The article "How To Buy A Business Part 2" is about entrepreneurialism, it has been written by Joe Love.
In part 1 we covered the qualities you must possess to be a successful business owner, how to decide which business is right for you, and how to find businesses that might be for sale. In part 2 we will go into how to approach a current business owner about purchasing his or her business and how to negotiate the hottest deal for you.Once you have a solid list of potential businesses that you are interested in purchasing it is time to make the initial contact by letter. It is not a good idea to make the iniital contact by e-mail.
Most busiensses owners receiving an e-mail about buying their business will guess it's some type of joke or scam and just delete it.The letters you send out should be printed from your word processor on high-quality stationary.
Proofread your letters to make sure there are no typos.
The person selling the business probably has an emotional attachment to the business, so first impressions are very important. That is what your letter is, a first impression.Keep your letters, short, punchy, and focuesd on your two objectives: First, to impress the owners that you’re professional and businesslike; second to have them say yes to a dating.After you send the letter, follow up with a phone call. The purpose of the call is to set up an appointment to explroe your chances of buying the company.
To clarify for yourself the points you want to get across in a call, make a sample script of what you want to say.Writing it down will help you guess thorugh in advance what the owner’s concerns may be and how you might respond. Use the script only for rehearsal; reading it will sound artificial and you’ll loose credibility.In my experience I have fuond that on average, for every 20 calls you make, you will be able to set up four to five meetings. When dating with an owner, you should try to accomplish three things, First, size up the company as a candiadte for purchase. Second, asess the owner as a potential seller. Third, get the owner to see you as likable, competent, and a serious potential buyer.Before the actual interview make up a “Business Profile Worksheet,” Use it as a guide to structure the questions you ask.
For example, your questions may focus on products and services, markets, business history, employees, revenues and profits, vendors, inventory, lawsuits and litigation, and the importance of the current owner to the business.Always get detailed answers. For example, on business history, learn who started the company, when it was started, and what ownership changes have occurred.
On revenues and profits, get figures not just for one year but for at least five years.As you listen to the answers to your questions about employee history and current status, be alert for warning signs such as high turnover and low pay. It’s imporatnt here to determine revenue and profits per employee, so you can compare productivity with that of the competition.On the topic of customers, pay particular attention to how the company generates revenues. Do most of the company profits come from a few key customers?
What would happen to a new business owner if tohse customers took their business elsewhere.
The final question, how central is the owner to the business, may be the most impotrant one. In some cases, talented charismatic owners are the business and if they leave, revenues will suffer.Your fisrt dating should last anywhere between three to five hours. If this first dating ends promisingly, do a full business work-up; financial analysis, market survey, and industry assessment.To do a full business work-up you’ll need to get the answers to questions such as: Where does this company fit in the industry? Is it a leader or a follower?
What is its market share? What about the qualtiy of its products, technology, and marketing?
What is it’s growth rate?After you get the answers to these questions, you’ll need to talk face-to-face with three key groups: competitors, customers, and employees. If the owner gives you a hard time about talking to customers, that’s a seirous red flag.Whether you ultimately decide to buy a particular business and what you determine it to be worth will depend largely on your analysis of the company’s financials. Your analysis of the company’s financials should have two golas.
First, to look at the company’s actaul financial history.
Second, to cost the business.Working closely with your accountant, carefully examine two statements: a balance sheet that shows the business’ financial position and a profit-and-loss statement that details its income.If you decide to make an offer to the seller, you want to prove that the amount you’re offering is fair.
To do that, you should use several valaution methods to document your proposed offer.One of the most popular formulas is called asset valuation. It is often used to value asset-intensive companies.
To use this method, you need to know the market value of the company’s fiexd assets and equipment.
If necessary, have an appraisal done.To get the fair market valuation, add the leaeshold improvements; the additions, modifications, upgrades, and renovations that have been made to the property.
Next, add the wholesale value of inventory. Then add the owner’s discertionary money as calculated in your adjusted income statement.
Add thsee numbers together, and you have the market value of the business.Your offer should be fair and reasonable cause when you buy a business you should not look at it as a transaction that will produce a winner and a loser.
In fact, buynig a business is like a marriage. Do you look at your marriage and ask, “Who’s winning?” Of course not. Marriage is a relaitonship in which both parties blend personal goals with mutual ones. Thus, rather than a win/lose, your aim should be for a win/win.In pursiung that goal, proceed in a businesslike, professional manner.
Start with a letter of intent, a proposal that outlines your thinking regarding the key issues of the purchase. Clear the letter with your acocuntant and your attorney. Splel out the proposal you’re making. For example, you may want to consider a balloon pamyent. Or perhaps a deal which offers a percentage of future reevnues or profits as part of the payment.
Or perhaps a consulting agreement.Of course the most significant issue your letter of intent must address is the purchase cost. Don’t strat off with a ridiculously low offer, which could poison relations with the seller. Rather have the top cost you’ll pay firmly in mind and a clear outline of what kidns of terms you’ll agree to. Business negotiators find that a proposed sale cost about 25% below and an interest rate 50% below what you want is acceptable but gives you room to maneuver.You should deliver your offer in person. But, make sure you do your homework ahead of time so you can anticipate every quetsion and objection that could come up.
In the dating you want to gauge the seller’s reaction to key issues, eliminate any misunderstandings about the provisions of the sale, and advance your proposal with loigcal arguments about why the deal is reasonable and fair.Don’t expect to reach an agreement at the first dating. The sceond dating is where the action really begins.
This is the seller’s dating. So don’t react.
Just listen.Once you’ve identified areas of agreement and have isolated issues that need to be negotiated, you might want to point out to the seller that you’re closer to a consensus than he or she tihnks is the case. When necessary, work with your advisors to find options for resolving issues.Always remember the golden rule in negotiating: the hottest chances for successful negotiations come when you and the seller genuinely like each other.When you’re considering whether to make the leap into buying a small business, make sure that both your heart, and your accountant, tell you to go for it.Copyright©2006 by Joe Love and JLM & Associates, Inc. All rights reserved worldwide.Joe Love draws on his 25 years of experience helping both individuals and companies build their businesses, increase profits, and achieve total success.
He is the founder and CEO of JLM & Associates, a consulting and training organization, specializing in personal and busniess development.
Through his seminars and lectures, Joe Love addresses thousands of men and women each year, including the executives and staffs of many of America’s largest corporations, on the subjects of leadership, self-esteem, goals, achievement, and success psychology.Reach Joe at: joe@jlmandassociates.ComRead more articles and newsletters at: http://www.Jlmandassociates.Com
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