In our post “I Think I Want to Buy a Business. Where Do I start?” we noted that you may want to start with lining up professional assistance to help you avoid the pitfalls of doing it yourself. That’s what experts are for, after all: to fill in the gaps in our personal experience and capabilities.
Let’s explore that: Whose help do you need to minimize your risk in buying a business and ensure that you make good decisions? The answer here is not the same for every person in every situation. You may well be capable of some more extensive plumbing projects than I am. Why? You have more experience, more knowledge, or people around you that do.
If this is the first time you are buying a business, the entire process and the required tasks at each stage might be new, even foreign, to you. You do not even know what you don’t know; this can be very dangerous when investing your money is involved. I really hate getting those calls or e-mails that begin: “Help me. I have gotten into a transaction, and now. . .” well, bad things are happening. It is too easy to get in over your head when you do not even know what you don’t know. Sometimes an expert coming into the middle of something can “fix” what’s gone wrong, but often we cannot do this AND gain the confidence of other parties in the deal, AND keep the deal moving ahead, AND recoup expenses you have incurred, AND avoid bringing in expensive legal help. If I got in over my head on my DIY plumbing project, and have flooded my house, I can now bring in a plumber, but it’s a bit late for the best outcome, right? Bottom line: it’s always better to consider whom you will likely need and line them up to bring in as you may need them.
What professionals you will need and when also depends on the type of business, the complexity in terms of required financial and legal due diligence, and any licenses and inspections required. Let’s look at some general categories of expert help:
1. Broker/Intermediary: If one experienced broker is retained on one side or the other, the parties will at least have a quarterback to guide them through the process, and ensure required tasks are assigned and completed. Keep in mind that brokers often represent either the buyer OR the seller. The buyer MAY need his own representation if he is a complete novice and if good negotiation skills are other divergent interest (buyer vs. seller) issues may be present.
2. Accountant: How well do you understand key small business financial statements, such as the Profit & Less (Income Statement,) Balance Sheet, and corporate Tax Returns? These are required for a business purchase and sale, for the buyer to understand what is happening financially in the business, and for the buyer to evaluate how much he is willing to pay. If these documents read like Ancient Latin to you, you likely need an accountant on your team at the outset. If you know your way around these financial reports, you may be able to hold off on retaining the accountant until Due Diligence.
The seller will have typically placed a price on the business, which may or may not be a fair market value for a financial buyer. What one buyer “should pay” is not always the same as what another buyer “should pay” due to strategic buyer factors, but all businesses have a fair market value based on revenue, profits, supply and demand, and some typical market factors. “Asking price” is sometimes inflated just enough for fair negotiations; other times, the price is “what the seller wants,” and my not even be financially feasible given the profits, the assets, obtaining a ROI (return on investment) and paying projected financing.
3. Small Business Transaction Attorney: Attorneys have areas of expertise inside the law. Given that they work by hour, the last thing either party in a business transaction wants is a litigator with a “kill the other side” mentality. Small business purchase and sales are not hostile take-overs and will rarely close if there is not a win-win scenario. You need an attorney who knows how to help solve problems and is willing to work with the other parties on your team and in the transaction (like the lender’s closing attorney) to help you reach your goal of closing the deal. You will need this professional to review contracts and advise you of areas of potential liability, as well as ways to minimize your risks. Many small business transactions are initially documented with standardized forms, much like you may have seen in Real Estate transactions, with contingencies to allow you to exit the transaction with no legal repercussions. Sometimes, non- binding letters of intent or term sheets are used, depending on the size and complexity of the transaction. You will need to bring in your own attorney at the stage at which you feel you do not understand all the terms and conditions to which you are committing yourself and for closing documents review.
4. Other Specialists: Do you need an equipment valuation or inspection of a restaurant or manufacturing equipment? Licensing support? Inventory count? Environmental assessment? Forensic accountant? Not sure? That’s where the Broker helps.
5. Lender: If you are not planning to pay cash, you will need a lender. Do not wander into your bank branch and ask the teller. We promise a separate post on business acquisition financing!
6. Your Spouse or significant other: If you are not single, the purchase of a business involves someone else—their lifestyle, and likely their finances. Have this discussion early, and involve this person to the extent they wish to be involved. You need and want their support for a successful acquisition and a smooth business operation after closing.
7. Other Trusted Advisors: Many people have professionals in their lives whom they trust from prior experience. These people can make great sounding boards. Do keep in mind that everyone has an opinion. If you listen to “everyone’s” diverse opinion, you may have a hard time making your own decisions.
Now you have some idea of what your acquisition team may look like. Be sure to get referrals vs. choosing them at random or by who is the “cheapest.”
