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.  

Comments

[rich]

excuse me but I cannot agree with the nonsense in this article. 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. It is absurd to expect a buyer to have to provide any information, this is a buyers market and anyone in a position to purchase a business in todays economy should expect the seller to fully back any financial claims made.

[jay kim]

thank you for your great discussion on common mistakes when buying a business, however when you said " if you want to be buyer, you have to start the buying process( contacting and meeting with sellers)"- where do you get the sellers ? jay

[Independent Computer Consultant]

Very good advice as always.

Do you see sellers of recession proof/resistant businesses (gas stations, liquor stores etc.) asking higher prices for their businesses than a year or tow ago?

[Alan Thomas]

Great material. I enjoyed reading the information.

Alan

[Don Wilson]

"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."

Quote from Rich

Rich:

I believe what Richard is saying is right on...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. A business is a living enity and not a used car that you can take for a test drive. As quoted below from Richard, the information will be provided in stages and not handed over to everyone who fills out an NDA.

"However, sellers will often disseminate this information in stages, as the buyer demonstrates their qualifications and level of interest in the business."