Buyers Need An “Entrance Strategy” For Buying A Business

Recently, I have been writing about business owners developing an “Exit Strategy” plan for retiring from their businesses. A fundamental trait of an exit strategy is that it is a planned event, meaning it is conceived before it becomes desirable or necessary.

The same can be said for buyers who are thinking about buying an existing business. We’ll call this an “Entrance Strategy”. As a starting point, buyers need to take an honest inventory of their skills, knowledge and interests.

For example:

  • Do they enjoy interacting with the public or are they more content behind a desk?
  • Are they comfortable with managing people and making decisions?
  • What technical skills or talents do they have that they can incorporate into the business?

At this point, buyers shouldn’t be too concerned if they are unable to identify exactly what type of business they are looking for.

Normally, most buyers know what they are not interested in, but really don’t know what would be attractive to them.

This cataloguing also included a solid understanding of their financial situation. Buyers need to know how much money they are prepared to invest and how much they expect to make. Typically, these two amounts are directly related to on another.

Buyers then need to start their search to find the availability of businesses that match their profile. Scheduling an appointment with a business broker who has a wide selection of businesses in their portfolio will give buyers a good sense of what is available.

The next step is often the hardest for many buyers — making an offer.  To show their seriousness, they should stay away from letters of intent. Since they are non-binding, most sellers do not take them seriously.

A well written offer to purchases will contain all the language necessary to successfully transfer a business while offering a number of contingencies that will give the buyer (and the seller) the required safeguards.

Once an offer has been accepted, the next step is for the buyer to begin their due diligence. There is no point in beginning this until the buyer and seller reach an agreement on price, down payment and terms. This is the point in time where a buyer’s accountant comes in and verifies the seller’s cash flow.

Beware that many outside advisors will seldom tell a buyer they should buy a business, and they shouldn’t be expected to.

If pressed for an answer, they’ll often give the safest one, “No.” In fact, rarely have I met an accountant who thought his client didn’t pay too much for a business. Conversely, I’ve seldom met an accountant who didn’t feel their client sold their business for enough.

The last step in the plan is to bring in a third disinterested party who will complete the necessary paperwork to ensure a smooth transition. This included lien searches, UCC filings, contacting governmental taxing agencies, promissory notes, bills for sale, etc., enabling the ownership of the business to change hands properly.

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