Buying A Business

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Buying a business is no simple undertaking. While you can go on and on and on about the effort that is necessary to get a business ready so it can be listed for sale, as a buyer you have to be prepared and do your homework too. The buyer in mergers and acquisitions is often the party that takes on more of the risk.

As the buyer you are making the investment. You are paying a large sum of money with the expectation that will grow and provide returns to you or your existing business. If you choose the wrong business opportunity, it can set you back financially and in other assets such as your time. It becomes vital that you give yourself the best chance to succeed after your close.

Unlike investing in the stock market or investing in assets such as real estate, when you purchase a business you not only have control of the process of selecting where you invest your time and money but you also have control over the outcome. As the owner of the business, you have the ability to control the future of that business and make a true impact on the appreciation of your investment. This is why it is critical during due diligence to fully vet the business opportunity. Once all the information is gathered about the business, you can weigh the risks you will be taking on, what you believe the future of the business is and whether you can see your skill set fitting with what the business needs. That is where the true decision to purchase should come from.

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Business For Sale Grand Rapids MI

You might be trying to find business opportunities in Grand Rapids but there are many sources for developing potential companies for acquisition. Business brokers, investment bankers, online listing services and other similar sources have databases full of potential business for sale. All you have to do is sign up for a few mailing lists and you will be inundated with potential business opportunities.

The more difficult part of the process for a buyer is to weed through the hundreds of potential acquisition targets. You need to develop a team to help you make this decision. This should be a team of advisors and not team of dictators. The ultimate decision to pursue a target should be your choice.

Questions You Should Be Asking When Buying A Business

Here are a few things you should be pondering when considering a potential business opportunity. While this list is generic to all potential buyers, it is obviously not complete. It is meant to give you a jump start on the things you need to consider before buying:

Is the current owner of the business working more as an owner or more as an employee of the business? You want to buy a business and not a job.
How reliant is the business on its top clients or customers? There can be great risk if the top-2 or 3 customers leave and 25% or more of the revenue goes with them.
Are key employees incentivized to remain on board after the closing? Employees can get nervous about a change in ownership and if key employees leave it can hurt the business greatly.
What type of potential claims could be brought against the business? Even with great indemnification provisions in the purchase agreement, ongoing PR problems can hurt the business.
What type of growth potential does the business have? If a business is in a limited market, you might not be able to grow the business much beyond its current abilities.
What type of contractual relationships does the business have? This can be a positive or a negative because you can renegotiate bad contracts to help the business out but you might be stuck with them too.
Does the corporate structure need to be overhauled? Its not uncommon for businesses to add employees and departments without thought. If change needs to happen it might be a risk to production and employee turnover.

Acquisition Due Diligence

Due diligence is a different concept for a buyer than it is for a seller. Where a seller can be overwhelmed by the feeling that the business is being interrogated and stripped bare for the world to see, the buyer has to take the approach that they need to investigate and find what the seller is hiding. This does not mean you have to be rude or treat the seller as the enemy. As a buyer you want to not only feel confident in what you are acquiring but the seller might be too close to the business to realize what needs to be disclosed.

Confidence in your purchase comes from finding out all the information you can about the business you are trying to acquire. This ranges from the obvious things like financials, projections, marketing and operations to other not so obvious aspects like contractual terms, potential claims and compliance issues. Having a good acquisition due diligence checklist can ensure that you cover as much as possible.

Sellers are generally entrenched in the the day-to-day operations of the business. They do things a certain way and have had minimal or no issues doing it that way for years. These actions and behaviors, while not problematic to date, are ticking time bombs for a buyer. Think about a seller that has used the same customer agreement for over 10 years. If there is a term in that agreement that leaves the seller potentially liable, even though the seller might have never had an issue, if you buy that business and assume those contracts, you will inherit that potential liability. Again, a solid acquisition due diligence checklist will ensure that you don’t overlook something that might be important.

Negotiating The Deal

Depending on what is discovered during the due diligence period, you may start to get nervous about certain aspects of the business. Maybe there are some shaking business relationships that are critical to the business. Maybe the owner is really a key employee and you don’t know what the business will look like without him or her there. Or maybe the business has just been mismanaged to date and its going to take a lot of work and change to get it where it needs to be. Whatever the reason may be, you may want to negotiate or renegotiate the deal.

You may be a seasoned negotiator or you may be a novice that has never negotiated anything. Whatever group you fall into or if you are somewhere in between, this is an area that you have to enter cautiously. While the deal might have some warts, you are still interested in buying a business and the seller is still interested in selling. You don’t want to kill the deal because of some issues that might end up being minor in the long run.

While you have the option to come in with a hardline position that you want lower the purchase price or to come in with a softer method that you think something needs to give because there might be some issues, the important thing is to not kill the deal. Having experience working in M&A transactions can be really beneficial in these situations.

One of the keys to these negotiations is to be hard on the problem and not on the person. This means that you need to stay focused on solving the issue and necessarily dominating the person representing the seller. This might mean that you try and get the purchase price lowered but often times, finding alternative payment methods are really all that is needed. Being able to be creative and provide terms that tie the purchase price to performance of the business after closing or will reduce the purchase price if certain events occur after closing are often the easiest way to reduce the buyer’s risk but also not scare the seller off.