As I was reading an industry trade magazine the other day, I came across an article about “what the average small business purchase involves.” The article referenced 76 “critical” questions a buyer needs to ask every seller, 200 “individual” points to investigate, 54 “specific” clauses to negotiate and 71 “key” issues to review.
After I picked up my jaw up off the floor and read further, I thankfully realized that the purpose of the article was not to educate, but rather to sell a book the author had written.
Nonetheless, it got me thinking about the important issues that real buyers look at when considering buying a business.
At the top of the list for almost all buyers is a business with a history of positive net income. Related to this attractive financing terms that will allow the buyer to service the debt while also continuing to make a healthy profit after debt service.
The next layer of issues is usually more strategic. How vital is the industry in general? Where is the market headed? What are the strengths, weaknesses, opportunities and threats of the company being sold as well as their competition?
Once understanding these issues, buyers typically begun to look at operational issues. Who are the key employees? What internal processes can be refined? Where can economies of scale be exploited? What are the profitable products or services and what aren’t?
While looking at all these issues, the buyer needs to be comfortable with the seller, and vica versa, these humanistic issues can range from honesty and full disclosure of all material facts to represent and admiration. When this bond gets broken, the sales transaction becomes seriously strained.
Finally, buyers will want to make sure that the purchase agreement that they enter into provides them with protection. For example, they will want a period of time to complete due diligence on the financial information that the seller has represented. The buyer will want the seller to continue to run the business as they always have until the close of escrow. They will want indemnification from any lawsuits that might have arisen from the seller’s operation of business. In general, they will want to make sure the are shielded from any problems with the business that they didn’t create.
Of course, the above issues are not at all encompassing, but rather a good review.
Going back to the original article I was reading, I am glad it was written about “small” business purchases rather than “large” or “medium.” It would have given new meaning to the term paralysis by analysis!