BizQuest's Business for Sale Blog

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.

Separating Buyers from "Lookers"

Being based in Florida, I get way too many calls from prospective 'business buyers' who have sold their businesses up north, they may be retired, and now they’ve settled down here. After a few months of playing golf, and being driven crazy by their spouses, they decide they want to get back into business. They think they want to buy a business, but the truth is they do not really want all the dirt or hard work that comes with it. What they are truly looking for is a way to keep busy.

And so they spend their time looking at businesses. In fact, the process has actually become their new job. This way, when someone at their clubhouse asks them “what’s up”, they can say: “I’m looking to buy a business”. It is a feel good thing. They search listings, they do research, meet with sellers, compile valuations, hire accountants, engage brokers, get busy with negotiations and ultimately, they always find a compelling reason (at least in their minds), to not buy any business. They usually don't even make any formal offers.

So why am I telling you this? It’s simple: I don’t want you to become a 'Professional Business Analyst' which is what many people evolve into after too much time looking. That is not your goal here. The intention is for you to buy a good business, pay a fair price, and build it into something great.

In order to do so, there are a few things to keep in mind:

1. There is no such thing as the 'perfect' business. It does not exist. If that is what you are seeking, it will not appear so stop looking.
2. It is critically important for you to conduct a thorough search and do all of the necessary analysis and review. This is a major decision. However, the old adage of 'analysis to paralysis' can easily take hold. No, you should never be reckless, but all of your groundwork must be done with the goal of finding one to buy; not just to find a reason to not purchase every one.
3. You must make offers! It is the only mechanism available to elicit the seller’s perspective, to demonstrate you are serious, and to get the deal rolling. Regardless of the outcome, the offer is the ignition to a meaningful dialogue. Keep in mind that any offer is YOUR offer, and do not allow yourself to be bullied by anyone on the other side regarding price, terms, or conditions. Again, it is your offer so construct it as you see fit in order for you to execute the deal. Some will be rejected and others will be countered by the seller. Either way, get into the habit of getting the deal moving along and a bona fide offer is the best way to accomplish it.

Above all, adopt a buying strategy, not a looking one.  I am certain you have far more important things to do with your time than to waste it.

Buy a Business with the Attributes of the NY Giants

A good life-lesson was learned from Sunday’s Super Bowl. Leading up to the game, none of the talking heads (i.e. network analysts) would dare predict the NY Giants having much of a chance. The most risqué prediction was that the Giants would have to be flawless to even “make it a ballgame”. Most fans figured it would be a blowout.

The results are now in and while I thought it would be nice to witness a perfect season; my heart was in favor of the Giants because my brother has been such a devoted fan for 40 years and I always root for the underdog. Besides, with the Giants winning eleven straight road games and three in the playoffs (an unbelievable accomplishment), I just thought they were peaking at the right time.

So why am I using today’s column to discuss a football game? Actually, there are a lot of similarities between the game and the process you’ll encounter to buy a business.

Slow and Steady Wins the Race

Buying a business is not a sprint; it’s more of a marathon. There are specific stages you must navigate from searching business for sale listings, determining the right business, negotiating, conducting business valuations, doing research, compiling analysis, undertaking due diligence  through to closing the deal. There are going to ups and downs. There will be lost deals, misrepresented numbers, and numerous other issues that come up which will deter fainthearted buyers.

It would be easy to drop out of the process, but that’s pointless. Plus, it’s good practice to experience these gut-wrenching scenarios. Just as the Giants could have easily given up time and again, they didn’t. They remained focused. They had and air of quiet confidence while their opponents simply became more shaken with each setback.

You Need a Plan - He Who Prepares Usually Wins

All the experts agreed that the Giants would need everything to go right to even keep the game close. The Giants laid out a spectacular plan and they knew they needed to exploit the little vulnerability that the Patriots had. It worked brilliantly.

The same holds true when buying a business. You cannot simply go into this process thinking it’s easy or not anticipating what obstacles will be thrown your way. You need to be prepared and well-informed. And you need to stay focused.

When evaluating any business for sale, you need to dissect the issues and look for the volatile areas. If not, you will feel too uncertain and will not be able to get the deal to closing.

Despite all the hoopla surrounding Bill Belichick's coaching acumen, the NY Giants staff annihilated him and his assistants. The lesson here is to surround yourself with the best advisors you can assemble, put your plan into place and execute.

Good Defense Beats Good Offense

I can’t even tell you how many times buyers will point out issues about a business and will not have any foundation to back up their position. This is especially true when it comes to valuations. It is so common for a buyer to say: “the business is overpriced” and they may be right, but based upon what?

When challenging a seller’s valuation, you need to have specifics to validate your point. Your argument must be factual, not emotional. You need to draw upon rate of return examples, industry statistics, demographics, market conditions, flaws in the business itself, and any other ammunition that will build your case. Unless the seller has an accomplished advisor at their side, they may not have any basis to their valuation, but if you can’t debate it logically, you will not win the point or make any headway.

The Pursuit of the Perfect Season and the Hunt for the Perfect Business

The Miami Dolphins recorded a 17-0 record in 1972. Since then, well over 10,000 NFL games have been played, and their record still stands (much to my dismay as an ardent Buffalo Bills fan). In that period, there are been some incredible teams and thirty-five Super Bowl champions. To those teams, winning the big one was the goal, not perfection.

So too does it apply when looking for a business. The “perfect” one may exist, but the chances are highly improbable (personally, I’ve never seen it). Unfortunately, many buyers keep looking and looking for the one that’s blemish-free. They find fault with every opportunity. If your goal is to acquire a perfect company, let me save you some time – it won’t happen. What you want is a platform- and that’s defined as a solid business, with robust core fundamentals, which through an effective plan, can be built into a champion business.

The NY Giants aren’t fancy. They’re a team with low-key personnel. They’re not flashy. In reality, they are a basic, bland, boring, unsexy team (the same attributes I like in a business). Just as the NY Giants flew under the radar for the entire season - you don’t need a high profile business either. Just get your hands on a rock-solid business that provides you with immediate cash flow that you can grow.

At the end of the day, people may look back at The Patriots as still being one of the greatest teams ever, but the NY Giants are the champs. So while you may be leaning towards an industry that's hot, substance is more important than the flash.

Recession - What Recession?

I don’t claim to be an expert in economics, but I always marvel how the average person gets lulled into believing the doom and gloom, and likewise the euphoria, that is spewed by all of the so called economic experts.

Having been in my own business for nearly eighteen years, I’ve been through a number of these economic cycles. I’ve learned a couple of things:

• There are very few “recession-proof” businesses
• The doom is never as bad as predicted
• The euphoria during the good times never lasts
• There will always be cycles, good and bad
• True entrepreneurs weather any storm
• Whenever a recession is predicated, my attitude is: “I’m not participating”

I must admit that I have seen a significant change in business buyer habits in the past twelve months. While the overall activity has been strong, and our business is up by twenty percent, people seem to be a lot more cautious. I believe a lot of this is tied to the real estate market. In the recent boom years, many people felt asset-rich and though they may have been “cash-poor”, the feeling was they could leverage their real estate holdings with confidence that it would continue to appreciate. Obviously, that mindset has changed.

Additionally, past volatility in the stock market reminded people that investing in equities is not for amateurs and so in seeking an environment where the individual was more in control brought the conclusion that buying a business, where at least you know what is going on everyday, was a safer alternative. However, with today’s roller-coaster market, people seem to have translated this to overall fear and so they are thinking differently.

While any trepidation is understandable, I see this from a different standpoint.

To me, there are three great reasons why right now is an ideal time to buy a business:

1. Many buyers will remain on the sidelines and therefore your competition is reduced.
2. Many businesses have experienced decreases in 2007 and the bottom line numbers on which valuations are done will be a lower basis. Multiples will generally take a step back as well.
3. Business owners tend to become a bit more motivated to sell if they believe that they are about to embark upon another difficult year.

Although few businesses are truly immune to a market slowdown, as a business buyer you need to embrace the unpredictability and realize that there will be swings in the economy. Further, you need to evaluate the uniqueness of any entity within its sector, and not be influenced by what is going on elsewhere if it truly does not impact the business.

Of equal or greater importance, you must realize that there’s never a “perfect” time to make any major decision, just as there is no such thing as a perfect business.

Any true entrepreneur recognizes that along with risk usually comes a disproportionate potential reward, and in order to be successful, you must be willing to take risks. The difference of course is to take calculated ones. You must make well-informed decisions, and now, more than ever, becoming a knowledgeable buyer will make all the difference.

I see tremendous opportunities every day in the business for sale marketplace and I anticipate there will be an abundance of them in the New Year. All you need to do is arm yourself with the right attitude and aptitude and 2008 will prove to be a banner year for you.

So here’s the advice: let all the pundits make their predictions but you need to make your own decisions. If you truly want to be in your own business, the future looks great, regardless of what the pessimists have to say.

The Results Are In - I'm Shocked - But Pleasantly Surprised!

Have you ever asked someone a question fully anticipating a certain answer and they reply the complete opposite way? You then find yourself almost too stunned to respond...right?

Well, that's exactly how I feel after last week's column. If you recall, some poignant questions were posed to the business broker readership. To give you some additional background, in prior columns, if I ever made a statement that did not sit perfectly with a business broker or two, they have been incredibly fast to fire off a nasty email to me. Given that I have skin as thick as a Buick, I actually enjoy receiving and responding to them and believe it makes for a healthy dialogue.

In any case, I fully expected a barrage of emails from business brokers defending the industry and pointing a finger to the buyers as the root of any problems (and for me for even suggesting them). Guess what? I did not receive a single email in that vein. In fact, I received a slew of emails from business brokers echoing the issues identified and furthermore, the majority actually lambasted the business brokerage community.

I could not believe it.

Many of the emails were written in confidence so I won't share them of course.

While I do not want to suggest that the sampling can make for any grand conclusions or qualify as scientific research , the consensus amongst the emails I received from business brokers included the following:

1. They do not believe that a national multiple listing service would work.
2. Co-brokering is not done by most because they do not have confidence in other business   brokers to  share the workload or maintain confidentiality.
3. It's harder today to get really good listings. Most simply do not want to split   commissions especially in light of the point above.
4. Having a national certification/accreditation and/or regulatory body to ensure business   brokers enter the field with and retain a certain level of ongoing education was an   overwhelmingly popular comment.
5. Almost every broker mentioned that too many garbage listings are taken by others in their    field and that is the major reason why the majority of listed business don't sell.
6. Their opinion of buyers was very consistent: too few are prepared and educated.

I've enjoyed the past two columns immensely. I believe that the top tier brokers recognize the pitfalls in the business buying process and work around them. On the buyer side, I have been preaching for years that the vast majority is ill-prepared and those are the ones who will either never buy, or buy a business that will become a disaster. I am pleased to know that so many business brokers validated this opinion.

I want to thank all of you for the incredible feedback! Hopefully, in time, education at all levels can improve. Just like every great society makes education its top priority, once all of the participants in the buying process do so as well, it will undoubtedly lead to significant increases in sold business percentages. That is precisely what we all want to happen.

Food, Clothing, Shelter, Owning a Business - The Basic Needs of EVERY Entrepreneur

Do You Really NEED To Buy A Business? I'll bet that of the first one hundred people that answer "no", ninety-eight of them will never buy a business. Similarly, I will give odds that the other two, will definitely buy one, and be successful. I cannot think of a better scenario than the process of buying a business to distinguish between wants and needs. This is an imperfect process made even more challenging by the fact that there's no such thing as a perfect business. You can always find a reason not to buy a particular business, or any at all. Just like you can always find a reason to not change jobs, get married, start a family, or even leave the house for that matter.

In prior posts and articles I have gone over the math and clearly, there is no better financial investment or vehicle to invest in yourself than to buy a solid existing business that you can grow; that's a given. Why then do so many people fail to ever complete a deal? There are three key reasons and I'll save the biggie for last. First, a lack of information is a major reason. There are a ton of new situations you'll encounter and without the right information at your fingertips, you'll get overwhelmed and give up. Second, it is much easier to look for a business than it is to buy one. There are tons of businesses listed for sale online and elsewhere. It's so easy to just keep clicking through the listings trying to find a better one. Guess what? You have to start somewhere. You CAN'T buy a business from a listing alone so send in inquiries to sellers and brokers and get the dialogue going (remember, before you get any meaningful information, you need to sign the necessary documents) so don't ask for tax returns in your first email. Third, and the most important one: if you don't need to buy one, you're in trouble so you may need to adjust your thinking.

This need can take many different forms. You may need it for financial reasons, or because you're confident you can succeed on your own and need to prove it or, you've always wanted to be in your own business, and now's the right time. I believe it's always the right time to do what you NEED to do! Above all, your need has to be that you are simply no longer willing to do what it is that you've been doing work-wise to this point. Once you make the decision that "enough is enough" and it's your turn now, you'll be successful in this project.

Through my courses, seminars, consulting and brokerage work, I'm in regular contact with thousands of prospective business buyers Even after all these years, it still drives me crazy when I meet people that have been looking for a year or two - I just feel terrible for them because they've wasted so much time. Then again, when I help them and they achieve their goals; there's nothing better. I have seen the transformation countless times in these situations. They come in discouraged and feeling they'll never find the right business, or with endless war stories about deals gone bad, uncooperative sellers/brokers, and on and on. However; once they identify that they've been attacking the process incorrectly and they move into the space of determining they need to start the buying process and abort the looking process, and moreover adjust their thinking to having to satisfy a real true need to buy, it's an epiphany.

So here's what you need to do:

- You need to stop looking and start thinking about buying.

- You need to follow up listings and meet with business owners

- You need to educate yourself

- You need to get your financial house in order and determine how much you can invest

- You need to understand that no business is perfect - but there are plenty of solid ones that can grow from your strengths

- You need to know that the buying process itself is not cast in stone and each business and broker may bring different circumstances

- You need to be realistic about what size businesses you can afford

- You need to get to set a timeline to get this done (six months maximum)

Above all, you NEED to succeed

An Old Concept Holds True

Years ago I read Napoleon Hill's 1937 classic "Think and Grow Rich" and a well worn copy has sat on my desk for close to 20 years now. I pick it up and flip though it periodically and I have made it a habit to bring it along on every business trip. It makes for great airplane reading (I've found that my time on an airplane to be some of the best time for me to think about business and personal matters with great clarity).

There have been a series on additional versions over the years but if you've never read the original, get a copy; it's well worth reading it cover to cover. Every single self-help book that has been published since this classic is, in my opinion, a variation of all the themes that Hill pegged brilliantly 70 years ago. If you want to read some interesting comments for people who read this material check out: http://www.interactivereviews.com/product/0452266602

Hill identifies fifteen character traits that are critical to and common amongst the great business leaders of that period including Andrew Carnegie, Charles Schwab, Henry Ford, Thomas Edison and others. What's truly amazing is that if these folks were substituted with today's great business leaders, the commonalities would still hold true.

One of the fifteen key attributes is what Hill terms the "Power of The Master Mind" and how you can effectively multiply your brain power by surrounding yourself with people that bring different strengths to the table. It's the ultimate corporate chart in some respects but it goes further than that. What I learned from it years back, and still leverage today, is to surround myself with people that are not only smarter than I am (not too difficult) but who bring specific knowledge to any situation.

This is critically important during the process of buying a business. You are going to need great advisors; not good ones. Don't try to save a few bucks when engaging accountants, attorneys or advisors. Hire the best possible people you can afford and spend a few bucks on the necessary resources. While friends and family may offer you sincere free advice, there's no substitute for great input from experienced advisors.

Your entire success in the buying process and in your business will ultimately come down to hard work and know how. You'd have to be out of your mind to make a decision of this magnitude without the right information or right team at your side. There's no shortcut or quick fix pill in any business endeavor. This is especially true when buying a business. Pay for good help - it's worth it! Devour as much information as you can - you'll need it!

On Resourcefulness

Before I go any further I want to take a moment to post about my partner in this project, Richard Parker. I've known and worked with Richard for going on 6 years now, and there is no one I can think of who is more qualified to write as an expert about buying and selling businesses, and entrepreneurship in general. Richard has built a multi-million dollar business through helping people achieve their dreams of business ownership. I am fairly certain he would do it even for free if he had to, because he so thoroughly enjoys helping people and seeing them pursue their entrepreneurial dreams. (Though eventually I'm sure he would still find a way to make money at it; he is an entrepreneur after all!)

Before I bought BizQuest in September of 2003, I bought and read Richard's How To Buy A Good Business At A Great Price© course cover to cover. Some of it I already knew, and some of it didn't apply to my situation, but overall I found it to be an immensely helpful overview of the process of buying a business.

It always amazes me how an aspiring business owner can contemplate spending many thousands of dollars on a business, but balk at spending a few bucks on a book or an educational course. In my opinion the return on investment (ROI) on money spent on education has always been very high. I never hesitate to spend money on books, online courses, eBooks, magazines, or anything else I think will contribute to my entrepreneurial education and help me to run my business better.

I currently subscribe to about 6 business magazines, and in addition to reading most of those cover to cover I have probably read about 50 business-related books over the last few years since becoming a business owner. I've read books about marketing, management, web design and programming, and numerous other topics including general entrepreneurship books that give me ideas and, often more importantly, inspiration for my own business.

Perhaps in this blog I will post about some of these in a "book review" format, but the point I wanted to make here is to add one more trait to our growing list of qualities that a successful entrepreneur must possess, and that is: resourcefulness. It's not about knowing everything; it's about knowing how to be resourceful enough to get the information you need to make effective decisions. Our modern, wired world is flooded with information. Oftentimes the resourcefulness lies not in finding the information you need, but sifting out the best or most relevant information from the vast amount of clutter and junk. Either way - whether your challenge is locating an obscure piece of information you need, or sifting a needle of information from a haystack of junk, it is the degree of resourcefulness you possess that will ultimately determine your success.

Every piece of information you could ever possibly need to know to be a successful, multi-millionaire business owner is already out there. The question is not are you smart enough, but will you be resourceful enough to tap into that vast information stream and use it to your advantage? (The fact that you have found your way to this blog is a good sign.)

My thanks again to Richard for joining me in this project, and for his vast contributions to the available information stream on buying and selling businesses. He has certainly made it much easier for all of us aspiring entrepreneurs to be resourceful.