Essential Tips for Buying a Business

The majority of people who set out to purchase a business for themselves will never succeed. This is not to say they will fail at running a business. The point is most shoppers won’t actually succeed at buying a business! 

While the steps to buying a business are fairly simple to understand, acquiring a business is not a paint-by-numbers project. Soft issues are inherent in all human interactions, and buying a business is no different. In fact, business acquisition requires more finesse than most business transactions. Most people shopping for businesses are not professional buyers, yet even professional buyers often fall short. This article focuses on understanding one’s motivations and commitment to the process, as well as the mindset required for buyers to successfully acquire a business.

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What Percentage of Buyers Actually Acquire a Business?

While there is little formal tracking on this statistic, it is not uncommon for industry professionals to report that shoppers who actually succeed at acquiring a business are in the minority. The reasons could be the buyer’s lack of commitment or qualifications, the seller’s being unorganized or unrealistic, or the businesses having too much risk, requiring too much effort or not being a good fit.

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What Type of Buyers are Seeking to Buy a Business?

Let’s first look at the range of buyers looking for businesses to acquire..

• Financial Buyers
• Strategic Buyers
• Search Funders
• Serial Buyers
• Entrepreneurs with Networks
• Hidden Market Buyers (see article on how to find businesses for sale in the hidden market)
• First Time Buyers

First time buyers are most competing with other first time buyers looking for small businesses with revenues under $1million. Therefore, there is little chance of crossing paths with larger professional buyers. However, it is possible to cross paths with buyers who already own businesses, who have acquired a business or two in the past, or who are just plain qualified, prepared and determined.

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How Can I Succeed as a First Time Business Buyer

What if you’re not one of these seasoned or highly active Buyers? The good news is that even first-time buyers have a chance at successfully buying a business because there are many businesses to choose from and there are gaps where other buyers don’t go or don’t navigate well. By showing the brokers and sellers on the other side that you have the emotional intelligence and mindset needed to successfully acquire a business, you will stand out. Many buyers, including “professional” buyers, fail in their structured, mechanical and impersonal approach to sellers.

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How to Know if Buying a Business is Viable for Me?

Viability boils down to ability and interest. Ability can be broken down to financial capability and the background to be successful.  Interest has many levels. To be interested enough to execute a purchase, a Buyer has to be determined. Read Am I Buying a Business or Buying a Job?

Here are several criteria for buyers to be successful in acquiring a business.

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How Attractive are the Alternatives to Buying a Business?

The grass is always greener on the other side, so if buying a business is meant to relieve oneself from a bad situation at work today, here is where you need to prove to yourself that buying a business is significantly preferable to all other options.  There are many alternative investments and endeavors to weigh against buying a business.

• get a job
• Keep a job
• Invest in stocks
• Invest in real estate
• start a business
• wait for a better time

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How Can I Test The Waters on Buying a Business?

By taking a few simple steps over the course of a week, you can understand your ability and commitment to buying a business.

1. Explore BizBuySell: This is the number one platform for buying and selling traditional businesses with physical locations. BizBuySell also lists franchises as well as location-independent businesses that are relocatable or entirely virtual or digital. Spend an hour setting filters on BizBuySell and searching for businesses. This is just a small taste of what you’ll be doing for hours, days, weeks and quite possibly months of searching for the right business to buy.

BizBuySell is the number one platform to find traditional businesses for sale. Read this article to learn about the many online sources to find traditional, digital, and franchise businesses for sale.

2. Read These Books: I recommend the first two books for buyers of main street businesses (under $1M in revenue) and the last three books for buyers and owners of businesses of over $1M in revenue.
   

*Links	Book Recommendations
	The Lifestyle Business Owner – Aaron Muller Main Street businesses under $1M in revenue
	Finance Basics for Managers – Harvard Business Review Perfect reference guide for business owners and intermediaries
	Buy Then Build – Walker Deibel Larger businesses over $1M in revenue
	Expensive Mistakes When Buying & Selling Companies – Richard Stieglitz & 3 others Issues when buying or selling larger larger businesses over $1M in revenue

3. Understand Financing: Unless you can pay cash for the business, you’ll need to look at:
   • Seller Financing
   • An SBA Loan
   • ROBS (Rollover for Business Startups)

4. Submit Inquiries On 10 Listings: Submitting inquiries is quick and easy and typically requires your email and/or phone number. Don’t hesitate to provide your phone number when inquiring about a business. You are unlikely to be bombarded by phone calls. In fact, you’ll be lucky to receive a call on a traditional business for sale.  More than likely, you’ll be contacted by email. Be prepared to sign NDAs (non-disclosure agreements) before receiving any substantive information.

5. Engage in 3 conversations with brokers, sellers or franchise reps: Track your inquiries since it is highly likely you’ll have to follow up with the business broker or seller after submitting an inquiry. To learn why brokers may be unresponsive, read this article on working with business brokers. After just three substantive conversations with business brokers, sellers, or franchise reps, you’ll start to understand the mechanics of buying a business and uncover the realities.

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Check-In: The Reality of Buying a Business

Once you’ve completed these steps, take note of whether you are invigorated, intrigued or exhausted. Ask yourself these questions to determine if you will continue down the path of acquiring a business.

• Is buying a business better than all of my alternatives like working a job or starting a business?
• What businesses do my skills realistically qualify me to buy and run?
• Am I ok with a personal guarantee if financing is required?
• Have I gotten closer to narrowing down the type of industry or business I want to pursue?
• Am I just buying a job, and am I okay with that?

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Focus Your Business Acquisition Criteria

There are many ways to find the perfect business opportunity for you, but the most important thing is to know what you want in a business.

• Do you want to work for yourself, or be part of a company?
• Do you want your own office space, or work from home?
• Do you like the idea of taking on risk and managing your own schedule?
• Are there specific industries that interest you?

Starting out as a business buyer, the world is your oyster. But in order to have a chance of completing an acquisition, you’ll have to focus. Now that you’ve done a gut check on the viability of buying a business, you can weed out certain businesses like these:

• you won’t get financing due to lack of skills
• the business poses too much risk
• you lack sufficient interest once you are honest about what your day-to-day activities will be

Here are some additional decisions to be made on the type of business you are willing to pursue.

• Stable, Growing or Distressed
• Digital or Bricks and Mortar
• Employees or No Employees
• B2B or B2C
• Product or Service

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Extra Steps to Become a Successful Business Acquirer

Brokers and sellers love qualified and motivated buyers. Consider these extra steps to elevate your business acquisition game, set yourself apart from typical buyers, and even get an edge over professional or repeat buyers.

• Gather Proof of Funds: This could be a recent statement from your bank account, investment or retirement account showing your name. A letter from your banker on their letterhead with their contact information may also be acceptable. Having this readily available will show you are prepared and more serious than most buyers.
• Create a Buyer’s Resume / Profile: Create a professional document outlining your skills, background, target parameters, financial qualifications and record of any previous business acquisitions.
• Construct an Online Presence: Create a simple website that becomes your digital Buyer Resume. Leave out confidential information but add personalization showing an ability to relate to small business owners. Google yourself before a broker or seller does and see what kind of digital footprint and reputation you have online.

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Understand Multiple Owner Dynamics

Multiple owners could be partners or family members. If you are working directly with the seller, you can ask questions like “If I can present you with an acceptable offer, how would your partner/spouse feel about it? When would we know and how would we know what your partner/spouse thinks? Should we include them in our next meeting?” If you are working with a broker, ask the broker if the owner they are dealing with has an authorization from co-owners to sell the business and what kind of approvals will be needed from other owners during the process. Brokers use a form for this called Corporate Resolution to Sell.

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Understand Broker Motivations

The primary motivation for brokers or intermediaries is to close the transaction in order to earn their success fee. (This may not be the case for intermediaries who charge significant upfront fees. See this article explaining broker compensation and working with brokers). While brokers facilitate buyer requests during due diligence, they will not do your due diligence and will not be held accountable or liable for your due diligence. If they do go out of their way to provide due diligence assistance above and beyond facilitation, keep in mind that you are ultimately responsible for evaluating their guidance and making the right decision.

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Understand How To Work With Attorneys

Take small steps forward with the seller to discuss and document all the details of an agreement. Utilize the business broker to smooth out this process. Certain issues will require agreement on many details, especially since many deals are structured with seller financing or earnouts. The collective business acumen between buyer, seller and broker should be sufficient to move detailed negotiations to the finish line. 

Once all parties feel the issue and details have been addressed, engage attorneys to document or edit the documentation. Attorneys can counsel their clients on missed details or stronger language, introduce additional documents to address other aspects of the transaction, and work with escrow to close the deal.

Beware that attorneys who want to mark up, challenge, and send walls of red ink back and forth may fall into one of these categories. These attorneys are called “deal killers.”

1. Inexperienced in business transactions
2. Coming down from larger M&A deals where this is more standard
3. Interested in running up the bill

Contrast that with intermediaries who are primarily motivated to keep deals together. The attorney only represents you whereas the business broker is likely a dual agent for you and the seller. By understanding the motivations of attorneys and brokers, you’ll be better off making decisions. This is where you as the buyer need to take control and make the determination of whether or not the deal works for you.

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Winning Mindset for Successful Business Acquisitions

Once you feel you are qualified and motivated, it’s time to work on a successful approach with the seller. A qualified buyer who lacks emotional intelligence will struggle. In general, sellers lack experience dealing with buyers. Here are some tips for dealing with sellers.

• Ditch the Aggressive Approach: If you’re reading this, you’re buying a small business, not a large company. If you have large company or M&A experience, you’ll need to leave any corporate bean counter / Wall Street MBA “qualities” you may possess at the door when dealing with most businesses under $10 million in revenue. I have witnessed condescension, bulldozering and lack of finesse from “professional” buyers coming down from larger M&A deals. These buyers are detached from small business owners and will turn them off.  If this sounds basic to you, then good. You may have an advantage.
• Don’t Bet On “Partnering” with the Seller:   The concept of a partnership between buyer and seller makes sense with respect to the mutual reliance created by seller financing or earnouts.  A few sellers may even be open to the idea of a true partnership with a prospective buyer in terms of shared ownership. However, the reality is most sellers are looking to exit.

The No Money Down Business Acquisition Pipe Dream In general, a no money down business acquisition is not going to succeed. Wouldn’t it be wonderful to say something like this –  “Since you are asking $500,000 Mr. Seller, I will work in your business for 50% of the profits. After you train me, you can relax at home and collect 50% of the profits until you have collected $500,000 at which point I own the business.” This kind of approach comes from the opposite end of the buyer spectrum from the larger M&A buyers. These buyers may not have funds, or just enough to pay for a no-money-down seminar. Whether or not they are financially qualified, they are viewed by sellers as bottom feeders. The typical seller’s reaction is “Okay let me get this straight. I’m going to hand over the keys, teach you how to run my business, sit at home and pray that you were a good student, that you will work hard, get along with my employees and maintain my business so that in five years, I can stop stressing out about the business I want to exit today.” Silence. Surely the seminar guru was responsible enough to tell the paid audience this will be hard work, is not a get rich quick scheme, and is a numbers game. Was this transparency out of the goodness of their heart, or part of the master plan to establish some credibility by making some common sense statements? The type of business owner willing to accept such an arrangement is probably not doing well. I once communicated with, but never listed, a machine shop owner who was open to this kind of arrangement after realizing his business had little value. The owner was disappointed once again when the entrepreneur did not see enough value in the business to move forward. See Can I Buy a Business With Little or No Money? and Buying a Business With an Earnest Money Deposit and a Down Payment.

• Have Patience With Slow Responses: Buyers often react negatively to slow responses with suspicion and doubt. They may conclude the business owner is disorganized or not truly motivated to sell, or the business lacks systems, or the seller is scrambling to “fix” things before providing information to the buyer. Buyers have wandering eyes and will quickly disappear in pursuit of alternatives.

Patience is a Virtue There are many plausible explanations for slow sellers. Buyers who understand this and can show grace may have an advantage. The seller may be dependent on a bookkeeper, accountant, or office manager and it’s possible that a family member holds one of these functions. At some point, the seller may realize they know little about selling a business and they better reach out to a friend, an acquaintance who sold their business, or a professional advisor. The seller may be actively handling day-to-day issues in the course of running the business and selling the business is their secondary job. With each request, ask the seller how much time they need and add a buffer to it. Notice if the seller responds sooner or later than the timeframe. This is not a test – it’s simply to understand the seller’s responsiveness and communications. If you have a deadline, let the seller know and find out if timing will or will not work. Keep the lines of communication open and accept the fact that the timing has to work for both sides. Buyers who display patience may uncover more opportunities than those who do not.

• Tolerance for Mom & Pop Financials and Imperfect Information: Many small businesses have subpar accounting and financial practices such as overpaid or underpaid family members, too many non-essential expenses or add backs, or even partial add backs buried within line items. Due diligence can be challenging due to manual or incomplete systems, multiple systems, systems or software changes or conversions, and information that is not tracked. This will be more common with smaller businesses and should be less common with larger businesses. If you are buying a larger business, you may want your CPA to weigh in on due diligence.

• Tune In To Seller Emotions: If a Seller talks about the importance of carrying on their legacy, seeing their “baby” continue to grow,  taking care of their “family” of employees, or making sure customers are provided for, then take notice. Some sellers sincerely feel strong about these kinds of issues. Others will have very little attachment, and most will fall somewhere in between. 

As a successful buyer, your job is not to show you care more or less than the seller, but to demonstrate you are aligned with what is important to them. You have to tune in and uncover their goals, emotions, triggers, and non-negotiables. If the seller has high confidence in you even though your offer may not be as strong financially as they like, you may be successfully chosen as the “right buyer.” However, the offer amount and deal structure are often the ultimate criteria despite the seller’s emphasis on other criteria.

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Pillars of Truth About Buying a Business

If what you have read so far sounds scary and you feel you would be taking excessive risk, then you are starting to understand why most prospective buyers never actually buy a business. Here are some truths about business acquisition. It’s not all bad news. Opportunity lies where others fear to go and there are definite positives for determined buyers. Also read What are The Inescapable Truths of Buying or Selling a Business.

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Build a Buffer for Minor Issues

Build a buffer in your offer that allows you to accept minor issues during due diligence. If issues are major, you may need to renegotiate or back out. If the issues are minor and within the tolerance you built into your offer, then resist the temptation for perfection, ie. nickel-and-diming. Renegotiation on minor issues will put off most Sellers.

The first step is to place yourself in the seller’s shoes. The second step is to decide if you can get past any remaining small gaps at the end of your due diligence. Inevitably, there will be one or two.

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Accept The Leap of Faith Required to Buy a Business

Do your best to minimize risk and satisfy yourself during due diligence, but you will have to come to terms with the basic facts of business acquisition. There is no perfect deal, you will not receive perfect information, and you will have to take a leap of faith at some point in the process. As long as it is a small leap that you have contained and can tolerate, and you have a good feeling about the seller, then go for it!

“I want a deal that’s fair for everybody.”

– Jeff D, successful acquirer of a high-speed sawing business