The rules for how to buy a business have changed, reflecting changes in the ways business is being conducted. The buyer who wants to be successful in this environment needs to understand at least six key principles.
1. Negotiating with landlords and other vendors: It’s no longer necessary for a business buyer to accept whatever terms the landlord wants to dictate for a new lease, or to keep buying at the same price and terms from suppliers of products and services. The supply/demand balance has shifted in favor of the tenant and the small business customer in many markets. The smart business buyer includes a contingency in the offer regarding satisfactory agreements with all vendors.
2. Knowing what to buy: It’s no secret that companies polluting the air are bound for trouble, or that businesses positioned to profit from the ecological movement are worth considering. The challenge is to learn enough about emerging industries and market trends to anticipate more subtle changes taking place in the economy. Because that change is happening so rapidly, the smart business buyer makes sure to become educated about, for example, the “buy-local” trend and the use of social media to monitor evolving customer needs and attitudes.
3. Calculating the cost of transforming the business to succeed in the future: The asking price might be a fair sum to pay for the company as it conducted business up until 2010. But today’s strategy for how to buy a business must include a determination of the cost to equip the company to compete in the future. That means a website able to effectively manage customer relations. And it means a social media presence that helps build the brand.
The cost of transformation is part of the investment in a business and should be considered when calculating the company’s value.
4. Using seller financing: Many sellers were able to “cash out” when plenty of money was available from lenders and when buyers had ample home equity to help collateralize their loans. In today’s marketplace however, any business seller motivated to achieve a deal, and at a fair price, must be willing to carry back part of that sum. The savvy buyer insists on seller assistance to fund the transaction.
5. Buying with an earnout: An entrepreneur who understands how to buy a business expects to pay what the company is worth today. That can result in a negotiating impasse when the seller wants a price that reflects the company’s more profitable performance when the economy was more robust. A strategy to meet the needs of both parties is an earnout. It allows the buyer to make payments calculated on the basis of current value. But if the business climate improves and the company rebounds to prior levels of sales and profits, those payments will be increased, resulting in a higher price for the business. The smart buyer is ready to engage in an earnout program to acquire a desirable business at a fair price.
6. Getting “real” about inventory value: Business buyers usually have accepted the seller’s figures when it came time to purchase inventory of merchandise for resale, as well as other inventory items such as supplies and spare parts for company equipment. But today’s careful business purchaser wants to make sure that everything he or she pays for is priced correctly and has value in operating the business. This might mean, for example, that some of that old merchandise is not bought outright, but is taken on consignment and paid for only when sold.
Understanding these principles is important for any entrepreneur who wants to know how to buy a business successfully in the current economic and social climate.
For More Info: Peter Siegel, 866-270-6278