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I would highly
suggest you start by getting a copy of
The
Business Buyer's Manual. It takes you through ever step of
buying a business. It will even help you decide on whether or
not being a business owner is really for you.
That being said, I
have listed 10 dos and don'ts that you should keep in the back of
your mind when buying a business.
From finding
the right business or franchise to buy, to finally accepting the
keys to the front door - buying a business can be an extremely
frustrating exercise. It is important that you plan and implement
each and every step in sequence and avoid the many caverns on the
road to completing the deal.
The following
10 points should always be in the back of your mind.
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Do not buy
or invest in a business that you do not understand or are not
familiar with. This does not mean that you have to know every detail
of the management and operation of that specific business.
Hopefully, you will receive specific training from the current
owner. What it does mean is that you should, at the very least
understand the primary principles of the business. We all understand
the principles behind a retailer; buy product that appeals to the
consumer at the lowest possible price and sell it at the highest
price possible while maintaining the lowest overheads – simple! But,
if the business you are considering is in the disposal of toxic
waste, understanding the basic parameters of how the business
operates and hence makes a profit could be completely foreign to
you. The current owner of any business that is listed for sale will
always tell you that running the business is relatively easy. It
probably is relatively easy for the seller; he has had many years of
experience that make it easy.
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The
complexities and timing of the transferring of knowledge from the
seller to the buyer is relative to the type of business that is
being acquired. A business that is very seasonal, should have a
minimum of one full year of support from the seller in order to
learn what occurs and how to manage and operate the business with
each and every season. Make sure that you have an agreement on how
and when the support and transferring of the seller’s knowledge will
take place. As an example, will you require that the seller be
available some evenings and/or weekends? Is the seller planning on
taking a three-week vacation in Europe the day after closing?
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Before you
buy a business, set a top price in your mind, that you can afford
and that you think the business is worth. Don’t ever be afraid or
embarrassed to walk away. Don’t become so involved in the actual
“buying” of the business that actually consummating the deal becomes
more important and exciting than the acquisition of the business
itself. No business that I have ever seen is worth buying at any
cost. Do not let yourself get caught up in the “its only another
$25K” routine!
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If you buy
the shares of a business, you are acquiring “everything”, that
includes tax liabilities, lawsuits, and debt. Those that exist now
and those that might appear in the future. There are methods whereby
you can purchase the shares and the assets and not the liabilities.
In this case, the liabilities fall back on the seller. However, you
must remember that even if you do not buy the liabilities, as you
own the shares, any and all lawsuits will be directed towards you
(the corporation). The previous owner may have given you a multitude
of “save harmless” clauses, which basically means that he will be
responsible for any lawsuits or claims made against the company for
things that occurred prior to you acquiring it. If something were to
happen to the previous owner or he looses all his money in the stock
market, you will end up being responsible for all of those
liabilities.
In other words
save harmless clauses are only as good as the person behind them. It
is better to uncover any and all potential problems and deal with
them before closing then it is to rely on save harmless clauses. As
well, even if the seller is prepared to take care of any liabilities
that are from the period that he owned the business, that might
arise in the future, the time burden of dealing with those
liabilities when they surface will still be your responsibility. It
will be your company that will have to bare the potentially negative
exposure and it will be your company that may be sued, and
secondarily it may very well affect your future liability insurance
rates as those rates are based on historic company claims.
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Look at
financing alternatives, owing the seller some money will give him an
incentive to transfer his knowledge (he has a very good reason to
help you succeed, he wants to get the balance of his money) and it
will give you something to negotiate with if there are any financial
disputes that appear after you have acquired the business. You can
usually obtain much better terms from the Seller, depending on the
Seller’s reasons for divesting himself from his business, then you
will from a bank or other financial institution.
However, you
must be aware of one pitfall in borrowing money from the seller. In
most cases his Non Compete Agreement, if there is one, will have a
clause that states if you do not live up to the terms and conditions
of the Loan Agreement that his Non Compete Agreement is null and
void. In other words, you miss one payment and the previous owner
may become your biggest competitor.
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The
seller’s net weekly, monthly, and yearly cash flow is likely to be
higher than yours due to the fact that he is not carrying the debt
you incurred to buy the company. The seller also has years of
experience and is likely to make fewer business errors and he will
be much more efficient.
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Warranty
issues in any company involved in creating goods or supplying
services can be a major liability. Most small businesses do not
accrue any reserve for warranty expenses. It is important that the
cost of warranty issues be resolved with the seller prior to
acquiring the business. If you purchase the shares of the company,
you are accepting any and all warranty liability costs and issues
for warranty claims in the period prior to acquiring the business.
Do not accept statements from the seller that warranty costs are
very low. Very low in the seller’s mind could be very high to you.
Warranty bill backs, if there are to be any, to the seller should be
defined in the agreements including labor costs (what rate) and
material costs and terms of payment (will it be deducted from the
buyers debt to the seller or invoiced to the seller weekly, monthly
or quarterly and on what payment terms).
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If you are acquiring a “service”
business, remember that you are primarily buying a business whose
assets are people. Buying people is always a dangerous game, because
you can never be 100% sure that the people will stay on after you
acquire the business. Before acquiring a service business,
investigate the market for the skills of the types of individuals
that you will be employing. Can your employees obtain equivalent and
or better paying jobs somewhere else, is there a market shortage or
a glut? This can usually be accomplished by reading the local
newspaper classified ads. If you are looking at acquiring a business
that does locksmith work and the local classifieds have ten
advertisements from your potential competitors looking for
locksmiths you may be acquiring a staffing problem! You can also
contact some recruitment agencies in the area the business is
located in and ask them if they have a lot of call for, or do they
have a lot of people looking for work with those disciplines.
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Once you
have found a business that you want to acquire and have basically
come to an agreement with the seller on the major terms and
conditions one of the parties, the seller or buyer will “draft” the
agreements. The party that drafts the agreements goes to his lawyer
and has him produce a set of agreements that will be the agreements
that both buyer and seller sign in order to consummate the
transaction. The reason the term “draft” is used is because they are
a set of documents, created by a party on one side of the
transaction that have not yet been agreed to, or vetted by the other
party. You may think that it is more economical for you to have the
seller draft and it probably is, at least up-front. But it makes it
a lot harder for you to add/or change things. If you draft then you
start off with exactly what you want and the seller must take
exception.
Conversely, if
the seller drafts you are the one who must take exception. People
have a tendency to accept the smaller things when presented to them,
rather than appear petty by saying they want it changed. I have
found that, in general, the party that drafts gets more of what he
wants than the party that doesn’t. As well, your lawyer will add the
protection clauses that are appropriate for you as a buyer, where
the seller’s lawyer will generally not include those clauses.
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There are
always downsides or negatives with any business. The seller will
always disclose all the upsides and the positives, the challenge,
which is part of the due diligence exercise is to figure out what
the negatives and downsides are.
For further
information and advise on buying a business or franchise visit:
The Business
Buyer's Manual |
