How NOT to Buy a Business

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The following is adapted from Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game

how to not buy a buisness

Perhaps you’re already familiar with the concept of acquisition entrepreneurship. It’s the process of purchasing an existing business, then exercising your entrepreneurial skills to grow that business, reaping satisfaction and serious financial benefits.

Done well, acquisition entrepreneurship can be a way to sidestep the chancy startup environment, while actively creating wealth in a way that isn’t possible with most forms of investment.

Unfortunately, only 10 percent of people who begin looking for a business to buy ever go ahead and make a purchase. In this article, we’ll talk about some of the most common mistakes and explain what to do instead.

Don’t Start a Pointless Search, Define Your Target and Match Your Skill Set with Available Opportunities

Most people look for a company to acquire completely the wrong way. They start by thinking about what industry they would like to target. Even most intermediaries start with this question: what type of business do you want to find? Rarely is this the right place to begin. Unless you have a definitive motivation to stay in the same industry, for example to leverage existing relationships, this is completely backwards.

Successful acquisition entrepreneurs turn the traditional search process upside down. They understand correctly that the building blocks of how to build a company and a vision don’t come from what’s “on the menu,” but from aligning their attitude, aptitude, and actions toward a specific opportunity.

Consider these questions: What does it take to run a successful company? What is the skillset needed? Are these skills innate or can they be learned? Instead of looking for companies within a specific industry, think about different types of companies. Are you interested in—and suited to—running a company that manufactures products, delivers services, or handles distribution?

Your target statement should cover the type of company you’re looking to purchase, the kind of opportunity it represents, its size, and any limiting factors or deal-breakers that will make the company a poor fit for you. Can you see how this is already a much more focused approach than most people use?

Don’t Passively Search the Internet, Take Steps to Achieve Your Vision

Now you have a target statement, how should you go about locating the right business? Most people start by finding a popular site such as bizbuysell.com and spending an inordinate amount of time, often during leisure time, passively reviewing the listings.

Whatever you do, do not do this. You do need to get familiar with sites like this and what’s on them, but plugging into this habit as your end game will stifle your effort from the start.

Why? You aren’t simply shopping for a t-shirt you like. You are performing potentially the most serious search of your life. You can’t expect to click on a bunch of listings and simply happen upon the right one for you.

What should you do instead? First, commit to finding the right business and buying it within six months. This is completely possible for a serious buyer. You are not a tire kicker; you are clear, motivated, goal-oriented, and prepared.

Second, get organized like this is your job, because it is. Set a folder aside for listings, start a spreadsheet as you look at listings and record industry, location, revenue, asking price, and any other critical or comparative information you can use later.

I do want you to go online and look at listings because you’ll get familiar with what’s out there, the different ways to search and review, and you can get additional information without wasting too much of an advisor’s time. It’s a great practice ground.

But don’t expect to find your dream company on the internet. Most of the best listings never make it that far.

To get a look at the most interesting business available within your criteria, you need to get upstream. That means getting prepared, meeting brokers, and impressing them with your seriousness. Most brokers work on at least 90 percent commission, so they don’t have time to waste on tire-kickers.

To win their trust, first show up like a professional. Dress intelligently. Let them know that you’ve been reading books on the process to “get smart” about buying a business and analyzing what you are looking for. Follow up with a “thank you” email after the meeting, highlighting next steps. Just do the basic things that professionals do.

Explain that you understand that most searches fail. Most buyers they spend their time with are a waste. Let them know that you are committed to buying a company within six months. Remember, you’re trying to recruit their help and you need to fill them with confidence that you are worth them spending time on. The conviction of a timeline is something they rarely see—especially on a first meeting.

Brokers want to feel good that you have the means to transact, and they’d like to know that you have at least 50 percent of the purchase amount in accessible, liquid assets. If you have a personal balance sheet that shows this, take it with you for discussion. You don’t need to leave it behind, but be ready to review it with them. Discuss how you are aware that banks lend on business acquisitions based on the hard assets, and that you are capable of getting a loan. If you get brokers comfortable that you have the means or the backing, you’ve just won a partner who will spend time helping you on your journey.

Don’t Wing It, Use a Process

If you rely solely on your emotions to make decisions about which business to buy, you’ll likely succumb to doubt and anxiety. This may culminate in what Jason Yelowitz at Quiet Light Brokerage calls an eleventh hour freakout.

As closing approaches, buyers often call the broker with a new, heightened level of concern. As you, the buyer, move through understanding the business with new intimacy, you’ll inevitably begin to see “how the sausage is made,” and the allure that first attracted you may begin to wear off.

Perhaps you will discover new aspects of the business that push existing concerns to a new level. Another risk is that persistent communication with the skeptics on your team, such as lawyers, accountants, and even your spouse, cause you to feel that the risk you are about to take on is greater than it really is. Make sure you get your spouse on board early in the process, and communicate with them regularly so they don’t turn into a saboteur.

Whatever the cause of your jitters, know that this is common. Call the broker and work through your concerns. In most cases, they will prove manageable.

To reduce the risk of an eleventh hour freakout striking altogether, get clear about the various stages of making a deal, from making an offer, through acquisition, to transitioning into ownership of a new company. Understand what you can expect at each stage and realize that you have a series of decisions to make that will define whether your purchase goes ahead.

Don’t Weigh Everyone’s Contribution Equally, Understand the Incentives Inherent in Each Role

To conduct a purchase successfully, you’ll need to rely on the services of various professionals: for example, brokers, an accountant, and a lawyer. You’ll also need to negotiate with your seller, who should hopefully be just as professional.

You want to trust that each person is giving you good information. At the same time, be aware that they all have their own financial incentives. Let’s list these:

  • You, the buyer: To buy a company. Probably the one they have under LOI, but maybe not.
  • The seller: To sell their specific company under certain conditions.
  • The broker: To do right by the seller and close a transaction.
  • The banker: To make a good loan. One that will get paid off in full and with interest.
  • Your accountant: To help you in the due diligence process and wave big red flags if they see things that are “off.”
  • The lawyers: To protect their client at all costs, including not closing a deal for unreasonable conditions.

Brokers, for example, want a transaction to occur. For this to happen, they need a capable buyer and willing seller to come to an agreement on price. At the end of the day, that’s it.

I’m not going to say that brokers are heartless, selfish people, but understanding the economics will highlight a couple key components. For example, they don’t really care about the exact sale price of a company. They might make anywhere from 2–8 percent on a million this direction or that. That’s not nothing, but not closing a deal is nothing—they get nothing. So, they’d rather transact a deal at the wrong price than not at all.

Lawyers, on the other hand, may complicate agreements unnecessarily. This is because their job is to protect their client at all costs, so they will be hyper-aware of any signs that it isn’t a good move. This does not mean all lawyers will do this or that they are evil by nature; rather, it’s critical you understand their incentives.

Once you’re clear about the incentives of each person with a stake in the deal, you will have clues on how to interpret their behavior and feedback.

Don’t Give Up, Know That You Can Do This

Buying and growing a business isn’t easy, but it can be immensely satisfying. The upside potential of launching a startup is huge, but the truth is that 99 percent of startups either fail to gain any traction at all or stall out at the size of an average small business. It’s a hugely risky endeavor. Investing in a house is much safer in terms of potential returns, but it’s a passive investment. No matter how hard you try, there’s not much you can do to move the real estate market.

Buying and growing a business combines the margin of safety of buying a house with the potential upside of launching a startup. As long as you choose carefully, you can purchase a business with a low likelihood of failure—or, if you’re looking for a “fixer-upper,” one that you purchase for less than its liquidity value. Yet, by investing your time and entrepreneurial skills, the potential ROI from a growing business dwarfs the returns you can make from real estate investment.

Just don’t make the all-too-common mistakes described in this article. Define your target, take steps to achieve your vision, work through a process, and understand the competing motivations of different players in the game.

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For more advice on how NOT to buy a business (and what to do instead), you can find Buy Then Build on Amazon.

Walker Deibel

Walker Deibel

Walker Deibel is an entrepreneur and advisor. He is the author of Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game.