| How to Buy and Sell A Business |
By Garrett Sutton, Esq.
Genre: Business & Money
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Before You Begin
Being Your Own Boss
It sounds like paradise-being your own boss. Owning your own business, setting your own hours, answering to no one, even dressing how you like. Robert Kiyosaki's rich dad advocates owning businesses, ideally man-aged by others, for the income they generate and the freedom they can provide. But whether you are a nonmanaging entrepreneur or a day-to-day boss, being the owner also means taking the responsibility-all the responsibility- for the business's health. The success or failure of your business (and correspondingly your personal financial success) lies squarely on your shoulders. There are no sick days, no vacation pay, no downsizing opportunities. A turn in the economy no longer means only worry over job security, but worry over utter financial ruin. There are no security blankets in the entrepreneurial world, so you'd better know from the start if you are a Linus or a Lucy. Linus was the intellectual of the Peanuts gang, but he required security. Lucy was the go-getter, a schemer who never thought anything through. Somewhere between the personalities of this brother-sister duo is the ideal entrepreneur. Do you have the right entrepreneurial personality?
Knowing your strengths and weaknesses going in can save you hours, possibly years, of frustration, and can limit your financial risk. Ask yourself some questions. Here are a few with which to start:
How does your education compare to the demands of the industry you plan to enter?
Do you know how to track financials and plan for taxes?
How do you feel about sales and marketing? How does your experience stack up?
Do your skills lend themselves to running the type of business you are considering?
Will your needs be met by your skills? If not, are these skills ones you can learn? If so, how long will it take you to get up-to-speed?
On a more interior level, how do the needs of the business fit your personality? If you don't really like people, you may not enjoy retail. If you abhor math, the intense financial and money management aspects of manufacturing won't likely be to your liking.
Some businesses live and die at the feet of a strong leader. The identity of the business may be the identity of the owner. Can you be all things to all people?
Some businesses require travel or heavy lifting or working nights, weekends, and holidays. Does your lifestyle allow for that? Are you willing to make the necessary changes? The odds of succeeding at a business you don't like, or whose demands do not naturally suit you, aren't good. Go with what you enjoy, what you know, or what you can learn.
How do your goals measure up to what the business can realistically offer? Passion will take you far, knowledge even further, but in the end it may be the numbers that tell the tale. So don't make decisions without them. Let your passion be for your objectives, even an industry, but not a particular business. Let your heart have its say, but let your head lead the way.
Will you be a good entrepreneur? Consider the following:
1. Do you need a lot of supervision or do you find your own way?
2. Are you trusted by others?
3. Are you responsible by choice or by force?
4. Are you a people person?
5. Are you a leader?
6. Are you willing to go the distance even if there is no immediate reward in sight?
7. Are you a decision-maker?
8. Can you put the big picture before immediate reward?
9. Do you finish what you start?
Do you know who you are and what you want? Pull out your r?sum?. Analyze it realistically. Write out your goals. Write out the realistic potential of the company you are considering. Imagine yourself running the company. Be specific. There is power in the specificity of written goals: Let them guide you in deciding if you are right for the business and if the business is right for you.
How will your family adapt? Now, before any papers are signed and any obligations finalized, is the time to bring in family considerations:
1. What will the extra hours and extra worry do to your family?
2. Will family members be able or willing to help carry the load?
3. How will the decrease in financial security affect the cohesiveness of your family?
4. Is it worth giving up the concreteness of paychecks, insurance, retirement benefits, paid vacation days, and the like for the pride of ownership and the hopes of a long-term payoff? In the language of Robert Kiyosaki's Cashflow Quadrant, are you ready to go from being an E (employee) to an S (self-employed business owner) to hopefully a B (owner of a business managed by others)?
5. What is the flexibility of family members-financially, psychologically, and emotionally? Make sure you know everyone's needs and consider whether this purchase will meet those needs.
6. If you don't get family support, will you be able to do it on your own? Family-run businesses don't necessarily put the whole family to work. If you expect help from a spouse, children, or others, you need to get their support long before the closing.
Are you running from something (dead-end job, mind-numbing boredom, the boss from hell) or toward something (self-esteem, independence, creativity)? If you are running from something, no business will take you far enough. But if you are running toward something, the distance will be greatly shortened with a bit of forethought and planning.
Why Buy (vs. Start Up)
Preparation and hard work can lead to personal fulfillment, a career you control, and financial independence. When you're the boss, you determine how much time you put in and how much money you take out. When success does come, it is your success. Your hours lead to your income. You are not just lining someone else's pockets.
There is much less financial risk involved with buying an existing business than with starting one up. It is that initial period from start-up to breaking even that is the most deadly for a business. An existing business must be doing something right to still be in existence. The rewards of ownership and independence are the same for a start-up and for an existing business, but an existing business has a past to help guide the future. A path has been cleared for new owners to tread.
History is a valuable tool in any business. There is a level of expectation- a theoretical roadmap for the future. It is this aura of predictability that makes financing a purchase easier than financing a start-up. The existing business has financial statements, assets, cash flow-in short, collateral that can be used for bank loans. And if the banks prove uninterested, many a motivated seller will help out with the financing, often with better terms than a commercial lender. An owner may even stick around after the sale to help with the often complicated, always delicate transition period.
We live in a time when small businesses are not only able to exist alongside big businesses; they are able to thrive. Technology has made access nearly seamless. Your business can reach customers on the other side of the world just as easily as the other side of the street. Fax, e-mail, Internet, video conferencing, printed material-all allow a local business to reach a global market while keeping overhead low and inventory small. These avenues may not have been explored by a company's current owner and could be the difference between his or her getting by and your getting ahead.
Why Sell (vs. Hang On)
The best time to sell is when the economy and the industry are in good shape. While sellers have little or no control over these factors, they can keep their companies in prime selling condition in order to take advantage of unforeseen opportunities. A well-run business is a valuable commodity in any market.
Knowing economic and industry norms and how the company stacks up against them will help a seller set the best price should he or she decide to sell. Sometimes events completely out of a seller's sphere of influence pop up and motivate a sale. Some of these include:
Change in the competition (such as when a large company decides to move into the arena and is looking for a company to buy).
Death of a partner or a majority shareholder (the owner may have to sell to pay off other partners or to divide up the deceased's estate).
The owner's own heirs don't want the company (or are not competent to run it).
Unexpected changes in finances (such as from divorce or medical emergencies).
Changes in the rules (such as zoning changes or new laws). Sometimes events completely within the seller's sphere of influence are prompting the sale. Sellers must understand their motivations to avoid making a mistake.
Burnout is a common sale motivator. But burnout is seldom long-term; a sale is. Maybe the seller just needs a vacation or shorter hours. Maybe he or she needs to shake things up and bring the fun and adventure back into the business. If the owner decided to sell, that freedom (just as with short-timer's syndrome in the workaday world) might prompt him or her to make changes. Sellers, why not make those changes now?
Timing is important whether buying or selling a business. The health of the overall economy, the state of the company's specific industry, and the condition of the company all play into the decision-making process. The overall economy's health may dictate the availability of loans while also coloring the perspective of potential buyers. Good economic times breed optimistic buyers. Optimistic buyers have rosier hopes for the future, and it is this future they are purchasing. The state of the target company's industry and the health of the target business help define levels of perceived risk. Lower risk means higher prices, even if those risks are only in the eye of the beholder. While buyers and sellers have no control over the health of the economy or even the state of the industry, assessing trends and perceptions will greatly influence their ability to be in the right place at the right time. The key ingre-dient to good luck is good planning.
Economic slumps may be good news for buyers. If buyers have the purchasing power (or better yet, the cash), there are usually bargains to be had during a recession. Of course, the risks are higher. After all, buyers are likely buying in the hopes of the economy turning around. Eventually it will, but weathering the storm can be an expensive proposition.
Economic booms may be good news for sellers. Optimism loosens purse strings. But higher purchase prices generally mean more debt for the buyer, and if optimism turns out to be unfounded, carrying a company with significant debt and insufficient valuation may require a buyer to sell. A struggling company in a struggling economy is the worst of all situations for the seller.
Either way, in good economies or bad, buyers want to be sure they have enough money on hand to cover not only the purchase but also the initial slump that generally accompanies new ownership.
Risk of No Sale
Imagine putting a company up for sale and getting no offers. Or getting only low offers. What went wrong? Maybe the asking price was too high. This would be the time for the seller to go back to the value analysis and reconsider the assumptions used in projections of future sales. Were the assumptions realistic? If the owner still wants to sell, he or she will need to consider lowering the price or taking the company off the market. If the former, the seller may need an ego check first. If the latter, damage control is warranted. A good way to understand some of the concepts we're discussing is through the use of case studies. Our first one is instructive.
Case No. 1-Walter, Peter, and Anian
Walter owned a chain of three tanning salons in a city of just over half a million residents. Walter did a fair amount of advertising and so people around town knew of Sunsation Tanning. His salons were all in good, high-traffic locations, and the future looked bright, so to speak, for the business.
Walter had built the business up to the point where he could step away and do other things. He had brought in Peter to be the general manager of the three tanning salons. Peter, being aggressive and confident in his abilities, insisted that he be able to acquire an ownership interest in the business over time. Walter agreed to this, but beyond an acceptance in principal, the negotiations had not yet begun and the terms for an acquisition of ownership had not even been discussed.
Shortly thereafter, Walter's plans for the business changed. An opportunity to own an even more profitable business with a much greater upside potential had landed in Walter's lap. To pull it off, he would have to sell Sunsation Tanning in order to generate enough cash for the down payment he needed on the new business.
Walter decided to quietly solicit offers to purchase Sunsation Tanning. He wanted to fly under the radar, so that no one would know of, or impede, his future plans. He didn't tell Peter or his banker or any of his inside circle of advisors.
Anian owned a chain of five tanning salons in the southern part of the state. She was a hard-nosed businesswoman, always interested in a deal. When Walter approached her about a quiet sale she responded with interest. On a handshake, she agreed to keep the whole matter confidential. In reality, she just wanted to see Walter's books. She wanted to know how he had been able to expand so quickly.
After reviewing the books, Anian placed two disastrous phone calls. First, she called Walter's banker to demand why she couldn't get the same favorable terms that Walter had received for equipment purchases. The banker was angry that the confidential relationship between him and Walter had been compromised. Then, Anian called Peter to see if he would work for her. Peter learned for the first time that the business he thought he had an ownership interest in was for sale. He was furious at Walter for what he considered to be an offensive betrayal of trust.
Both Peter and the banker refused to do business with Walter again. Peter quit in a very loud and derisive manner, encouraging other employees to quit as well, many of whom did. The banker called several of Walter's promissory notes (written promises to pay a debt), forcing Walter to scramble to find alternative financing, and killing all of Walter's hopes for completing the other business opportunity he had sought to pursue.
The disruption caused Walter to almost lose the business. When the employees left they took some of their regular customers with them. Some of his best employees started working at two new, very competitive salons-that Anian had opened up in town.
Walter hung on by assuring the remaining employees that they would always have a place to work, that he was not selling the business, and that their job security was as important to him as it was to them. It took almost a year, but Walter brought the business back. And he had learned a very valuable lesson about the confidentiality needed when selling a business, and the care needed in selecting the right potential buyers.
As we have just seen, company sales affect more than just buyers and sellers. Customers, vendors, and employees can all find out about the possibility of a sale, and emotional reactions are inevitable. Fear of what is to come may have some already looking for new suppliers, customers, and jobs. The fallout can be far-reaching without the owner ever even knowing about it.
Therefore, sellers need to be proactive from the beginning. Confidentiality agreements are a must to keep the news of a sale on a need-to-know basis. The agreement should be in writing with, if possible, a damage provision for the unauthorized release of confidential information. However, this type of contractual provision will only take the seller so far. Once the others find out, or are likely about to find out (and be assured, they WILL learn of a potential sale), the seller needs to start talking and alleviating fears. And you'd better have your story consistent and down pat, because your employees are going to want to hear something that is reasonable, reassuring, and makes sense.
How to Handle a Failed Sale
If the sale does not go through and the company is taken off the market, the owner will need to talk to those involved and reassure them all that he or she is recommitted to the business and looking forward to future success. Any sense of failure projected by an owner will lead others into the cycle of uncertainty. As we all know from experience, uncertainty leads to fear. Fear leads to grasping for safety. And that search for safety can mean customers, vendors, and employees finding new opportunities elsewhere and leaving the owner behind.
To allay customer fears after deciding not to sell, owners should redouble customer service efforts. It is unlikely that most customers will even know there was the potential of a sale, but the owner has no way of knowing who might or might not have heard the news. Customer service never hurts a business and making service a priority not only convinces those who did hear that you are recommitted to the business but may increase the loyalty of those who never even knew anything was in the offing. For those who ask what happened, be frank but don't give away details. Customers need reassurance, not a lesson in capitalism. As Henry Ford said, "Never complain, never explain." The fallout with vendors could have financial consequences. Most vendors have relationships with owners based on long-term rewards. They may offer good credit deals in hopes of keeping an owner's business for a long time. The news of a company being up for sale makes those long-term hopes less likely. Don't expect the news of the sale not going through to be a relief. It is likely that vendors will now see the company as a short-term investment (they will be wondering if the owner is still trying to sell, questioning his or her commitment). This is especially true with smaller, privately held businesses where relationships are more intimate. Owners may find vendors have hurt feelings about being kept in the dark. While from your perspective it is none of their business, from their viewpoint it is their business. Your business is their business. Appreciating their position will help in understanding the dynamics involved.
Employees likely will be relieved the company is no longer for sale, but they may have some of the same feelings as vendors and customers. They may still question owner loyalty. Once that happens, their own levels of loyalty are likely to decrease as they turn more toward protecting themselves. Morale will likely be down. Owners might consider having a company party or perhaps a team-building retreat to reinvigorate the company. No matter what work the owner puts in, the damage may be done. In the end, there is still the danger that not selling will cost the owner more than dropping the price would have. Knowing that, let's review in our next chapter the strategies of both buyers and sellers.
Rich Dad's Tips
Know your strengths and weaknesses before buying a business.
Be prepared to accept complete personal responsibility for the success or failure of your business.
As a seller of a business know and understand the repercussions of a failed business sale.
Excerpted from How to Buy and Sell A Business , by Garrett Sutton, Esq. . Copyright (c) 2003 by Garrett Sutton, Esq. . Reprinted by permission of Little, Brown and Company, New York, NY. All rights reserved.Back to top