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- Are you up to the
challenge? Owning and running a small business is
quite different than working for a larger company. You may
provide some new perspective, perhaps, but the principal
requirement for success will be energy and hard
work.
- Be positive:
There are no perfect businesses. If you look hard enough,
you can always find a reason not to buy. Keep the
big picture in the forefront as you evaluate the
opportunity. Picture yourself as the owner.
- Sell yourself:
Provide a resume and financial statement. Remember, the
seller will most likely be your banker and will want to be
convinced that you can run "his" business
successfully, protect the employees, and pay down the note.
- Focus on earning
power. Just about anybody can buy assets, such as
inventory and equipment. But you are buying a company. Focus
primarily on the company’s discretionary cash flow or
EBITDA, i.e., what the business really earns now for the
seller, then determine what it might earn for you in the
future. Most good small businesses will be priced at two to
four times cash flow.
- Recognize real
value: Sellers deserve a fair price for the years
they have spent building the business and its reputation,
its market share and loyal employees. Be prepared to pay
for such intangible factors, in addition to the value of
the company’s tangible assets. Smart buyers of successful
companies rarely focus primarily on tangible asset value.
 Make
sure you have enough cash: Some potential buyers
have wholly unrealistic expectations as related to their own
financial ability. Provide a confidential financial
statement to the broker at the outset. Don’t waste
everyone’s time if you don’t have sufficient liquid
resources to make the down payment, with something left over
for working capital. Further, don’t announce that you
can enlist “investors” if you can’t introduce them –
and aren't able to demonstrate their level of potential
commitment – up front. But the down payment, and possibly
some working capital, will be your only monetary investment.
A good business will pay for itself out of its cash flow,
i.e., by paying down the debt.
- Employ experienced
advisors: If you need third party advice before
making an offer, use people with broad business perspective.
Let attorneys advise on legal matters and accountants on
financial matters. And make sure that your attorney has
solid business "deal making" experience. If
not, his true cost to you could end up being more than his
fee. And, remember, attorneys and accountants work for
you; tell them you want the deal to happen and that
their job, while protecting your interests, is to figure out
how to get the deal done.
- Act expeditiously:
Don’t drag out your due diligence after agreeing on price
and terms. Keep the focus on key business issues and
avoid getting tangled up in minutia. This is not the
time for an “audit.”
- Sell yourself to
the landlord: If there will a landlord other than
the seller, he usually will have little to gain by changing
the status quo. Go to your initial meeting with him armed
with your resume and financial statement.
- Rely on the
intermediary or broker: He most likely will be an
experienced professional, with a depth of knowledge both
about the business in question and transactions in general.
He should also have important access to potential lenders.
Even though he is normally compensated by the seller, in
truth he represents "the deal" and can help you as
much as the seller. He will lower the stress level for all
concerned.
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