Acquiring A Business
Use Common Sense in Buying a Business

© Premier Sales, Inc 

As seen in The Business Journal - January 1995 - Cover Article

Buying a business can destroy your ego, keep you up all night or be the most exhilarating and intelligent decision you will ever make in your life.  It is imperative that prospective buyers ask relevant questions and carefully analyze all aspects of the subject business before closing transactions.

Whether one is an entrepreneurial maverick or a conservative corporate executive, buyers need to be very honest and ask themselves some key questions.  They need to question whether they possess the requisite experience, talents and personal strengths to successfully handle the challenges of owning a business.  They also must ask themselves whether or not they realistically possess the liquid capital.  At the same time, buyers must assess their real cost-of-living requirements.

Questions concerning the origins and evolution of the company are important.  When was it founded?  Did the current owner buy the subject business? How has the company grown?  Inquire into historical trends and cycles from marketing, financial and other perspectives.

Balance sheets, profit and loss statements (also known as income statements), tax returns and other financial documents give buyers good "snapshots" of financial history.  If sales, profit and income trends are down, don't be too quick to reject the business.  Every business has redeemable virtues and often businesses are the victims of incompetent management.  New blood may bring the requisite skills and sound leadership qualities to an inefficient operation to make it stable and highly profitable.

Also, learn about the employees.  Who are the key people?  Will they stay or leave once the business is sold?  What is the longevity of employees, turnover and replaceablility of personnel?  Is the shop union or not?  Are there any benefits or other "carrots" that have been promised to employees?  Do they require any special skills or are most tasks of a low technology nature?  Compensation issues, manager issues and employment contracts need to be explored.  Are there too many employees or too few?  Are there backup plans for sick personnel such as cross-trained personnel?  Another key personnel issue is the role the current owner plays in the business.  What are the person's strengths and weaknesses, and can you bring new and better skills or ideas to the operation?  Can you improve the business and enhance the "bottom line"?

The current facility also must be evaluated for functional adequacy, potential expansion, a reasonable lease, (rental) agreements and geographically desireability.  Obviously, the rates, terms and conditions of the lease agreement and its potential assignability or renewability will answer many questions.

The condition and functional life of equipment is important.  if the equipment is virtually obsolete or requires frequent repairs, a buyer may need to factor in the possibility of capital expenditures for new or functionally usable equipment.  If the maintenance of equipment requires specialized skills, a buyer should implement contingency plans to handle "downtime".  Whether the equipment is owned free and clear, financed or leased, may have financial impact on the value of the business.

The quality, nature and diversity of the existing and potential, marketplace must be understood.  Who are the current customers?  Can this marketplace be expanded or new marketplaces cultivated?  Is the marketplace vertical, broad, international, localized, faddish, repeat, diversified or overly dependent on one or two customers?

Equally important, is there an open market of competitive suppliers of the company's product and/or raw materials so a supplier will not hold a business hostage in its everyday production operation?  Another related issue concerns market share and pricing.  Is the sale price high, low or average in the marketplace?  Also, is the product or service provided superior, adequate or inferior to the competition?  Who is the competition?  Evaluate and analyze the competition and their potential plans, as they may impact your business.

review the business's marketing, sales strategies and policies, as well as brochures, collateral material and marketing and sales contracts.  Very few owners are skilled at marketing their product or service efficiently to their existing and potential marketplace.  In fact, this is one of the major areas where buyers can significantly impact the profit picture and consequently the future value of the business.

Buyers should inquire as to why the owner is selling the business and what his plans for the future are.  They should insist on the sellers signing "covenants not to compete" for reasonable, specified time frames and within a specified geographic area.  This will effectively prohibit the seller from competing with the buyer in the same business or industry, within certain parameters, in order to prevent the seller from threatening the integrity of the business enterprise.

Legal issues need to be explored prior to buying a business.  These issues include, but are not limited to: contractual documents, letters of intent, buying entity, type of sale (stock or asset), existing or contemplated litigation, liability, environmental concerns, leases, liens representations, warranties, patents, trade names, trademarks, licenses, etc.

The "bottom line" is one of the most important criteria buyers evaluate when considering business acquisitions, so a clear understanding of the financial statements is necessary.  Terms often used to describe the bottom line in small-to-medium sized businesses vary.  They include pretax net income, net profit, earnings, cash flow and owner's discretionary cash flow.

Make sure you and the owner understand the meaning of the words you use.  Articulate your statements and financial descriptions clearly.  In small private companies, many accountants structure corporate financial statements so the profit and loss statements reflect a minimal pretax net income for tax avoidance purposes. reconstructing and adjusting the statements is necessary to understand the owners' real economic and net profit picture.  Contrarily, most public companies reflect net profit toward the bottom line because they want to manifest substantial profitability for investors, analysts, stockholders and bankers.

Business ownership comes with joys and tribulations.  making your own decisions, implementing your own ideas, increasing your income, obtaining economic benefit through business tax planning and building asset appreciation through business growth are all joys of owning a business.  Additionally, if your net profit or earnings increase, so does the value of your business.  Finally, realistic expectations and common sense should prevail throughout the acquisition process.  A good deal is a transaction that is good for both the seller and the buyer.