Free Advice

Business Owners & Buyers on Buying a Business

Last month I wrote about an informal survey of business owners and their thoughts about selling. To recap, their top concerns were finding qualified buyers, what is the price/value, will the key staff stay and negotiating a deal.

Those same owners provided me inpt on buying a business, which I supplemented by polling some recent buyers. You’ll find the concerns similar.

The top two issues were the same. Buyers (especially those who do not already own a company) were most concerned with finding a good one and trying to figure out what the price should be.

Finding a good one

It’s tough to find a good, profitable company with a motivated seller. At best we’re talking 5% of businesses are at any particular time available, profitable and presentable. Many firms meet the first two but fail on the third. The owner presents questionable financial information, can’t answer basic questions about the company, etc.

It’s important for buyers to define their likes, dislikes, motivators and desires before searching. As one client put it, “the touchy-feely stuff.” For example, do you want to do good for the world or just sell something, do you want to bring customers in by marketing or have a field sales force and is your preference white collar or technical employees versus blue collar or low skilled employees. (We use a 25-question profile to pin these items down.)

Then have a proven search system, not just a weekly look at the Sunday paper and the Internet. As Business Week has pointed out, the vast majority of small businesses sold are sold on the “hidden market.”

What’s it worth

Buyers and sellers look at it from a different perspective. Without getting into detail, keep the following in mind. If you’re unsure about a price, work backwards. Forecast a realistic cash flow (I always tell buyers to figure their first year should forecast flat, the same sales as the seller’s last year). Allow a cushion, remember that principal payments are not deductible and don’t allocate more than 50% of profits to acquisition debt payments (or it will be tough to grow the business). Basing a price on (rosy) projections of future earnings is suicide could violate Fraudulent Conveyance statutes.

Employees

Another common issue was the employees. Buyers were more concerned about this, as they well should be. The people are the number one asset in most businesses. Buyer’s worry that key employees will see this as their chance to make a life change or that the owner has made promises on behalf of the buyer (one buyer found out that the GM, not the seller, told the employees that once the new owner came on board everyone would get a raise).

Cash flow

Some seller’s do so much recasting it’s tough to figure out what is really a legitimate business expense. (Recasting is adjusting the income statement to allow for non-essential business expenses the owner has taken the liberty of having the business pay. This could be a personal car, donations, a child on staff, meals, etc.)

My advice to seller’s is to make it easy for the buyer to verify the cash flow of the business. It’s better to pay a little more tax if it makes a deal flow smoother. And don’t go overboard and claim you added up all the lunches that really weren’t business related (and therefore cash flow is $347 higher).

To summarize, the concerns of business buyers and sellers are similar. Finding a qualified buyer/seller, what’s it worth and will the employees stay top both lists. All legitimate matters and all issues that can be overcome.

Happy Holidays!!

© Copyright John Martinka 2000. All rights reserved.