Buying a Business? You Need a Proactive Plan
It doesn’t matter the industry or location; buying a business is something that must be taken seriously and executed in a diplomatic fashion. Whether it’s a six-, seven-, or even eight-figure business, there are certain processes and systems that must be followed in order to achieve the desired result. Are you prepared?
5 Helpful Tips for Buyers
Buying a business requires an investment on multiple fronts. It commands money, time, and mental energy. And if you don’t fully commit to the process of buying a business the right way, you could end up making decisions that eventually come back to haunt you.
Whether it’s your first business or one in a deep portfolio of companies, you may find the following helpful in guiding your thought process and decision making.
It’s imperative that you level with yourself before getting too far along in the process. More specifically, you need to ask yourself this simple question: “Why do I want to buy this business?”
That might seem like a very obvious question, but the answer will tell you a lot about your motivations and expectations. Take the time to explore other related questions like:
If you can’t answer these questions, you probably shouldn’t buy the business. Clarity (News - Alert) is the first ingredient and it’s imperative that you take the time to filter out the distractions so that you can analyze the elements that matter most.
Regardless of how confident you are in your “why,” there are still risks associated with purchasing a business. A thorough due diligence process will help identify as many of the negatives and “booby traps” as possible. Here are some elements to consider:
This isn’t an exhaustive list by any means. Your due diligence could take months to follow through on. The important thing is that you uncover as much information as possible and pursue any questionable insights that are uncovered. Where there’s smoke, there’s typically a smoldering fire.
Financing is obviously a very tricky and complicated aspect of buying a business. This is something that you want to get 90 percent squared away prior to beginning your search for a business. The other 10 percent will then need to be ironed out once you have a target.
Every situation is different, but it may be smart to work with a full-service brokerage firm - particularly if you’re buying a business in a specific niche where there are nuances and strict requirements.
Let’s say, for example, that you want to buy a delivery route. There are actually full-service brokerage firms that specialize in helping people purchase FedEx routes. Working with one of these companies gives you a massive advantage and will allow you to avoid so many of the pitfalls that typically trip up buyers. They understand financing and can help you structure the deal in a way that’s most profitable.
When it comes to drafting a sale agreement, you need to be as specific as possible. Operate under the assumption that something will only be done if it’s in writing.
Indemnity is one such example. No matter how much you’ve poured over the seller’s tax returns and books, it’s always possible that something could be overlooked and/or uncovered later on down the road. And the last thing you want is to get sued for something the previous owner did.
Entrepreneur Cliff Ennico advises buyers to, “Get an indemnity from the seller, promising to defend the lawsuit and pay all judgments and fees if that should happen. Likewise, you should be prepared to give the seller an indemnity if he gets sued because of something you do - or fail to do - after the closing takes place.”
Clauses like this might seem like small potatoes, but they can be supremely important. You want to be as prepared as possible, even when it feels like overkill.
It’s always a good idea to work the contract so the seller sticks around for a while after the transaction is complete. This helps you ease into the new role and have someone around who can answer questions and facilitate a smooth handoff.
If you do want the seller to stick around, be specific about the expectations. Somewhere between one to six months is adequate in most cases. (Again, specificity is a must. Write these details into your sale agreement.)
Put Your Best Foot Forward
There are no shortcuts for buying a business. If you want it to go smoothly (before, during, and after), you have to be purposeful and disciplined in your approach. Doing it halfway won’t work. Hopefully this article has supplied you with some insights to implement a proactive plan that guides you from start to finish.