BizQuest's Business for Sale Blog

Getting the Money from Family and Friends When Buying a Business

Getting the money to buy a business is, oddly enough, one of the things that many buyers leave for the last minute. Perhaps it ties into the incorrect perception that traditional lenders have their vaults open ready to hand over money to you to buy a business.

Unfortunately, it is not the case. Not even close!

Today, I received an email from a website visitor explaining he has found a business, negotiated the deal and now is absolutely stunned and stuck to learn that his “investor”, his Uncle Max, doesn’t want to lend him the money.

This financial backer initially told him “I will lend you the money – don’t worry” (I really wish they had read my course because here’s what they would have learned):

If you are planning on having friends or family members finance your purchase, you need to understand it is a business deal. More importantly, you must be sure that they will be there to write the check when you need it. It is very easy for somone to off-handedly promise you the money, but it is a whole different ballgame when the time comes for them to fork over the cash.

If you are considering getting financing from your “Uncle Max”, keep a few things in mind:

• Make sure Uncle Max’s criteria for agreeing to finance you is completely aligned with the type of business you are looking to buy.
• Nail down the deal details with your financier before you begin negotiations with any seller.
• Lay out very specifically what Uncle Max expects in return for his investment. Is it equity, debt, and what are the note terms, etc.?
• Involve him in the process. Keep him updated. Analyze companies together. If a particular business is not of interest to Uncle Max, you want to know it early on.
• Be completely upfront with any sellers or their brokers about the source of your financing. Simply telling them “My Uncle Max has plenty of money and will finance the deal” is not good enough.
• Get Uncle Max to provide you with a letter acknowledging they will assist in the financing, and have him provide you with a Personal Financial Statement that you can offer sellers as proof to back up your claim.

While family and friends who offer to lend you the money are well-intentioned, and may even come through with the financing, do yourself a favor and don’t put your entire future in Uncle Max’s hands. There are many options available to finance a business. Learn what these are beforehand. When the right opportunity arises, you want to be in a position to pounce on it and get it done!

I will be leaving for Canada on a personal matter as my father is quite ill. The beauty of my business is that I can operate it from anywhere. However, I am not certain when my next posting will appear, but I do hope to be back on track for the newsletter after Memorial Day. As you may have read in some of my posts last year, I became an American citizen on January 23, 2007 which was one of the greatest days of my life. I waited ten years to achieve that incredible honor. I love this country, and I am totally excited to vote next November. As we “celebrate” Memorial Day, I hope that you too will recognize the day for what it is supposed to be – to honor those before us who gave so much, and paid the ultimate price, so that we can enjoy our freedom. One of my true life heroes is Jerry Efros, who works with Transworld Business Brokers in Fort Lauderdale, Florida. Jerry is a highly decorated WWII veteran and each year, on the Thursday before Memorial Day, I look forward to his sobering, yet somehow uplifting recollection of his military career, and his 33 combat missions as a B17 tail gunner. His stories are bone-chilling. Jerry definitely does not see himself as a hero - he always tells people "the guys that never made it back - those are the heroes." While Memorial Day seems to have unfortunately evolved into a mass retail marketing event, please be sure that you take the time to honor the day and its true meaning. Regardless of your political beliefs, the fact remains that far too many of this great country’s finest young men and women are stationed away from home today and sacrificing their lives for us, just as others before them have done.  Give them their due. We owe it to them. To my friend Jerry Efros, a real American hero, you definitely symbolize the greatest generation - God Bless You!

When You Buy or Sell a Business An Effective Training Period Benefits Everyone

Having a reasonable and effective transition time when you buy a business can sometimes make the entire difference between whether or not the business remains successful after you take over.

Similarly, every seller should want the business to be turned over to a competent individual.

While there are no hard rules that dictate how long the former owner should stay, there are some guidelines.

The first thing a buyer must understand is that the seller cannot remain to perpetuity. If a buyer is too worried about taking over the company, and believes the seller must remain on board for an unusually long time, chances are the buyer is not suited to operate the company and may want to reconsider their decision altogether.

On the flip side, some of the training periods offered by sellers are completely ridiculous.

Unless you are acquiring a very basic business (i.e. a sandwich shop where the seller has very little impact day-to-day), a two week post closing training period is nonsense. I have always wondered why any seller or broker would remain inflexible on this point. If the seller truly wants to see the buyer succeed, if the business is what they have represented it to be, unless there is an extraordinary issue forcing them to be completely removed from the operation in short-order, and especially if there’s a seller note involved, then for goodness sake, offer an ample transitional period!

While two weeks may not be enough, it does not have to be for a year either; nor does the transitional period have to be free. But it does have to provide the buyer with adequate time and instruction to get settled in and avoid being overwhelmed.

In my experience, it typically takes a buyer about three months to really get a grasp on the operations of a reasonably straight-forward business. This does not mean that every seller has to remain on board for three-months, but they may need to be available, if necessary.

A buyer must negotiate a transition period that will allow them to at least have the seller accessible during ownership change. Keep in mind that employees, suppliers, customers, landlords and all other stakeholders in the deal will be apprehensive initially and it will take time for the buyer to alleviate any concerns they may have.

By the same token,, the buyer must understand that in some cases, having the old owner around can cause more harm than good. The buyer may not be perceived as the real boss while the old owner is still in the business.

Often times, it makes sense to have a short-term, full-time transition immediately after closing (i.e. one month), and then reduce the amount of time the seller is involved. Having the option of them being available either part-time, or with diminishing hours, or on an as-needed basis after the initial term, will likely provide you with some security and certainly make for a more effective changeover.

In some businesses where the seller is “the business”, or perceived as such, you may simply want to have them perform a diplomatic role long-term. In other words, they will be available for any key meetings, or to perform other tasks that will provide the impression that they are still involved.

In all of the businesses I have purchased, I had the seller tied to the business for anywhere from one month to two years. I must admit however, that they never made it the full term. I usually found that after a short period of time they were more of a hindrance than an asset. These were in companies where I took over the operations, and I certainly did not have the seller exit until I felt relatively comfortable assuming their role.

Equally important to the amount of time you negotiate for training, you must have a plan in place for what you need to cover and accomplish during the training period. As the buyer, it is incumbent upon you to map out a detailed training schedule. This should include of the questions you want them to answer during your training. Break it down to employees, customers, financials, sales, marketing, suppliers, competition, etc.

To make the point more candidly, your goal during the post-sale closing period is to conduct a form of training due diligence.

Having the option of a long transition is a good thing. But the quicker you get in, learn the company, establish mutual respect with all of the parties involved, and put your stamp on the company; the better off you will be down the road.

Whether Buying or Selling a Business You Can Learn Something From Warren Buffett

I want to talk about two issues both of which emanate from renowned investor Warren Buffett which are great lessons for both prospective business buyers and sellers.

Lesson For Sellers:

The annual Berkshire Hathaway meeting was held in Omaha, Nebraska last weekend. About 25,000 faithful showed up to spend time with Buffet and his business partner Charlie Munger in what has become a love-fest with the brilliant investors and somewhat of a pilgrimage for the shareholders.

The thing I find incredible is that Buffett and Munger spend most of the time answering questions from shareholders. These are not rehearsed questions or ones that have to pre-approved. They’re straight from the floor and I’m told Buffett doesn’t dodge any of them. It is just great to think that the world’s richest man is completely open with his shareholders and devotes the majority of the meeting to their questions.

(By the way, if you really want some great reading, get a copy of the Berkshire annual report to shareholders – it will be some of the best, down-to-earth company insight you will ever read. Here’s a list dating back to 1977 http://www.berkshirehathaway.com/letters/letters.html)

The Berkshire meetings have followed this question and answer format for years, regardless of the company’s performance. In Buffett’s eyes, the company belongs to the shareholders and more importantly, every question deserves a response – there are no secrets at Berkshire nor do they feel the onus is on the shareholder to dig through the minutia like some public companies do to uncover the really story.

On the other hand, The Office Depot annual meeting was held last week down the street from my office. That company is getting hammered on all fronts yet I was told that  their CEO would only take pre-submitted questions, with strict time constraints….something is definitely wrong with the process here don’t you think?

It reminded me of the countless interactions I’ve had and have been party to with buyer clients over the years with business sellers. I always laugh when sellers or their intermediaries are apprehensive about having meetings or disclosing pertinent data, even to qualified buyers until an offer is submitted. Or, when questions are deferred with the response: “you can look into that during due diligence”.

If anyone could substantiate not answering questions, it would be Warren Buffett yet he is always an open book (and quite engaging) with his shareholders. I figure that if he can spend two days answering shareholder questions, then no seller is immune from the same process.

Lesson For Buyers:

When asked about the recession he said: “I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.”

Talk about removing the economic and political BS we constantly hear and putting it into plain English.

He was also very direct when stating that his company is NOT in the business of predicting the economy…if he was, he said he would invest in the S & P futures market and not businesses.

Buffett’s long-standing take on business success is VERY simple and so critical right now. If you’re running scared finding every possible reason not to buy a business because you’re worried about the economy (make sure you read my prior blog about the recession at: http://blog.bizquest.com/2007/12/recession-what.html) and be sure to follow Buffett’s decades old PROVEN formula to create enormous wealth:

Step 1: Turn off the stock market
Step 2: Don’t worry about the economy
Step 3: Buy a business not a stock
Step 4: Manage a portfolio of businesses

So there you have it - solid advice that has worked for Warren Buffett. If you want to buy a business, focus on the long-term, not the immediate newsworthy trends. If you’re selling, get everything on the table, warts and all,  and make the process transparent for everyone.