Logic – The Other Key Ingredient When Buying A Business

Last week we talked about the emotional aspects to the business buying process. You learned when emotion must impact your thought process and conversely when to avoid making emotional decisions. Today, we will review the other side of the equation when common issues arise in the business buying process and you must let logic prevail

Numbers Don’t Lie – People Do

Whether you are looking at industry data, company financials, or any other reports on the business where numbers are involved, the only approach is to allow logic to dictate your conclusions.  No matter what “twist” any seller wants to put on their numbers; the fact is that the numbers never lie; only people do. There is never any reason to attach emotion to numbers unless there is an attempt to manipulate them. So when we are talking numbers, it is all black and white, good old logic.

Now of course, there may be instances where you must take certain things into consideration when analyzing financial statements for example, or there can be some instances where further discussions are appropriate, but in all, the numbers are the numbers and so you must review them logically.

The same holds true for any data you may uncover such as customer concentration issues, declining margins, company sales data, or industry trends that could impact the future of the business. You certainly want to allow the seller to make their point, but they will need a very compelling case to override the factual data.

Are You Going To Be Successful As The Boss?

No matter how wonderful or poor a business may be today, you must logically determine whether or not you have the skills to replace the seller and operate the business successfully in the future. There is no such thing as an “easy business to run”. Every business has its challenges. Certainly, there are plenty of businesses that are operated by the wrong owner, and these present opportunities. However, this is only the case if you have the skill set to give the business what it needs to grow.

Conversely, solid businesses run by the wrong people will turn sour quickly. This is one area where business buyers make terrible mistakes. You must logically determine if YOU have what it takes to be the boss of the particular business. You cannot afford to grow into the job. Sure, there will always be some on the job training during a normal transition period, but if you lack the core strengths to run the business, then have the common sense and logic to make that determination and then find another opportunity.

Do not allow yourself to start dreaming about running the business, or trying to convince yourself you are something you are not. Take out the “logic mirror” and give yourself a good, hard look.

Are The “Fixes” Really Fixable?

Everybody is a critic. It is very easy to sit on the sidelines and point out all the things that a business owner is doing wrong. I am still amazed whenever I get an email from a prospective buyer outlining all the wonderful things they think they will do once they take over, and how they are going to repair all the ills that are now in place. Well guess what? Unless you have a wealth of experience in that specific type of business, you truly have no clue to draw up any meaningful strategies yet, nor do you know whether or not your ideas make any sense at all.

This comes back to what you have probably read many times over the years in my column; you first have to understand the business intimately before you can logically undertake any new aggressive initiatives. Translation: “Don’t try to fix anything until you know what the heck you are doing!”

Pulling Off The Deal

Right now, the financial markets are in complete disarray. Getting financing requires very specific skills, and even with those, banks are not lending. The stimulus package the government is touting provides nothing more than stimulating debate right now. Time will tell if this gets the banks to start putting money on the street for the small business buyer. If you want to leverage a deal, seller financing is a must. But along with that strategy, you have to be in a position to “sell” the seller on your ability to get the deal done, and convince them you will be successful in the future. You cannot do this by making an emotional plea. It takes a logical plan to demonstrate and convince them they should bet on you.

The vast majority of our clients (91% in fact) get seller financing, but not every seller is going to be open-minded about it (those are the ones whose businesses won’t be selling today) and so you have to be able to logically approach this type of offer. Of equal importance, you have to know where these opportunities exist.

Similarly, you cannot have delusional expectations about the size business you want to acquire. Logic must prevail in your thinking. There is no doubt that the market is poised for incredibly creative deals today that can be very attractive to a seller if, and only if, you have the know-how (a.k.a. logic) to properly structure them.

Remember, if you want to read more articles on buying a business, please visit: http://www.diomo.com/articles.html

Have a great week!

Comments

[Leon Parker]

This is another of Richard's "right on" articles.
I share his amazement at some of the wild proposals customers make about how to immediately "turn around" businesses they are looking at, without even understanding the basics of the operation. Unless it is a real distressed business situation I tell all customers who want to be buyers to plan to "run it six months" then start investing in improvements. Often when we go back 6 months after a sale we find a happy camper who has forgotten all the things they wanted to change.

Also in today's confused market, with the restrictions in place and proposed on SBA loan guarantees, Seller Financing is the key to getting deals done. All we have seen so far is rhetoric from our political leaders about how important small businesses are. Only when they figure out how to back it up with changed policies regarding the SBA programs and credit markets in general will we see any improvement.

[Leon Parker]

Picking up on the comment "everybody is a critic", I find it interesting how many friends and relatives come out of the woodwork when a customer decides to try to buy something. Everybody has an opinion about whatever is proposed, and most of them think that as a favor they should find all the things that are wrong with a deal.

Buyers should be very careful about who's advice they listen to, and always question the credentials of so called experts. Competent advisers understand the business based on involvement with similar operations or situations and present balanced reviews with specific suggestions.

[William Bruce, ABI]

Richard:

Great article. As business brokers, we are explaining to sellers that seller financing is a must in today's economy. With "logic" by the buyer as you explained, an adequate down payment, a decent interest rate and possibly a balloon payment in 4 to 5 years, it's a win-win situation for both parties.

William Bruce, President
American Business Brokers Association

[Mike]

If you read many of the top blogs written by one specific individual you will notice that they know a lot about a certain topic. They usually have spent a significant amount of time working and experiencing the things they write about. Consequentially they can blog with the authority that only comes from experience.

============================

Mike

[url="http://business.bizoppjunction.com">Home Based Business[/url]