doesn't want them, why can't I try to get the listing?" Well, because if you do, your agenda from the onset is not unequivocally geared towards the buyer's best interest; that's why! Furthermore, in the eyes of an astute buyer, you are using their fees to cover your marketing costs. Any business broker can certainly pursue  listings and also provide search services, but if you truly want to serve the buyer then the two they must be completely independent activities.  

How Do They Find Them and Once They Do What Happens?

There are no standard procedures and so you need to know in advance how they work specifically and make sure their service fit your needs.

It is important to understand what their services include beyond simply sending out letters (on this note, make sure they send out letters or conduct phone calls and not just fax blast and email businesses). You need to know exactly how they conduct their search. You certainly don't need them to scour the Internet. Do they send out letters, and to whom? How do they get their lists? How many businesses do they contact? Is there a limit?  

What happens when a business owner responds to their inquiry? Do they pre-qualify them further, or just hand over the names to you? Will they potentially act as an intermediary on your behalf, or are you on your own?

Do It On Your Own

I have long believed that every business is for sale; some owners just don't know it yet. After all, who wouldn't sell their business if the deal and timing are right? You can always contact companies on your own using a well scripted letter. In fact, we have a sample in our guide that some clients have experienced up to 40% response rates when sent out to the right market. If you decide to solicit businesses on your own, it is best to have your attorney send out the letter for you (everyone opens a lawyer's letter) and let them just defer all the responses to you directly.

Although you can get some great results on your own, it does take work. It can be a good first step you wish to test and if you do not get stellar results, then hire a firm to do it for you. And remember, whatever amount you have to potentially pay for a search, if it results in you finding the right business, the cost is meaningless compared to what you stand to gain as the owner of a good business.

Having said all this, do not just toss aside searching online. First, it is a very important first step. Second, there are plenty of good businesses available. It's just like the farmer who found his son digging in a 10-foot high pile of cow manure. When asked what he was doing, the boy explained: "there must be a pony in here somewhere!" So despite the awful industry statistics, rest assured there are some tremendous gems in the mix as long as you are prepared for the hunting. 

Have a great week!

Buying A Business To Run Absentee

It is a fantastic idea to buy a business, have someone else run it, and get a wonderful return on your investment. The problem is that the concept seldom translates into reality.

While absentee ownership has been the foundation upon which fortunes have been made, and a model that has worked well for large corporations and private equity groups, it is a cumbersome task to successfully translate it to an individual level where you would be buying an owner-operated business.

Don't get me wrong; I love the idea, and I have, on two occasions, been able to do it myself. However, what I see far too often are individuals who are looking to buy a business and they begin to dream (maybe hallucinate) about the concept of building an empire before they have even tested the waters, or run any type of business.

Keep It Simple

Absentee-run businesses have traditionally been associate with what people believe are more simple businesses such as coin laundries, liquor stores, for good reason. The less complex the environment, the more readily it can operate without the owner being there full-time. 

You Can't Learn It If You're Not There

Unless you are very familiar with a particular business, it would be reckless to attempt to buy a business and simply hand over the operations to the employees. Many small businesses thrive because of the hands-on nature of the owner. This model is also why some businesses do not transition well to a new owner. As such, if you are looking to run a business absentee that doesn't currently operate that way, you categorically must get involved initially and learn the business. The idea that you will just hire a manager won't work, unless strong management is already in place. If you are not well-versed in the business, you are not in any position to even know what is the profile of the ideal manager so how can you hire them? Once you get the keys to the place, you cannot just hand them over to a third-party.

At the very least, you will need to seller to remain in place, with a vested interest to do so, until such time as a replacement can be found. But again, this is not an ideal strategy. It is far better for you to get totally immersed in the operations and once you understand all aspects of the operations, you can look to engage a manager to take over from you.

Of course if there is already competent personnel in the business that has been running it day-to-day (or can do so), you can continue that strategy but make sure that you validate the capability of the employees. And to do so, you will want to be involved after you take over to be certain they are the right people to run your company.

It All Comes Down To Systems

If someone else is running your business, you have to implement policies, procedures and reporting systems that will allow you to keep a pulse on the business. If not, mayhem will likely prevail. And worse, if the business starts to slide, if you do not have adequate reporting procedures in place, by the time you uncover the problem, it will likely be too late to repair. Another aspect to the systems is especially important in cash businesses. If you're not there to monitor the flow of money, you can rest assured that some of it will find its way into the employee's pockets.

If You Want To Just Collect The Cash Then Buy An Armored Car Company

I always laugh when buyers tell me they envision the day when they can just show up to the business and collect the proceeds. I promise that won't happen; only Brinks can do that. Regardless of how effective your systems may be, if you are not involved in the operations, or if you really have no clue how to run the business, ultimately, you will fail. Even on the most basic level, what happens if your manager suddenly quits, or cannot run the company? Who will take the reins?

The Strategy To Follow

The overriding lesson to having a successful absentee-run business is to be certain that you are capable of running it. If you adopt the philosophy that you are simply going to put the future of your business in someone else's hands, then you have to be prepared to let them control your destiny. You do not have to look any further than the Madoff scandal to realize that when someone else holds your purse strings, you are never in control. Furthermore, the idea behind business ownership is to take control of your destiny, so you have to be on top of it.

In theory, absentee-run businesses can be a tremendous way to accumulate wealth, but building an empire starts with a rock-solid foundation. Take the time to get the base in place and you can build from there.

Have a great week.

The One Thing You Need To Know When Buying A Business

Before getting into this week's topic, I want to thank Don Wilson for the comments he posted in response to one reader suggesting: "The seller should absolutely be prepared to have at least 2 years worth of verifiable financials supporting the claims made in the add readily available after signing the non disclosure." Don, who has purchased several businesses, and is a hugely successful entrepreneur, reinforced the comments I made last week when he stated: "The seller obviously should already have their financials together and be prepared to provide them at the appropriate time, but not before. Just because someone signs a NDA doesn't mean that you hand them the keys to the store."

This exchange is indicative of the difference in attitude, strategy and understanding of someone like Don, who is a seasoned buyer, versus someone that has not gone through the buying process, or is simply inflexible. Buying a business is not a black and white procedure. If a buyer sets too many hard rules, and especially if they have zero experience, and they think they will be successful with a "my way or the highway" attitude, they are in for a huge shock, and they are setting themselves up to fail.

10,000 Hours To Success

I am reading Malcolm Gladwell's new book - Outliers (Gladwell is the author of The Tipping Point and Blink - read the former if you haven't). In Outliers, Gladwell examines some fascinating trends and out-of-the-ordinary data points that are common to incredibly successful people. One of his conclusions is that to reach the pinnacle in any field, research indicates that it takes roughly 10,000 hours of practice.

Looking at the greatest artists, athletes and business revolutionaries, he concludes; "Practice isn't the thing you do once you're good. It's the thing you do that makes you good." I could not have written a better descriptive of what it takes to be a successful business buyer. I have long believed there is one single ingredient that separates the superb buyers like Don Wilson, from the others who will always remain "lookers" and that is the ability to spot and take advantage of an opportunity when it surfaces. To do so takes practice - lots of practice. And when buying a business, knowledge is the platform upon which you can practice.

Buying a business is NOT a numbers game! It is not simply a matter of spending time looking, unless your time is productive. You are not going to find the right business as a result of spending hours searching through thousands of business for sale listings. Sure, you may come across the odd decent prospect, but that is just a matter of luck.

But luck has no place in the business-buying process. An ancient philosopher – Roman Seneca said: “Luck is what happens when preparation meets opportunity.” In other words, be prepared so you will know immediately when a good opportunity surfaces, and you can pounce on it.

 

Knowing how to identify a good opportunity is critical and the only way to do that is by being well prepared for each component of the business-buying process. This skill can only be acquired as a result of knowledge. With knowledge, you can practice effectively.

 

Get Ready – Opportunity Comes In A Flash and It’s Gone In A Second

 

Regardless of the economy, good businesses sell fast. If you are not ready when the right business comes around, someone else will take advantage of it.

 

Most buyers remind me of my son’s pet hamster – George. He gets on the wheel in his cage and he runs full steam for hours. But at the end of the day, he hasn’t gone anywhere. “George the Business Buyer”, searches a ton of business for sale ads, but after a month, or two, or six, he’s still in the same spot. Don’t be like George.

 

Preparation is fundamental in this process. It is the cure to spinning your wheels. It requires you to do a bit of work upfront but the results will be phenomenal. Preparation means acquiring all of the knowledge you can get your hands on first, so it’s right at your fingertips throughout the buying process.

 

With the right preparation you will know what type of business makes sense for you, what questions to ask the seller/broker, how to research the industry, investigate the competition, arrange financing, compile an accurate valuation, how to negotiate all the key issues to put together a great deal, and finally, proper preparation allows you to uncover the hidden problems in any business before you buy it. 

 

Regardless of the economy, the market is always flooded with people looking to get into their own business. In fact, industry statistics indicate that are fifteen buyers (or at least people actively looking to buy a business) for every seller. Most will never buy a business but they do create havoc. They bombard sellers and brokers with inquiries.

 

Preparation is the only way for you to stand out from all of the “lookers”. If you’re not prepared, you probably won’t even get a response from any inquiries that you send in for advertised businesses.

 

Knowledge is Everything

 

Buying a business is no different from any other major undertaking except for just one thing: it is likely that you have never bought a business before and so without having all the knowledge you need at your fingertips, without having an expert or mentor to help, you will bounce all over the place with limited success, if any at all.

 

With the right knowledge, you will be poised to take advantage of the perfect opportunity when it surfaces. If not, you won’t even recognize it even if it’s staring you in the face.

 

It’s Just Common Sense.

  

Buying a business is a major decision. You have to get it right the first time.

 

Don’t leave anything to chance. You can try to figure it out as you go, but with that strategy you won’t go far.

 

If you want to completely avoid all the pitfalls that most people make, and instead buy a good business with a solid future where you can make a lot of money, then there is no escaping the fact that you have to learn before you can earn. Be sure to pick up a copy of our guide How To Buy A Good Business At A Great Price - it's 10,000 hours of practice as a business buyer that you can learn instantly.

 

Have a great week!

Common Mistakes When Buying A Business

Sometimes I have to just shake my head when it comes to how people approach buying a business. Here are some of the common issues that buyers table and I want to use today’s forum to get a few things straight for you:

 

Don’t expect the seller to hand over a binder of confidential documents - Of course any buyers want to have access to as much financial documentation as possible so they can effectively value the business. However, sellers will often disseminate this information in stages, as the buyer demonstrates their qualifications and level of interest in the business. It makes no sense whatsoever to barge into the first meeting with the seller expecting a portfolio of documentation or request detailed financials at first contact with the broker.

 

Sign the non-disclosures right away - When you contact the seller the first time, do not request any information. In fact, it is just the opposite; it is the buyer who should be offering to provide information to the selling party, and specifically a non-disclosure form. As such, in your first contact, simply express interest, and request the appropriate documents for you to execute in order to get additional information. You know the old adage about first impressions….if you come across as an amateur, you probably will never hear back from the seller.

 

The first meeting is like a first date - While you absolutely need to be prepared with all of your questions for the first meeting with the seller, it is best to keep the meeting conversational. You want to engage in a dialogue with the seller, and to learn more about their business. If you sense they are apprehensive in answering any questions, just move on to the next one. Your goal in the first meeting is to get a good sense about the business, can you see yourself running it, do you like/trust the seller. You want to leave with enough data to conduct your research, and don’t worry; you will have ample time to get all your questions answered, regardless of whether or not the seller/broker pushes for an offer.

 

Impress the seller but don’t boast - It is amazing how a buyer can negotiate better deal terms when they impress the seller. After all, there is no way any seller will provide financing if they believe you are incapable of running the business. Do not try to show the seller how smart you are; show them how capable you are. Outline your past accomplishments and be honest about your strengths and weaknesses. As you learn more about the business you can provide feedback and questions about certain initiatives you would like to consider and ask more pointed questions about the past a strategies the seller has implemented.

 

Don’t lie - I know this sounds obvious but you cannot even imagine how many buyers go through with contacting brokers, meeting sellers and completely embellish their story. This mostly happens when they’re asked how they are going to finance the deal. If you do not have financing lined up, and you are expecting the seller to finance the deal, and especially if you have limited resources for a down payment, then be upfront about it. Don’t waste anyone’s time, and certainly your own. Yes indeed there are some incredible deals in the market now, but you have to be realistic as well about what you can afford.

 

You cannot buy a business from an ad - The listings you see online are teasers. They will provide you with some basic information about the business. These advertisements strictly provide the buyer with a general overview of the business and when you find one of interest, send in an inquiry. You can spend endless hours searching endless listings. That is not how you buy a business; that is how you “look” for a business. If you want to be a buyer, you have to start the buying process and that means contacting sellers, meeting with them, and conducting your research. If you sit in front of your computer and click from one ad to the next hoping that your ideal business is a click away, you are going to spend a ton of time and get no results. Get into the hunt and get out there and meet sellers…lots of them….it is undoubtedly the best strategy to become a buyer and not a looker.

 

And the single most frequent comment I get from buyers is - ”Should I buy a business in this economy?” And my answer is always the same: "I have no idea." But, I will tell you that it is a tremendous time to do so because you can put together a better deal today than at any other time in the twenty years I have been involved in the business of buying businesses. We have written an excellent report on this subject which you need to read because there are specific deal terms you must follow given today’s uncertain times. You can access the report at: http://www.diomo.com/tips.html

 

Have a great week.  

Buying A Business Can Teach You How To Sell It Later On

I get too many emails and newsletter comments from frustrated business buyers. Often times, I wonder if they will run their businesses differently from all the sellers they complain about. Given that the average business changes hands every five years, I have to think that many business buyers actually end up perpetuating the problems that they themselves found so challenging when buying a business.

While I am not a big believer in focusing too heavily on an exit plan before you even buy a business, the day will come (faster than you think), when you will want to sell.

By positioning your business to operate in a certain manner starting today, you’ll not only sell it for more, you’ll actually make more money between now and then. More importantly, learn from the challenges you face as a buyer when you become an owner.

Here are a few things to keep in mind once you become a business owner:

Some People Say Problems Are Opportunities - Sometimes They're Just Problems

If there’s something in your business that would turn off a potential buyer, chances are it’s also hurting your business today. Typical examples are high customer concentration, the possibility of losing a key supplier or employee, contingent liabilities, past claims, leases due to expire, inaccurate inventory, poor monitoring systems, etc.

While trying to build your business, even if you have no plans to sell it, look at it through the eyes of a possible buyer. By simply identifying possible issues, and fixing them, your business will improve immediately. Likewise, these matters will not come back to haunt. Don’t think they’ll disappear or that a savvy buyer won’t uncover them. They’ll stick around and hurt you today and down the road.

Keeping Good Books and Records

Any business broker will tell you that a business with super-clean books gets the most action, and usually the purchase price is very close to the asking price. When the time comes to sell, a business with clean books and records will generally sell in the shortest time frame possible. In fact, this is usually the number-one reason why deals fall apart (outside of major, sudden surprises).

In operating your business today, keeping great books will allow you to always have a true grasp on your cash flow and the ability to properly analyze expense and other activity.

Systems, Policies and Procedures

I once read that a company’s manuals, policies and procedures should be explained in such a way that the lowest-level employee can understand them. If you incorporate a methodology to deal with every possible scenario that comes up, and modify it continuously, think about the positive impact that can have when the time comes to train a new employee, expand the office, or open a new location. Instead of wasting endless hours getting people up to speed, all you need to do is “throw the book at them”.

Similarly, every buyer is concerned that too much of the business may be new to them or that they won’t ever be able to grasp the guts of the business. With top-notch manuals, systems and procedures, this concern will be completely eliminated so they can focus on replacing you effectively.

What Happens If You Get Hit By a Cement Truck Tomorrow?

Can anyone step in and run the business? If they can’t, and something happens to you, the business will go down the tubes quickly. Not only will they forfeit your income, they certainly won’t be able to sell it. So, if you are you “the business”, better start working on your systems, or be certain that you always look both ways before your cross the street!

Unless an individual comes from a like industry, or is one of your current employees or partners, they will be worried about the transfer of your knowledge. Regardless of how simple your business model may be, training a new owner to do what you do every day is crucial. The majority of people buy businesses that are in new industries (I don’t necessarily agree, but that’s the fact). As they go deeper into evaluating your business, they usually get nervous by thinking about all of the things they don’t know. If you don’t have a simple mechanism to show the new owner how to get up to speed quickly, or if they fail because your job role was too overwhelming for them, you too can suffer if you’ve participated in the financing.

If You Steal The Money, Don't Expect To Get Paid For It

If you’re in a business where you remove “cash” and don’t report it to the IRS, well of course, that’s your business, and your risk. The problem if you intend on selling the business, is that you’re only cheating yourself. Some people claim that as long as you can “prove” the figures you’ll be fine, but it’s not that simple. You may not want to prove the figures. If you’ve hidden it from the IRS, do you really want a complete stranger knowing about your “dirty little secrets”?

Furthermore, for every dollar you steal, you’re probably saving thirty cents or so on taxes. On $30,000 a year, over five years, you’ve saved yourself a grand total of $45,000 plus payroll taxes. Now, if you take the same $30,000 per year, and record it properly on your books, the total amount will be added back to the total figure that a buyer will use to value the business, including the payroll taxes. Here’s the kicker: businesses sell at a multiple. That same $30,000 will have a two to three-times multiplier attached to it. On the high side that $30,000 will increase the value by $90,000. That’s double what you saved by not reporting it.

From an operational standpoint, that same money kept in the business can be used for all kinds of marketing or business-building. Use it right; the money can have a significant impact on the business, which again will result in more money while you own it, and two to three times more when you sell it.

Do It The Right Way From Day One!

When all is said and done, if you approach the daily running of your business like you have to sell it tomorrow, you’ll find yourself implementing strategies that will immediately improve your business, and will pay you multiple dividends down the road when the day arrives to sell it.

Similarly, as you go through the business buying process and analyze various opportunities, always give consideration to what you will do to build a more solid platform for the business itself. It is a great exercise that will serve you well during your analysis, and also train you to identify the core issues that will make the business you buy a better one to run, and a more saleable one down the road.