I am reading a great book by Ed Pendarvis entitled – Secrets of Buying The Right Business (for you) Right. Ed is one of the world’s most experienced and well known “Main Street” brokers – he is founder of Sunbelt Business Brokers and his career spans more than 30 years helping buyers and sellers successfully close thousands of deals. In this blog post, I am going to recite Ed’s Rules for Buyers as outlined in his book.
1. Take the time to look at the business market in your community, look at businesses that interest you and that you feel that you could run and that you would be pleased to say you own.
2. Take the time to visit personally with a business broker that has businesses listed in your market (this is far too important for just Internet or telephone contact).
3. Take the time to look at and visit incognito any business opportunities that you are interested in, get a feel for the business without anyone, including the owner, knowing that you are a potential buyer. There are, obviously, some businesses that you cannot just “visit”, like a manufacturing business. In that case, make an appointment – perhaps after hours, and always visit the owner with the broker, if the business is listed through a broker, who can be very helpful.
4. Always meet personally with the seller, perhaps after hours (and with spouses) to get to know the seller, hear the seller’s story, including why he/she is selling and how much he thinks you could make owning the business.
5. Never do any face-to-face negotiating with the seller on the first visit – if there is a broker involved, all negotiations should flow through the broker.
6. You should already know if you like the business (through a process of elimination) and you should have the preliminary financial information available to you as furnished by the seller that represents gross sales and what the seller is representing that he/she is making. You can see if that fits based on my 10/20 percent rule (seller’s discretionary income should be in the range of 10-20% of gross sales).
7. You know how much you need to make a year to provide a minimum “lifestyle” for you and your family; you know how much you are comfortable coming up with a down payment, you are ready to make an offer, subject to absolute “walk away” clauses on the contingency contract.
8. Never start with a full price offer (you can always come up).
9. Never take yourself out of cash with a down payment (you have to have some working capital, plus house payments, car payments, etc.) and remember, the monthly payments on debt service have to come out of the reported seller’s discretionary earnings, still leaving you enough money to provide for your minimum family lifestyle.
10. Never pay all cash at closing — allow for a little “what if” money (to allow for a no-surprises training and transition of the business). If you do end up with an all cash deal, I suggest you place $10-20,000 in the closing attorney’s escrow account for 60-90 days to ensure a smooth transition.
11. Always ask the seller to finance at least a part of the purchase price. By doing this, you have a lender that can really help you with the business issues and you’ll know they have a vested interest in your success.
12. Make any offer contingent upon the following:
a. Buyer review and approval of the financials of the business.
b. Buyer review and approval of the terms and conditions of an acceptable lease.
c. Buyer/Seller agreement on an acceptable training and transition period for new management.
d. Buyer/Seller agreement on an acceptable industry non-compete agreement.
e. Buyer being able to obtain necessary financing at acceptable terms.
f. All equipment to be in good working order at the time of closing.
g. The normal level of sellable inventory will be in the business at closing.
13. Make an offer accompanied by a small, refundable deposit (i.e. $1,000) to be held in an escrow account with the broker or an attorney (never the seller’s attorney or seller), pending getting acceptable negotiated offer of contract, and subject to due diligence.
14. All offers should be in writing with a requested response from the seller of 3-7 days.
15. Always keep the horse in front of the cart; let’s make an offer an at least see if we can negotiate an acceptable price, terms, and conditions with the seller, subject to due diligence before we spend a lot of money on accountants and attorneys.
For more information, please visit Ed Pendarvis’ website – www.businessbuyersuniversity.com. Thanks to Ed for letting BusinessBroker.net publish this excerpt from his book, we hope our customers find it helpful.
