How to Buy a Business without Being Had

During more than thirty years working in the fields of business development and business brokerage, I have seen many people achieve their financial dreams through buying and operating successful businesses. This has given me much pleasure. The purpose of this book is to assist you in achieving your financial dream through the successful purchase of a business.

Unfortunately, some people became disappointed with the businesses they bought. It seems that, for some reason, these buyers and these businesses did not make a good fit. This has troubled and perplexed me. I wanted to know what went wrong, so I could more effectively counsel buyers in the future. Five possible explanations come to mind.

1. The economy: Was the economy to blame? A recession or rising prices of critical items or rising interest rates, for example.

2. The business: Loss of key customers or valued employees, or weak Cash Flow, perhaps.

3. The price: Did the buyer pay too much for the business and thereby take on too much debt?

4. Misrepresentation: Did the seller or broker or someone else misrepresent the financial stability or profitability of the business in some way?

5. The buyer: Was the disappointment in some way the fault of the buyer?

Each of these five factors may have played a role in what went wrong, yet none fully explains why many buyers’ expectations were not met. After following up with hundreds of buyers, I concluded that some “good” businesses are not good for some people and, conversely, some “not-so-good” businesses are perfect for other people. Two keys to success for the buyer seem to be:

1. Discovering why some businesses and some people make a good fit, and

2. Doing some careful homework before buying in order to learn what makes the business run and what would make it run better.

I was also puzzled by the fact that some qualified buyers passed on purchasing businesses that I felt were unusually good financial opportunities for them. One answer to this puzzle turned out to be that some buyers had been advised (by their bankers or other financial advisors) that the businesses that they liked and had considered buying were too expensive. This was, of course, easy advice to give, and often not very helpful, since the advice was usually based largely upon a seller’s initial asking price. It was not upon any detailed knowledge of the business or of how the business fit into its market or industry.

It is not unusual, for example, for an appraiser or financial advisor retained by a Seller to assign a value of, say, $300,000 to a business while an appraiser or financial advisor retained by a Buyer assigned a value as low as $100,000. I began to ask myself how, if these were trained and experienced appraisers and advisors, could the differences be so great? How can we make sense of these disparate opinions of value? It is no wonder that some buyers become discouraged and passed up good opportunities. They did not know whom to trust.

When Buyers did decide to explore an opportunity in depth, often neither the appraisers nor the Buyers did adequate homework. They relied much too heavily on federal tax returns and on year-end financial statements without making adjustments or asking sufficient questions to learn how the statements were prepared. And often they did not tour the business, meet with the owner, or review the business’s monthly financial statements. For me, after many years of experience in the field of “small business,” I have learned that it is in the monthly (rather than year-end)) statements that the answers to many critical questions concerning the value of a business can be found.

Certainly, in some cases, the asking prices were too high, particularly the initial asking prices. However, as a broker for many years, I can comfortably state that the price at which many (not all) businesses are sold is considerably less than the initial asking price. It sometimes takes a Seller a while to determine when the initial asking price is too steep. Therefore, the initial price sought by the Seller is not always a reliable criterion for selecting an opportunity to explore (or for not considering an otherwise attractive business).

In other cases there was genuine misunderstanding regarding the nature of the business or how the business in question kept (or did not keep) its books. In a few cases there appeared to be a lack of understanding regarding the nature or the quantities of assets that would be included in the sale. For example, the actual value of inventories-on-hand can far exceed their Book Value, that is, the value at which they are carried on a company’s Balance Sheet.

Above all, I learned the importance of writing down clearly and in detail the agreements reached between Buyer and Seller. Poorly drafted purchase contracts were probably the single greatest source of frustration for buyers of the businesses that I have worked with. How often have I heard the words: “Don’t worry. We can handle that later.” Often “later” is too late to avoid costly business interruptions such as the search for a knowledgeable attorney or trying to find the Seller and pin him down on loose ends not fully spelled out in the purchase contract.

As important as it is to write things down, it is equally important to understand all the provisions set out in the purchase contract. Too many buyers do not read their contracts in full or fully enough to understand their contents. In their enthusiasm buyers sometimes sign a contract or sign the closings papers without reading them and discover later that “failing to read” is no defense when it comes to the law. Every buyer should be careful to understand each paper he or she signs, why the paper is important, whom it protects, and what the remedies might be if problems or misunderstandings arise.

It is from these observations that the idea of writing a guide for prospective purchasers arose. I wanted these purchasers to be able to learn “How To Buy A Business Without Being Had” and without paying too high a price or being disappointed in the financial results of the business after the purchase. It is my hope and belief that if Buyers follow the steps set out in this book, they will avoid buying the wrong business and will avoid passing up some great opportunities as well.