Questions About Buying Businesses

[Forza]

In the future, I would like to buy a business that makes at least several hundred thousand dollars per year. But I fear I won't know what I'm getting into. What I mean is,

How does this business really work?
What exactly is it about this business that enables it to be so busy, and profitable?
How can I be sure of the answer?
What is wrong with this business, and how can I be sure?
Is there a competitor in the market, or something I'm not seeing that is about to take business away some time after I've bought it?
If the CEO leaves, how will I find another one to replace them, and what do I do without one there?

This is where I'm at. Just asking questions.

 

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[Rem]

Know something about the business you wish to buy. Do your own homework. Buying a business just to buy a business is very risky. You don't have to know everything or do everything but learn who you can trust and who to listen to in certain situations.

 

[phlgirl]

My husband I and have been in the market to purchase an existing business for a few years now. We have reviewed hundreds of listings, investigated dozens, made offers on a few and closed on zero. I liken it to real estate, in that you need to look at plenty of deals before you find the right one. I also believe that once you buy one, the learning curve, for identifying the good ones, is likely to decrease.

We are currently pursuing 2 businesses and hope to make an offer on at least one in the next few weeks.

The answers to most of your questions lie in the due diligence. You will need to do a good deal of research, in order to mitigate the potential risk. Talk to other owners of similar businesses, review & analyze & verify the financials of the business. You can also utilize industry statistics, associations and forums to conduct further research and ask questions.

There are scores of books on the subject. This is one I thought had some valuable information.

Amazon.com: How To Buy a Business (9780793104505): Richard A. Joseph, Anna M.…


In addition, for a great overview of buying a business, use the link below. There is a sales pitch at the end but it's an hour + of pure content leading up to it. Great tips from someone who has purchased dozens of businesses. (I know I sound like a commercial for KJC but he is truly the best)!

http://www.keystothevault.com/video/20100309HOWTOBUYABUSINESS.wmv

Good luck!

 

[Smooth]

These are all very common, check-list type questions that any LBO or private equity firm looks into. Let me tell you, from past experiences working at a PE firm, they can get VERY sneaky on how to get this information. For instance:

How does this business really work?

Ask for a business plan obviously, but also interview employees and see what their vision of the company is 5-years down the line and see if they are similar to each other, and similar to the CEO.

What exactly is it about this business that enables it to be so busy, and profitable?

This is pure due-diligence. The main way to do this is to interview customers of the business.

How can I be sure of the answer?

You can never be...that's the risk.

Is there a competitor in the market, or something I'm not seeing that is about to take business away some time after I've bought it?

Pretty easy to identify, but also consider other indirect competitors, such as a customer buying NOTHING, either from you or your competitor, or an alternative product/service.

If the CEO leaves, how will I find another one to replace them, and what do I do without one there?

I thought this was the most clever solution: Many PE firms schedule meetings with the CEO, and then reschedule last minute. If the CEO can accommodate, then they must not be too integral to the operations at this point. If they cannot accommodate, then they must be still too involved in the business and there might be some problems if they leave. This is not to say that these problems can't be fixed, but you need to prepare.

Interesting article relating to this stuff:
4 Traps to Avoid When Selling Your Company

 

[Guest3722A]

Here's some, I guess, 'insider info'...

When I was doing commercial loans and mortgages here in michigan I spoke with SEVERAL lenders all across the country and one of them in particular said that he loved dunkin donuts and would finance them all day every day no matter where the location was.

 

[Smooth]

Here's some, I guess, 'insider info'...

When I was doing commercial loans and mortgages here in michigan I spoke with SEVERAL lenders all across the country and one of them in particular said that he loved dunkin donuts and would finance them all day every day no matter where the location was.

I always thought the same thing, although never actually invested in one. Coffee is addicting, and everyone loves breakfast foods and donuts. As long as you are not across the street from another competitor and you are in a fairly high-traffic area, you should be good to go.

Maybe I should look into this...

 

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[max momo]

When I entered negotiations on buying an existing business I learned five things:

1) Many businesses keep three sets of books
a) one for the IRS
b) one for a potential buyer
c) one for themselves

2) It is easier to agree on price rather than terms
3) Goodwill is rarely worth what the seller believes
4) Depending on the business, inventory and/or customer lists are worth the majority of the firms valuation
5) Make sure you are only buying the assets, not the liabilities

I decided to start my own business instead of buying an existing one...

 

[Smooth]

When I entered negotiations on buying an existing business I learned five things:

5) Make sure you are only buying the assets, not the liabilities

As in debt? I'm not sure if that's the norm...

 

[throttleforward]

The one lesson I kept repeating in my mind when I was evaluating a business was "Don't buy other people's problems."

The other related thing that I discovered was to treat the reason that the current owner was giving as to why the business was for sale with extreme skepticism, bordering on assuming that they are always lying. Some truly are "interested in other things", but most just want to move on from an albatross of a business.

 

[Smooth]

In the future, I would like to buy a business that makes at least several hundred thousand dollars per year.

Best, most probable and efficient to accomplish this is to buy an underperforming business with revenues <$100,000 per year and build it up.

 

[phlgirl]

Best, most probable and efficient to accomplish this is to buy an underperforming business with revenues <$100,000 per year and build it up.

If you watch/listen to the webinar, via the link posted above, you will learn why this is NOT the case (according to someone who has successfully purchased dozens of businesses).

 

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[anacron77]

1. Make sure customers won't leave after you buy the company.
2. If you find out that you would be inheriting the problems, see if those are happy problems. In my case, am selling majority stake to my company to make sure the company can handle a lot more of the opportunities that are coming in compared to if I handle it myself.

3. Make sure things are running fairly independently from the owners. If a lot of things are being done by the owner themselves then you should at least make sure you can do what the owner is doing if or when he leaves.

4. Talk to the staff, what would make them stay on after the purchase? Especially if this is a service oriented company where the people are the one making the money for the company.

my .02