(Part 2 of 2. This issue addresses buying a business; previously discussed was selling a business.)
It is the eager dream of many entrepreneurs to buy a business. The right people make an introduction, the price is perfect, the fit is fantastic, the profits are profound. You pick it up without missing a beat, add value, and double the revenue. That’s the dream.
The reality is that buying a business is complicated. Most often it’s made complicated because the seller wants you to realize (really, really realize) how much work it took them to build it. From scratch, against adversity, through COVID, …uphill both ways, …while carrying firewood. And because they built it, they are almost always going to believe that it’s worth more than it actually is.
There are three questions to answer in buying a business: Is the business making money? How will an acquisition affect the company? What is the seller looking for?
Is the business making money? When you buy a business, you jump onto a moving locomotive. You have revenue and expenses, products and vendors, and employees (with personalities, and skills, and history). This can be amazing because you avoid trial and error and skip right to momentum. But no business is perfect, so a $100,000 business has $100,000 problems. And a million-dollar business has million-dollar problems. That comes with the territory…as long as there is profit to weather those storms. If you can see on the P&L (profit and loss statement) that there is profit, and by you coming on board you can add more value (bringing your skills, or funding, or expertise), that’s a big green flag. However, if the business isn’t making money, it’s harder to turn it around. Once successful companies are now treading water or looking to sell quickly (often because of debt, outdated products/services, or poor market demand). TEDx speaker and leadership expert Angela Vassallo says, “It’s easier to give birth than to raise the dead.” So choose wisely.
How will the acquisition affect the company? Some businesses make money just because of the owner; they have a unique skill or they have star power. If a new owner comes in, how will the business change?
Look for the missing sock – A couple wanted to buy a laundry mat and on paper the deal looked enticing. The business had great cash flow, a steady stream of repeat customers, and required minimal staff. But upon looking closer, like a dryer load with a sock missing, there was an empty line on the P&L. Where were the fix-it costs for the wear and tear on the washers and dryers? It turns out that the owner was a gifted mechanic. The cost of hiring someone to do the repairs was over $35,000 a year, which dirtied the profits and ended up killing the deal.
Often the idea of a new owner creates stress on the current staff. They ask questions like “Who’s getting fired? What’s going to change? Why should I stay?” These are essential questions to answer. Garret Gunderson said, “In the absence of communication, negativity fills the void.” Once a deal is being worked out, let the current team know that you are here to keep a great business going. Listen to the things they find most important and the things they want to see changed. Don’t overpromise (realistically you will probably change things and have staff turnover), but let them see you write it all down and make sure they feel heard.
What is the seller looking for? Sellers are unconsciously looking for reasons not to sell their business. Remember they’ve never sold a business before, so they don’t know what to expect. As a buyer, you need to walk into a meeting with as much certainty as possible. Bring well-thought-out and easy-to-explain answers – timing of the deal, buyout structure, maintaining staff, keeping the company name.
Mike Bilotta of Gladstone Associates (an M&A firm) said, “The most successful buyouts involve the buyer telling the story of their own firm and including the seller in the next chapter.” Constantly remind the seller of the reasons to combine and collaborate so they get on board with your vision of the future of the company.
Buying can be the beginning of a beautiful relationship, so start with: Is the business making money? How will an acquisition affect the company? What is the seller is looking for?
