Thinking Of Buying a Business? Buyer Beware!

For some reason, many people seem to want to spend too much money to purchase existing businesses. This is confusing, until you realize that buyers are trying to purchase solutions to a number of problems. Prospective buyers see an operating business and tend to think that they can simply buy it and it will continue to operate as it does under the ownership of the seller. As a buyer, you might imagine the business will allow you to be your own boss, pay you a great salary, raise your self-esteem, afford you an attractive lifestyle and eventually make you rich. If this is to be your destiny, you’ve got some serious homework to do… before signing away your hard-earned equity. If you are thinking about buying a business, you should take a few moments to consider the following:

1. Determine why the business is for sale.

Every seller will have a story, but the truth is – if a business is doing all of the things it should for its owner it should be very difficult to part with. There has to be a very credible reason for selling, such as poor health or retirement. Most anything else should raise your suspicions and cause you to dig deeper.

2. The most important information available to you will likely come from the financial history.

Insist on accessing the past three years of statements and if you can’t get them without a fuss, walk away. This is usually the first sign of trouble. If you can’t get the financials easily and quickly, your seller may be dishonest or disorganized, either of which is bound to bring you sorrow. Unless you are an accountant, turn the financial statements over to a qualified, trusted accountant for interpretation.

3. If the business location is leased and if it is important, what are the terms of the lease?

How long is the term of the existing lease? Are there any hooks that tie the lease rate to your revenue/sales? Are there any stepped increase-type clauses that could cause you to be paying more to the lessor than you can afford to pay yourself? I’m aware of at least one lease that resulted in the business owner paying in excess of $8,000 per month, far more than this owner could ever pay themselves. This is clearly a rent-seeker out of control and one stressed, broke business owner.

4. If the business is in a strip mall or a hotel, does the lease allow the landlord to lease to another similar business in their facility?

Or does it protect you with a clause that prohibits the landlord from doing this?

5. Can the business pay down the cost of the purchase and still pay you a reasonable salary?

This is critical to you from a personal perspective but also when selling the concept to a lender.

6. Determine what you are paying for.

When purchasing a business you can choose to purchase the entity or the assets. Purchasing the assets is often less risky from the buyers perspective. Purchasing the entity is the cleanest and easiest from the seller’s perspective.

7. If you purchase the entity (for example, the corporation), you may be buying some liabilities that you might not wish to take on.

For example, have the taxes been paid? Can the seller provide proof that taxes have been paid? Are there any outstanding lawsuits or employee or customer claims? Be sure to get a clean bill of health in writing.

8. If you are purchasing assets, how much of the purchase price is inventory and how much is equipment?

You will want to place your own value on these items but it is stronger to get a third party assessment of assets when trying to gain the vote of a lender. When it comes to assessing values, lenders might have a preference as to who does the assessments.

9. Determine what value the seller places on goodwill.

Most lenders place zero value on goodwill. If you are attempting to borrow money to purchase the business, you will likely find it difficult to sell the lender on any significant amount of goodwill.

10. It is important to understand that the process of ‘being in business’ is very different than it appears to an onlooker.

Once you have become enamoured with the notion of owning and operating a particular business, it gets difficult to be objective. Try to imagine what it would be like to work in the business. Can you see yourself standing serving customers in this business for the next five to ten years? Is it something you will enjoy doing?

11. You should definitely check the seller’s product or service sources, the companies or individuals he or she purchase from.

Determine how stable they are and if they will do business with you (at the same rates as they give him or her).

12. If you are planning to borrow the money to purchase the business, where will it come from?

Do you have at least 10% to put in of your own money/equity? Whether you’re going through a chartered bank or an alternate lender, 20% of your own equity makes a stronger application. To avoid surprises, know your target agencies and determine what they expect.

I’m not trying to create the impression that business sellers are dishonest or less than ethical. As an owner who might want to sell one day, I know that we place a high emotional value on our investment in our business. We pay for it each day with our energy and our lives and when it comes to selling, we expect and hope to get top dollar for our efforts. For me, ultimately it will be most rewarding if the new owner is able to pay a fair price and then succeed.

Buyers often ask me if a business plan is as important or necessary when purchasing a business. Yes, it is. Your business planning should be made somewhat easier by the fact that some of your market research should come from the existing owner. I know this is an old cliché, but the rule with purchasing a business is buyer beware. Take off those rose coloured glasses and take the time to get a clear picture before putting your assets on the line.


Seven Attachments That Make Your Business Plan More Credible

Business planning workshop participants often ask what sort of attachments should be included with their business plans.

From a high level perspective, a business plan is made up of three main parts: narrative, financials and supporting information. Supporting documents are best attached as appendices to your business plan.

The appendix is where you will place any detailed or complex information that supports all those amazing claims made in the narrative and financial parts of your business plan. The narrative or body of your plan is where you’ll tell your story, and it must be easy to read. Any back-up documents or items that would disrupt the body of your plan should be tucked instead into the appendices.

Here are a few of the most likely documents you should attach to your business plan.

1. Resume. A resumé is a concise inventory of your personal experiences, your educational background, and any personal information that adds credibility to you as manager or owner of the proposed business. It’s an opportunity to highlight your strengths and show how your work experience increases your chances of success.

2. Certificates and Accreditation. Provide any certificates and accreditations that will build your credibility as owner and manager of your proposed business. In doing this, you’re best not to overdo it, just include the certificates most relevant to the business you’re planning.

3. Historical Financial Statements. If your business plan is for an existing business or if you’re planning to buy a business, you’ll want to attach enough financial history to show whether the business has been earning or losing money.

4. References. If you’re starting a new business, and particularly if you’re looking for financing, a list of references or a few reference letters will add strength to your case. Be sure any letters are up-to-date and that those providing the letters are aware of what you’re using them for. A supporter forewarned will be better primed to give you a rollicking good reference, if she gets a call from the lender.

5. Validation of Sales. For a going concern, a list of paying customers enables the reader of a business plan to evaluate the strength and quality of the customer base, and therefore the enterprise’s sustainability. Start-ups with no sales to tout will use other types of validation, such as letters of intent, expressions of interest, or comparisons to similar businesses.

6. Market Research. If you’ve gone to the effort to survey potential customers, you will want to summarize your findings and attach them to the business plan. This is also a place to include items like demographic tables or articles that add credibility to your business case.

7. Legal Documents. If you’re getting into a partnership, you might wish to attach a copy of your partnership agreement. This appendix might also include contracts, lease agreements or any other relevant legal documentation.

When deciding what to include as supporting information for your business plan, keep the target audience in mind. If the plan is for a banker, ask what he or she needs in order to do the due diligence on your plan. While most professionals will want to see the items above, it’s equally true that each person or group to whom you submit your business plan may request a slightly different mix of supporting information.

The key to successful business planning is to do your own due diligence, to ask each person you submit the plan to what supporting information they need, and then include the documents they want.

Be Nice To The Gatekeepers You Meet

As you start or grow a business, you will come across a few gatekeepers. Gatekeepers are bankers, business analysts and managers of government or other programs that might provide grants to your business. While they are responsible to protect their employers’ funds, they can also play an important role in making opportunities possible for entrepreneurs.

A gatekeeper’s first order of business will be to perform the due diligence necessary to determine if your business idea is viable. She will evaluate whether or not you can live up to all those amazing promises made in your business plan, before taking your proposal forth to run the gauntlet with her boss or the decision making committee. The experience can be daunting to a newbie, but it really shouldn’t be.

As you work with gatekeepers, they invariably help you build a stronger business plan. Often they are highly knowledgeable generalists who research and evaluate a broad range of businesses. They can usually recognize whether you’re off or on track, and can become tremendous allies in your business endeavors.

Here are nine tips for working effectively with gatekeepers:

1. Be curious, be a learner, and be coachable!

2. Prepare for your discussions and meetings; manage the time efficiently.

3. Be on time for appointments, return phone calls promptly and honour all the promises you make.

4. Know your business plan thoroughly but accept that you may not have all the answers. When asked questions for which you don’t have answers, commit to finding them and follow through with that commitment.

5. Without being a know-it-all, try to anticipate which questions the gatekeeper might ask and have your answers ready.

6. If she seems to be negative about your business plan, ask questions until you understand the problem and what you need to do to fix it.

7. If your application is declined, determine if the decision is final or whether you can fix the problems and reapply.

8. Whether you reapply or not, use the gatekeeper’s input to strengthen any weaknesses in your business plan.

9. Say thank you. Whether you get the loan or not, express your gratitude for the time invested and the feedback.

The gatekeeper who appears to be laying roadblocks in your path is assessing you and your business idea to determine the level of risk. If you meet her requirements, you might just win the loan or grant and with it, the opportunity to start or grow your business.

Market Research Questions to Ask

As we begin thinking about starting a business, we tend to form opinions about who the customers will be, how much they’ll pay for our goods, and what they like or dislike. But opinions are not necessarily the most solid foundation on which to gamble grandma’s nest egg.

At some point early in the business start-up process you’ll need to venture forth and speak to potential customers. This is the part of the journey where you learn more about who they are, what they need or want and whether or not they will buy from you, once your business is up and running.

Once you have a rough idea of who you’re targeting, it’s time to clarify what you want to learn about them. What would you like to ask or confirm when speaking directly to potential customers? The following questions should help you get started. Feel free to delete any that don’t apply to your business or to add a few of your own.

  1. Who are your customers? How old?
  2. Male or female? Educational background?
  3. Where do they live? Where do they work?
  4. Do they need or already purchase the goods or services you intend to sell?
  5. How much money do they intend to spend on the products or services?
  6. Where do they currently buy the products or services?
  7. What do they like or dislike about the products or services they currently purchase?
  8. Do they think their need for these products and services will be increasing or decreasing in the future?
  9. Will they buy these goods in the next year? How often?
  10. Would they buy this product or service from your business? When?

When surveying potential customers, it’s important to ask only for the information you need and to respect the privacy of all who participate. You might want to test your draft survey on a couple of close friends before taking it to the streets. It’s also important to keep the survey as brief as possible, and to thank those who agree to take part.

If you begin with these basic questions and listen closely to the answers you get, those you’re surveying will guide you to learn much about your business. Their answers will also help you revise some of your questions and even add new ones. It’s perfectly ok to adjust your survey on the fly, adapting to new information as you speak with different people in your market area.

Some entrepreneurs are put off by the task of surveying potential customers. Rather than fearing or delaying market research, view it as an opportunity to learn about the most important component of your future business, your customer.

Your Business. Your Plan. Your Way.