Finding a Business to Buy and Determining an Offer Price

So, what is really involved when finding a business to purchase and how complicated could it be?

I’d like to say the answer to this question is “it’s very simple”, but since it really isn’t, I won’t insult your intelligence. And it is definitely not similar to searching for a home. Except for the fact that there are Brokers to help you and market trends involved to assist in valuations, there is no comparison to buying a home. Believe me, if you have not bought or sold a business before, this process will come as a shock to you if you are looking to compare it to house hunting.

In this process, you will be highly analytical and the Seller will be highly emotional. This is their baby that they have built on their own, or like you are attempting to do, have bought from someone else and made it their life. Hopefully I can help prepare you for the general process steps that will occur. Before you go forward and read the steps below, it is important that you have already prepared yourself to buy a business. To make sure you are ready for the information in this article, please read my other article that precedes this one entitled Buying a Business- Prepare Yourself.

Step 1: Shopping- There are many places to look for businesses for sale and there are ways to go about buying unadvertised businesses. This second way is a little complicated and too much for this article so we will stay with advertised businesses for sale.

As far as looking for advertised businesses are concerned, the internet is a great place to look. The newspaper is the worst place to look and in a moment I will tell you why.

You will find two types of businesses in your hunt: those for sale by the owner and those for sale through a Broker. Not to get too in-depth since it is a subject in itself, you are much better off sticking with Broker based sales. These can be found on Broker websites and they also occupy 95% of the listings on general business for sale sites. I recommended staying away from newspapers because most of those ads are for sale by owner (FSBO) businesses. On top of that, they do not give you enough information to warrant truly looking into the business. Concerning dealing directly with Sellers, it is a rare instance that this is ever a good experience. The pricing is normally way off and the information is very often inaccurate. If you get past that, then the negotiating will often be very unpleasant.

Working with a Broker is a good idea and you don’t have to work with just one company. Go to as many as you can find but only continue working with those that you feel comfortable with and those that pay attention to you. If you are a prepared Buyer and a Broker does not give you the attention you deserve, get another one within that brokerage.

You will often find listings on a particular internet site to be the same because most Brokers work on a non-exclusive basis. Don’t get confused if you see very similar listings since they are probably the same business. By the way, when I say use a Broker, I mean a BUSINESS BROKER. Do not waste your time with any listings you find with a Real Estate Broker. The majority have conned a not-so-savvy business owner into thinking that they know how to price and sell a business just to lock them into a 6 month contract and hope a sucker comes by to purchase the business. Don’t be that sucker. Again, this is not like selling or buying a house so stick to a Business Broker.

Step 2: Taking action- If you see something you like, take the next step in getting more info from the Seller or Broker. You will most likely need to sign a non-disclosure form. If a Brokerage gives you this form, you will only have to sign it once and it will carry over to every listing they show you.

Respect this short but very legally binding document. It should basically state that you will be receiving confidential information and you agree to keep it confidential. Confidentiality will also mean not exposing the for sale status to any employees, vendors, customers, etc. Lastly, it will have a circumvention clause that states if you try to pull a fast one and go around the Broker after you have this vital information, you will be caught (believe me you will) and you ,as well as the Seller, will owe money to the Brokerage company. It’s shady and not right so just don’t do it.

Step 3: Information gathering- Once you have signed the non-disclosure and asked for further information, you will receive a packet of vital information. In most cases you are not going to get 3 years worth of tax documents or even P&L reports for that matter. You can ask for it, but the odds are slim on getting it. That’s too much information at this point to give to a semi-committed Buyer. What you will get is a profile which will give the latest 12 months of revenues, expenses and cash flow information. Other provided information may be whether inventory is included in addition to its value, the value of furniture, fixtures and equipment (FFE) but not a list, an extended business description, and lease or property purchase information.

At this point the address and name of the company may be given to you, but often that is done after you have reviewed the information and request to see the business. Again, this avoids giving tire-kickers vital information and the location when they are really not serious Buyers. This may disrupt the business or waste the Seller’s time.

Step 4: Review- Once you have the vital information you need you must really review it. This is the time to ask questions. However, it is not the time to start negotiating.

If you are getting into a business that you are not very familiar with regarding the technical aspects, get some help with good questions to ask. Believe it or not, asking irrelevant questions will not be received kindly with either the Seller or the Broker you may be working with. There is nothing wrong with going into a fairly unfamiliar business, but asking the right questions with help from a Business Advisor or Broker will become essential in this type of circumstance. Asking nothing at all, whether you know the industry or not, is also not a good idea.

Some basic questions would be:

Is there anything missing in the profile or something that doesn’t make sense? An example would be a profile that says there are 3 full time employees but there is no payroll information at all.

Is there any seasonality to the business?

Is there any heavy competition in the area?

Again, you and your advisors can come up with many questions depending on the type of business. The kinds of questions that won’t usually be answered are along the lines of very in-depth financial inquiries or those related to contacting vendors and such. You are looking to ask mostly surface type questions to determine if you would like to get to the next level of digging into the company. There is still no real commitment to purchase at the next level, so don’t feel you need to know everything to get there.

Step 5: See the business/Seller meeting- When you have done your review and things still look interesting, this is the time to request a viewing of the business and/or a meeting with the Seller.

A meeting with the Seller will not be made to negotiate price when dealing with a Broker. This is neither the time nor the place. Doing this separately with the Broker in the middle of the Seller and you is crucial. If a Broker is not involved, this meeting will probably end up being the start of negotiations between you and the Seller. Again, it often ends up not being pretty unless you are going to offer very close to the asking price. This is why I do not recommend dealing with FSBO businesses. Most smart Brokers will also have you conduct a visit before allowing a Broker-mediated meeting with the Seller.

Assuming a Broker is involved, they will give you the business address to visit it. Depending on the type of business, a discrete “drive-by” will be permitted or an arrangement to see the business after hours will be made. Retail establishments will almost always allow you to do the “drive-by”, which entails seeing the business through the eyes of a customer. Talking to employees, customers or looking for the owner will get you immediately blacklisted from this business as well as any others you want to see if working with a Broker. If working with a FSBO, you will probably get yourself thrown out very quickly and the deal will be dead.

Step 6: Determine an offer price- Here is the one thing that almost all first time business Buyers do not do well. First, you need to understand that if the business was appealing enough to get you this far, then you should come up with an offer to the Seller. If you are going to completely insult them by low balling well below market value, don’t do it, but you really don’t know what they will accept without putting some kind of offer on the table. This is an automatic missed opportunity if you don’t give it a shot.

For example, a business could be on the market for $300k and it was attractive enough for you to get to Step 5 of the process. Let’s say you determined there are factors in your research that lower the value of the business such as the need to replace some of the equipment. Now you think an offer of $200k would make more sense. Well, offer a little less than the $200k with your reasons behind it. If it is a price you can live with and it makes sense, go for it. The Seller just might take it. If the Seller balks, then you move on. That decision by the Seller will probably tell you they are unreasonable and someone you don’t want to deal with anyway. Maybe he will change his mind before you find another suitable deal. Or maybe he will come up with a counter offer. You will never know if you don’t put it out there. Don’t make assumptions.

Hopefully you initially chose to look at this particular business because it fit all of your pre-business hunting criteria that you established. On top of that, I will assume you have conferred with an Advisor that has market/industry knowledge who determined that the original asking price made sense based on preliminary information. If this is all ok, then the process of determining an offer price in this step should be relatively painless. The offer will sit well with you when you make it regardless of whether the Seller takes it or not. That’s the goal.

Congratulations, you are now ready to make an offer! At this point you have done everything possible to determine that this business is right for you and you have come up with a corresponding price tag. To find out what happens next in the buying process, including walking away with the keys to your new business, please read my article entitled Closing the Deal on Buying a Business.

Finding a Business to Buy and Determining an Offer Price - To learn more about this author, visit George J Sierchio's Website.

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