Buying a Business - Emotion and Due Diligence

When buying a business, both emotion and due diligence are elemental and essential.

Here are 10 key matters to consider when you find that magical business for which you've been searching. It covers important points that are sometimes overlooked when your head is in the clouds during the emotional excitement of a deal.

1) Know that when you own a business it is a lifestyle change. The business becomes part of your family and demands attention. Make sure both you and your family are ready for it.

2) Is it a business that you know and understand? If not, do the research and make sure you learn about the business, its competitors and any changes that are due in the marketplace. There is usually public information available for almost any industry. Find out if there are any industry issues that will positively or negatively impact the business.

3) Make sure it is a business you want to be in. Can you picture yourself working it? It would be a good idea to meet with the owner and discuss in detail what he or she does on a day-to-day basis so you can get comfortable assuming that roll or bringing in people to help you. For instance, if the owner is the person who also keeps the office computers up and running or repairs the vehicles, then you either need to be able to perform those tasks or hire someone who can.

4) Get a complete set of financials from the business and review them with a good accountant, one that is experienced in business transfer transactions. Bank statements, financial reports and tax returns should coincide with what the owner is telling you. Lenders will not finance undocumented income.

5) Make sure the lease on the property is transferable to a new owner or that a sublease is acceptable. Get this in writing from the property owner. Be sure the rent is at fair market value, and if not, renegotiate it. If it’s a retail location, learn about the neighborhood and any zoning or construction projects that may affect the business.

6) Do a business plan based on realistic expense and income figures that you have from the existing business. Factor in your personal living expenses that you must draw from the business to live on, such as mortgage, car payments, groceries, taxes. If you are borrowing money to buy the business, you must also factor in debt service — the cost of the loan. Will the existing cash flow continue after the sale, and will it be enough to cover the expenses? If not, how much cash will you need to carry the operation until it gets up to speed?

7) Evaluate your impact on the business. Are you going to make a difference to the performance of the business? Are you looking to maintain the status quo, or are you looking for growth opportunities? If all goes well, will the business provide the lifestyle you want?

8) Check to make sure there are no pending lawsuits against the business, or any other liability problems. You should engage a competent attorney, one who is experienced in business transfer transactions, to review documents and make sure that you understand your rights and obligations in any contracts.

An attorney can also draft a non-compete agreement for the seller to sign, as well as employment contracts for key employees who are critical to the operation of the business. You don’t want the seller or manager setting up shop down the street while you are getting your new business up to speed. It is wise to interview key employees to make sure there is a good fit.

9) Check to make sure the inventory is accurate. Do a complete physical inventory to check for quality and saleability of the stock. Is any of the product damaged, obsolete or exceeding expiration dates? Inventory equals cash, make sure you know what you have.

10) If any special permits or licenses are required, how difficult is it to have them transferred to you as the new owner? Do you qualify to have them in your name, or do you need to hire someone who does qualify?

Feeling an emotional connection to the business you intend to purchase is important since it will be a large part of your life. However, during the due diligence process make sure you use common sense in your approach. Weigh the facts and try to take the emotion out of it. Do your homework upfront. While you cannot examine every nook and cranny of the business as someone looking in from the outside, you can certainly find out enough to know whether or not it is a comfortable fit and if it is worth the risk. There is no such thing as a perfect business and there is always inherent risks associated with any business venture. With proper diligence before the purchase, you will likely enjoy the rewards of successful business ownership, both financially and emotionally.

Now Is The Right Time To Sell A Business -- Are You Ready?

There are many factors that determine right-timing for selling your small business. The financial condition of the company, valuation, growth cycle, profit history, and the current market. But there is one single thing about timing that comes into play that makes all other factors make little difference....it is the business owner's emotional readiness to sell.

However, if your only criteria in the decision to sell your business is when you are emotionally ready to go, you will be in a weaker bargaining position and you may miss the boat.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, the mergers-and-acquisitions marketplace, industry trends, competition, stock market volatility, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value. Internal conditions within a company, of course, also change – often in combination with external factors, sometimes independent of those factors. Changes do, and will, occur and they always tend to impact business value – sometimes eroding value and sometimes increasing value.

Yes, it’s easy to understand that you should hold on to a growing business, sell it after it grows bigger. That makes sense, and may be right. But you can’t get the best price at the top of your growth cycle. Imagine the bell curve and the peak being the top of the growth cycle. The top is when you have reached the flat plane of growth...a sustaining mode. Buyers pay the best prices when they can’t see the top, when it looks like it's all up from here. When others can see the top, they don’t buy, or pay prices based on the downside risk after the top. If you wait until your revenues are already sliding over to the downside of the bell curve, you have waited too long. Your business has already started to retire before you have. Buyers are not too interested in declining businesses. To get the best deal you have to sell on the way up -- not at the top or the downside -- and when the market and prices are good.

Markets change and fortunes change from year to year. Right now the small business market place is hot, especially in Houston, buyers are plentiful, and capital is readily available. Fueling the market is the leading edge of baby-boomer-business-owners reaching the exit zone, and the 30-something-up-and-comers are aggressively buying and building. Buyers exceed sellers, and we have a robust exit market –for now. The time will come when the flood of baby-boomer-business-owners ready to sell will outweigh the ready next-generation buyers, and prices and acquisition appetites will fall. As a seller, you do not want to be in the middle or later in that trend.

Now-ish is the time to sell

for those who have been thinking about retirement

or are at the optimal position on the bell curve.

The economy is in its best shape since the dot-com bubble burst in 2001. Banks are aggressively lending money for all kinds of acquisitions. Increasingly, corporate America views the purchase of small firms as a shortcut to growth and innovation. As a result, a small-business feeding frenzy is in progress. According to FactSet Mergerstat's January 2007 New Release, "even 2005’s celebrated market could not match the ebullience of 2006." As of today, Mergerstat's transaction chart indicates that 2007 will surpass 2006 activity, and is projected to be an all-time record level of activity.

The time is right when the external and internal conditions are right. When the market, the buyers, and the money is good and terms are favorable. If those things are right, it’s time to get your emotional readiness in line, or you are likely to miss the boat. It’s that simple. If you turn down a great market, when buyers are willing to pay a great price, and if you wait too long for your emotional readiness to catch up, the market cycle will likely have turned. And, you will have to sell at a lower price, or wait for the next cycle.

The Market is ready and it is never wrong -- and like time, it waits for no one.