SCORE

Seems to be relatively simple when a buyer of a business writes a check to the seller of the business. Or vice versa.

However, if you look deeper into it there is a myriad of complex undertakings during the Buy/Sell process of a business, including satisfying the needs of numerous stakeholders in the process before the final objectives are met by either the Buyer or the Seller.

THE BUYER’S STRATEGY

For the buyers of a business, there are many profiles:  the public stock buyer (remember, stock is a piece of ownership of a business), the buyer of shares in a large private company, and the entrepreneur buyer who wants to purchase an operating company from the owner-operator of a small business. 

For the following buyer’s strategy, the buyer we are referring to is the last one:  the entrepreneur-buyer who wants to purchase an operating company from the owner-operator of a small business. 

If you’re thinking about buying a business, I always recommend you first create a checklist of steps and questions that will protect you from missing important details. The questions in the checklist should be about yourself and the business you’re trying to buy.

Here are some of the questions you should ask:

  • Do you have any specific knowledge and/or experience about managing and operating a business in the intended industry or any industry in that regard?
  • Do you have the ability of a “Quick Start” which would shorten the learning curve for the intended venture?
  • Do you have a team of advisors (Consultants, Accountants, Legal, Financial Advisors, etc.) that can help you put together a list of necessary questions, such as assets and liabilities, to ask a seller when buying a business?
  • Who are the stakeholders that you may or will have to satisfy? They could be:Shareholders (Equity Investors), Lenders (Banks or Private Investors), Customers [who need to be retained with a seamless change of owners or lost to current competitors], Trade Suppliers, and/or Employees.
  • Is the prospect—a seller of the business you’re interested in buying—a sole proprietor, or a business entity (Corporation, Partnerships, LLC, etc.)? What government legal requirements the business functions under its location (City, County, State)? Remember, all stakeholders are equally important if they are applicable to the business being purchased.

When you’re buying a business, you are not only investing in a business for your personal involvement, you are also investing your own capital. Therefore, you should look for two types of rewards here: one for your time commitment to operate and manage the business and another for your capital investment in business, which can be calculated as a net profit (calculated as revenue – expenses). For the latter, it helps to think of it as an interest rate you would earn from the business, just like you earn interest from a high-yield savings account.

If you thoroughly understand the income-generating (revenue) ability of the business and successfully manage it, you should be able to reap the rewards through a satisfactory salary for your time commitment and a return equal to or greater than market interest rates for your capital investment.

Having established the above preparation, you are ready to seek out a prospect.  In this respect, buying a business is like buying anything else. You can find prospects in several ways:

  • Through a licensed business broker. You can use California Association of Business Brokers or FranNet if you're interested in franchises.
  • By reading through various business publications and/or online sites that matches potential buyers and sellers. BizBuySell is one of such sites.
  • Through your own network. Maybe your friend or a friend of friends owns a business and wants to sell it.

Unless you have a specific industry in mind, be open to explore businesses in various sectors and industries that you think would be a good fit for your goal and needs.

Once you identified some prospects, the next step is to interview the prospect. This step is referred to as undertaking your “Due Diligence”, before the final step of committing to the purchase and making the capital payment.

I always recommend that you meet with the decision maker (business owner or CEO) of a business you’re interested in buying, rather than the business broker or someone who may not have all the information about the business that would be necessary for the buyer to make a purchase decision.

In my opinion, once the buyer and the seller—decision maker—start to negotiate the purchase of the intended business, the buyer has leverage over the discussion with the seller, as the buyer is the one that writes the check for the business.

About the Author(s)

 Richard  Krelstein

Richard L Krelstein is a SCORE Mentor in Los Angeles Chapter who works with entrerpreneurs for solutions on business strategy and planning, mergers/acquisitions, finance and accounting, management, marketing, sales, manufacturing and customer service and support.

SCORE Mentor, SCORE Los Angeles
The Checklist: Buying and Selling a Business Part I