Buying A Business Is Easy - Once You Know How

Although I have already purchased ten companies, I promised my wife I would abstain from buying a business until our fourth child was in middle school (only four year to go – or so I thought).

However, the current market has become so attractive for buyers that I managed to weasel my way out of the deal. For the past couple of months I have been seeking a business to buy. In the various guides I have written about buying a business, I have always told people how important it is to put on a “buyer’s hat” and to try to be perceptive about every business they come across, whether it is a business for sale listing, or one they encounter in their daily lives because they never know where an opportunity lies.

I make it a point to speak to every business owner I encounter; it drives my wife and kids crazy, and my father-in-law gets the greatest kick out it. He says I am the only guy that can walk into a florist shop to buy flowers and leave knowing the owner’s business life story. Buyers need to do the same thing. Most owners love to talk about their business so ask them about it. Find out what they like and dislike, how their business is performing, how they compete, how they got into the business, etc. It is a fabulous to learn about businesses, but also a brilliant way to find one to buy that may not even be for sale.

A good friend of mine works for a company (which has to remain confidential), that he has told me for a while has tremendous growth potential. While the company is doing well, the owner simply is not an expert on the operations side and therefore the business has only grown marginally. After learning about their core model, I asked my friend to set up a call with the owner.

Here we are less than five weeks later, and I expect to close within a week. So how did it happen?

Even though I have been teaching and preaching all of the strategies used in this transaction, a few are worth reiterating, because the fact is that buying a business is easy, once you know how to do it.

Qualify Yourself

I contacted the seller and introduced myself. I told him I may be interested in buying his business. Within the first few minutes of the initial conversation, I offered to send him any documentation that he needed to gain comfort in my ability to execute the deal. Once he knew I was qualified, he was immediately more open-minded. Keep in mind that when he got up that morning, he hardly expected to be discussing the sale of his business that day.

Some buyers express concern about divulging their financial position fearing a seller will exploit it, but that is definitely not the case. When a seller knows that a buyer can get the deal done, that buyer moves to the top of the list.

Establish Trust

Don’t come on like a bull in a china shop. Feel out the seller. The goal is to establish cordial relationship with them. There is no need to ask highly confidential questions or ones that will get their guard up at the beginning. Learn their “hot buttons”. In this case, it was simply a matter of asking them what they like and don’t like about the business, and what they were hoping to achieve by potentially selling the business. I immediately learned the seller loves his business, but hates the operational side. He enjoys the sales and marketing, but is caught up in the logistics which he doesn’t like, nor does he do well.

I asked him to layout exactly what he would like to do post-sale and soon learned he was hopeful to stay on in a sales and marketing capacity. Knowing this, my strategy and potential deal outline would simply address his objectives.

We discussed what life could potentially be like post-sale, how he could stay involved, what the general deal parameters under such an arrangement may be, and he was soon smitten with the whole idea. The rest, as they say, was easy.

Learn the Business

After our first call, I spent the next several days immersing myself in the industry so that I could ask the right questions, and verify if there were some obvious looming threats. Furthermore, when our second call took place, and these questions were asked, the owner immediately recognized two things: One, I was serious and diligent and two, he was not going to “sell” me. All the research I did was readily available, but doing so serves to reinforce a buyer’s credibility. By establishing this perception, the seller will begin to believe that you may very well be the buyer.

Outline Your Agenda and Get The Documents

I was very clear about my intention to complete a transaction if the business met my criteria. I outlined very specific timing to assure him I was not “kicking tires”. I also made it abundantly clear about my requirement for certain financial documents to complete my valuation and to make an offer. While some buyers often complain about sellers not disclosing financials, this only becomes a common scenario for the most part if the seller or broker thinks you are just fishing. So the lesson here is to take control of the deal by conveying sincerity and a sense of urgency to the seller.

Lay Out The Deal

Upon receipt of the initial documents I compiled my valuation and considered the potential deal terms given what I needed in place valuation-wise, and coupled with what I knew the seller wanted from the deal. It was a very simple case of me sticking to the formula I have used for nearly twenty years – “I’ll pay your price, you accept my terms.”

Talk Through The Initial Offer

I believe a buyer should discuss the general deal terms they are thinking about before putting them on paper. This serves two purposes: you can gauge the seller’s initial reaction and second, when you present a formal offer that precisely reflects what was discussed, you build additional credibility with the seller.

Establish The “No Surprises” Rule

I get very nervous when surprises surface the seller did not disclose to me. I have been doing this long enough that it is likely I will find out every potential problem. I expressed this to the seller and told him to tell me every potential issue because if he doesn’t, and I uncover it (and I will), the deal will be dead, unless it is something that he absolutely could not know (rarely happens by the way). Up to this point I had been building credibility with the seller. And, he was with me as well. He was perfectly upfront with every issue, warts and all.

While I have found some items during my inspection period, it has not been anything major. More importantly, we have been able to resolve any issues, rather than have them impact the intention of the two parties to get a deal done.

So now I am in the final week or so of the due diligence. The deal terms are in place, contingencies being satisfied and he has provided me with unlimited access to all the information I have requested. There haven’t been any ridiculous surprises, he is pleased with the price, I am happy with the terms, and it all seems like we are heading to the finish line.

So that’s it, easy isn’t it? Makes me wonder why some buyers can take months or years to mess around with this process.

Sure I have the advantage over most buyers because I have done this so many times before. But, this is not rocket science, and do not forget that I found this business a month ago. From my first call with the seller through to closing will be about 45 days.

Right now is a great time to buy a business, so even if it takes you a bit longer, who cares? The fact is that if you approach the business buying process in the right way, if you are well-informed, open-minded and truly sincere about buying a business, you can easily get a deal done.

I will keep you posted on the deal.

Have a great week.

Comments

[Howtofinance]

So what were the terms - seller financing with a 30% down payment? DO you use your own cash in the deals? Does not seem like many banks want to loan out money these days. Thanks

FROM RICHARD: I will be using very little cash in this deal. It is a very substantial combination of seller financing and a performance based deal structure where the seller has the opportunity to earn far more than the market price for the business.

[Jim Pawell]

Congratulations. I'll be interested to hear how the purchase turns out for you.

Illustrates that finding the right business is the hard part. Once a good business has been identified, the rest isn't that hard.

I like the "tell me about the problems" approach, and plan to use that next time.

[Jack Green]

Please list the 10 buisneses you acquired.
Tell us the purchase price and selling price and if you have time explain what did you do in one or two of them to increas Value.

Jack

FROM RICHARD: In an upcoming newsletter I will definitely cover off the three key areas I have always targeted in the businesses I have pourchased to increase sales.

[computer consultant]

Was it a service or retail business? Will you povide more details once you close?

[www.facebook.com/profile.php?id=1278188571]

I'll be watching closely for your next newsletters!

Congrats for the finding. I hope to follow suit very soon.

[Franchise for sale]

Yes buying a business is easy. But we should not believe what ever the broker says. We should analyze and decide to buy the right business.

[William McBride]

What are your key valuation components when looking at a Potential business.