Free Advice

Business buyers and sellers have same concerns

Springtime may lead to thoughts of romance, but the New Year leads to action by business buyers and sellers. Traditionally, this is a very active time for those people who want to own their own company and for those who wish to exit. We tend to do a lot of planning centered around the changing of the calendar.

A changing economy and downsizing elevate the entrepreneurial spirit. There are four degrees of entrepreneurs. On the extremes are those who will never own their own company and those who wouldn’t do it any other way. In the middle are where most entrepreneurs come from. Either they fall into it or they are forced into it. There’s a lot of falling and forcing these days.               

Sellers appear to be cautious. Many realize that valuations are down. However, if a catastrophic event hits (divorce, death, disability, etc.), there is no getting around it, they must sell. Similar to buyers whose entrepreneurial spirit rides the economic wave, owners who coasted on the boom wave are now wondering if they have what it takes, or have the energy, to survive in challenging times.

I recently surveyed some business owners and buyers. Each group had the same top three concerns regarding a buy-sell transaction.

Finding the right partner

For buyers, finding a business that is mature, profitable, has potential and is a good match for the buyers’ skills is always a challenge. They don’t want to mold and chisel themselves (the square peg) to fit a business (the round hole).

Seller’s always worry about who will be capable, both financially and managerially, of taking over their company. Since most transactions under a few million dollars involve some seller financing, it’s a legitimate concern. They know that most of the people who are managerially capable are not willing to take the risk of business ownership.

That’s why when a buyer or a seller find what appears to be a qualified “partner” they need to do everything they can to make a deal happen. This is especially true for sellers. A friend of mine paraphrases an old cliché, “Businesses [to buy] are like busses, miss one and another will come along.”

Buyers have a lot to choose from. There are over 100,000 non-professional practice companies (doctors, lawyers, etc.) in the Puget Sound area. 10% or more are probably willing to talk about a sale. On the other hand, sellers need to be especially careful. They only have one business to sell. If they blow a deal, who knows how it could take to find another qualified buyer.

What’s it worth

A business owner asks, “What multiple of earnings is my company worth?” Another common question is “My friend says he sold his for seven times earnings, can’t I do the same?” Loaded questions, that’s for sure. The answer depends on whether it’s pre or after tax earnings, does it include owners salary or not, did the top customer, accounting for 22% of sales, stop doing business with the firm recently (or is about to) and more.

The key is to scrutinize the non-financial factors of the business. These are the customer and employee relationships, the management structure, the lease, the competition, the market and economy, the firm’s marketing plan and more.

Buyers worry, and so should sellers, about the debt load of the new firm. No matter what the price, if the profits don’t support it, the payments won’t be made. Two people recently asked me to help renegotiate deals. One was a year old and the other six years old. One was a naïve overpayment; the other was inattention to detail, by both the buyer and the seller. Both situations were easily avoidable by asking the right questions and verifying the answers.

The employees are key

Buyers and sellers both worry about the status of the employees. The buyers want to make sure the key people stay. The sellers worry that the buyer will fire their long-term, loyal friends. 

Usually the employees want to stay and don’t realize what an important part they are to the deal. Recently a buyer (a corporation) demanded that the top 50% of employees sign a very restrictive non-compete and employment contract. I’ve also seen deals where there were handshake agreements.

One piece of advice, don’t tell the employees too early. One client did that and his top two people gave their notice (although one came back quickly because the grass was brown, not greener, on the other side).

To summarize, buyers and sellers are a lot more similar than they think. They have the same concerns and the same goals (a win-win deal). When it appears that the match is made in heaven, it behooves all involved to make it happen.

© Copyright John Martinka 2002. All rights reserved.