I’ve worked with many business sellers and many more potential business buyers over the years and let me tell you; it’s never easy getting a deal accomplished! I strongly believe and firmly advocate that the absolutely best way for an entrepreneur to successfully get into business, or expand what they already have, is to buy an existing profitable company. But there are many obstacles and pitfalls along the way. It really is a jungle out there!
To help those who are considering buying or selling a business, I offer the following overview of what I think are the seven most important Laws of the Business Buying and Selling Jungle.
Jungle Law #1: Lawyers Are Deal Killers!
There certainly is an important role for a competent commercial law attorney to advise and prepare the legal structure of a business purchase and sale transaction. The problems arise when lawyers see themselves as business negotiators whose mission is to get the “best deal” for their clients. They frequently forget that the “best deal” has to involve both parties, the buyer and the seller, and that compromise is usually the best solution. Lawyers generally have a difficult time with compromise in this type of situation because they often see their role as advising their clients on how to get the better deal. Usually, an attempt at a lopsided deal for either party will result in “no deal” at all.
Jungle Law #2: A Business Is Worth Only Whatever Someone Is Willing To Pay For It!
Buyers and sellers are natural adversaries; the sellers want as much as they can get and the buyer wants to pay as little as possible. So, what process should you use to value a business? Forget about putting a value on the assets. Forget about comparing the business to the one in the next town. Forget about all the “rules of thumb” like X times gross income or some dollar amount per account or any other shortcut formula. A business value, and therefore its selling price, only makes sense when it’s based on the capitalized earnings stream. Most small businesses sell for a price in the range of 2-5 times earnings before interest and tax expenses are deducted.
Jungle Law #3: A Business Buyer Is Really Buying A Stream Of Earnings!
The assets of the business are just the tools of the trade that enable an earnings stream to be realized. Without the earnings stream, the business essentially has no value. You should note that in using this method, a business may actually be worth less than its fair market asset value or in many cases worth substantially more. A seller will be able to get the most they can for a business by showing a buyer the true investment value in the business based on provable earnings.
Jungle Law #4: Most Sellers Are Fibbers! (Or They At Least Stretch The Truth)
A buyer should approach all information provided in the sale with some skepticism. Buyers are making a major financial decision and should carefully consider all information presented during a detailed due diligence process. If a buyer approaches the purchase of a business with a good healthy dose of “prove it to me,” then it will be difficult for them to get burned.
Jungle Law #5: Always Assume There Are Skeletons In The Closet!
Most businesses have some negative feature(s) that the seller will be reluctant to talk about. You can be sure that any problems will come out later as buyers begin analyzing the business (due diligence), and it could kill the sale if the problems are perceived as cover-ups. This is because buyers will ask themselves (logically) “if they hid this fact from me, what else are they hiding?” If the negative aspect(s) is clearly presented and discussed with the buyer, it may not be a serious problem because the buyer may feel that it can be overcome. The seller should strongly consider this and determine all of the possible negative factors that could affect the sale of the business.
Jungle Law #6: Negotiations Must Stop At The Signing Of The Purchase And Sale Agreement!
Once the Purchase and Sale Agreement has been signed by both the seller and buyer, there is an excellent chance that the sale will actually take place. But, there must be an end to the negotiation process or things will begin to unravel. The deal at this point is like a house of cards with many parts of the negotiated deal contingent on another part. Trying to reopen negotiations after a Purchase and Sale Agreement has been signed will most likely lead to a collapse of the entire deal.
Jungle Law #7: After Buying A Business, Do Not Change Anything (At First)!
Of course, this doesn’t hold true if you’re buying a turnaround situation; but in general, if the business you are buying is profitable, leave it alone while you learn how to manage it in accordance with the status quo. One of the experiences I have had that best illustrates this point is as follows: One buyer of a fast food chicken franchise soon after the closing changed meat suppliers because he found that he could get the chicken at 10% a pound cheaper. What the new owner did not realize was that these chicken pieces were 25% larger than those provided by the original supplier. The problem with this is; the franchise doesn’t sell chicken by the pound; it sells it by the piece. The new franchise owner completely wiped out his profit margin by paying a smaller price per pound but delivering to the customer 25% more chicken at the same retail price!
Copyright 1999 by Russell L. Brown
About the Author
This article was written by Russell L. Brown, Business Broker, http://www.businessbookpress.com
