Business Purchase Advice
When you think of the wealthiest people in the world, one commonality is clear -- most wealth comes from ownership. Very few people have achieved great wealth by working for someone else. Anyone contemplating that step should listen to some basic advice.
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Before You Start
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Accurately determine what you can afford to put into the business, including any amount that you can borrow, and that is your limit. Never exceed that limit. The leading cause of small business failure is inadequate capitalization.
Make an honest, accurate assessment of your skill set. If the business requires skills that you lack, determine how that need is going to be filled.
Do your homework not only on the business but on the industry. You don't want to be the guy buying a chain of blacksmith shops as the first Model T's are rolling off the assembly line.
Obey the Numbers
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Don't overpay. Sounds simple, but you need to consider not only the price but the terms. There is a saying in the mergers and acquisitions trade -- If you tell me the price I will tell you the terms, and if you tell me the terms I will tell you the price. "Don't overpay" relates to both the price and the terms -- they are like dark and light. One is meaningless without the other.
Take your time make decisions in accordance with the quantitative data. Don't fall in love with the business. Kiss the business goodbye if the numbers are not what you need.
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Trust but Verify
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Remember that the listing broker works for the seller and is not your friend.
Be wary of "normalized" numbers. Normalization is a method of removing one-time, extraordinary or non-business related expenses. These are legitimate adjustments and occur in nearly every private company deal, but they must be examined closely. Trust but verify.
Sales and Production -- The Most Basic of the Basics
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Find out who controls the customers. If it is the old owner, make some arrangements for a transitioning period. If it is someone else on the staff, make sure that person's continued employment a condition to closing.
Check the historical capital expenditures. If they have gone down in the last year or two, the seller may have been postponing capital-intensive purchases that you will have to face.
Deal Only With Honest People
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Finally, if you catch the least bit of dishonesty on the part of the seller or his agents -- run away. The seller may have worked in the business for a lifetime, and if there is something that he or she does not want you to know it is unlikely that you will find it. Fortunately, most are honest.
Look Ahead
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Then, when you have done your work, negotiated the best deal, worked for weeks or months and finally made the closing, remember this -- now the real work starts.
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