BizQuest's Business for Sale Blog

Complete Your Financial Statement and Make it Available

Many prospective business buyers express concern when a seller or business broker asks them to provide their personal financials. Personally, I've never understood this apprehension. There are a number of issues buyers note specifically as being worrisome, but the truth is their reasoning is based more on opinion than fact.

In my experience, those buyers that are unwilling to provide their financials are generally the ones who are either not serious about buying a business, they are often completely misinformed about the business-buying process, or they are simply not in any position to acquire the size businesses they are investigating.

There are two main buyer misconceptions that you need to understand so that you can gain comfort with this matter.

Myth # 1 - Disclosing the Buyer's Financials Will Reduce Their Bargaining Power

I've heard buyers claim that once they divulge their financials they will be at a disadvantage in any negotiation. The fear often cited is that the broker/seller will now know exactly how much money they have, and will then push harder to get hold of all of their cash in a down payment or force them to secure a loan with all of their assets.

While I do understand this assumption, in fact, the opposite holds true. A financially strong buyer will actually improve their negotiating position.

• The other side will recognize their ability to get the deal done.
• The buyer will immediately establish credibility by having achieved a certain level of net worth.

On the other hand, if you do not have the financial strength to execute a certain deal size, it will force you to adjust your thinking and focus your time on businesses that make sense for you. Here again, you will be in a better position when you provide them to parties for the reasons noted above.

Myth # 2 - The Seller/Broker Has No Reason To See a Buyer's Financials

To me, it simply shows good faith and honestly to be willing to provide your financial statement. After all, if you want to see the seller's books and records, shouldn't they be entitled to see yours? This is especially true if you want to negotiate any seller financing.

Further, throughout the transaction, the seller will provide you with infinitely more confidential information than your personal financial statement will disclose.

Now, I know all the skeptics are saying: "I signed a confidentiality agreement but they didn't". Good point, However, the seller/broker has absolutely no interest or reason to disclose your financials to any other parties. Additionally, even in a worse case scenario, let's say they did tell someone, what possible negative impact could it have on you? If you want added assurance, have the seller/broker sign a non-disclosure attesting to the fact that they will hold the information in confidence (your attorney can draft a simple agreement).

The Biggest Reasons to Complete a Personal Financial Statement

It blows my mind every time I ask a buyer "How much are you willing to invest personally to buy a business" and they reply: "I haven't really thought of it." Well guess what, if you haven't thought of it, you should put a complete halt on any additional looking, at start to think of it now.

First, it is critically important that you get a handle on your personal financial situation. Yes, it is true that there are some wonderfully creative ways to finance a business purchase regardless of your financial position, however, in smaller deals these generally play less of a role.

Second, if there is someone else who shares your financial picture (i.e. a spouse or partner), you need to have them completely on board so that when the time comes for you to write a check together, there won't be any surprises.

Third, and most importantly, by completing this simple task, you will put yourself in a much better position against other interested buyers on those businesses that you can afford to acquire.

   

 

Buying a Business with a Partner – A Marriage Made in Heaven (or Hell)

I receive a surprising number of emails from prospective business buyers who are thinking about going into a venture with a partner. Usually, it’s a family member, friend or business acquaintance. What I find astonishing is that most inquiries relate to whether or not there needs to be a formalized agreement between the parties. After all most note, the partners have known each other for many years, they get along great, and trust one another. That’s all wonderful but the answer is an overwhelming, unconditional and categorical "yes" – you absolutely must have a formalized agreement.

To give you a personal example, my brother and I owned a large company together. I would trust my brother with my life in addition to him being a tremendous business confidante. Our partnership was perfect but, if heaven forbid something happened to him or me, the last thing either of us wanted was to suddenly have the other’s spouse as our partner (even though we love our sisters-in-law). For this, and numerous other reasons, it just makes sense to have everything documented.

It does not have to be a 50-page shareholder/partnership agreement but it must clearly spell out the necessary fundamentals. Everyone goes into a partnership all glassy-eyed and hopeful. Dreams are shared. You are convinced you’ll conquer the world together. Unfortunately, situations change. Like my first boss and late uncle once told me: "you never know a woman until you marry her, and you never know a man until you work with him".

While you will want to have an attorney compile any agreement, a few of the issues to consider include:

• Definition of ownership
• Dealing with disputes
• Mechanisms to dissolve the partnership
• Procedures to follow and a pre-determined formula to value the business in the event of a buyout by one party
• Voting rights should one partner own the majority of shares (some issues such as dilution, binding the company, selling additional shares may need unanimous consent)
• Procedure to follow in the event one partner dies, becomes incapacitated and unable to contribute to the business for an extensive period of time

Above all, the agreement must be fair to both parties.

I have had many partners in the numerous companies I have owned over the years. Most were great, and only a few were disastrous. Personally, I am a huge believer in having a partner. If the combination is right you can really divide and conquer!

If you are going to buy a business with a partner here are a few things to consider:

• Partnerships work best when each party brings a distinct set of skills to the equation. In other words, you should each have your own area of expertise and not simply a duplication of skills.
• Just because you get along with the other party is not enough reason to go into business together.\
• You need to formulate a list of fundamentals in advance that you both agree any business you consider purchasing must have in place. If not, each partner will find a reason not to buy every business you review.
• Understand that your personal relationship with the partner will never be the same once you’re in business together. It may get better. It may get worse. Just remember what my uncle said. In my opinion, it is never worth it to jeopardize a friendship over a business but that’s not always possible. Be mindful of it and try as best as you can to keep business and personal issues separate.
• You need to share the philosophy that the business comes first before individual personal gain. If you do right by the business, the personal rewards will always follow.

Business partnerships are a lot more difficult than marriage because there’s money at stake from day one and it can really influence people. Just like a marriage, a business partnership takes work; you must have full faith in the other party, and initiatives you undertake should be for mutual benefit. Most importantly like a marriage, if there are "issues", you need to communicate no matter how difficult it may be. You cannot sweep problems under the rug hoping they’ll go away. Just like in a marriage, problems left unresolved or ones that are too big, will cause the business to breakdown and will likely not be salvageable.