Laws of Business of Buying and Selling II

September 7, 2003

In an earlier article, I proposed the idea of looking into buying an existing business instead of starting one from scratch. I also began the process of introducing you to the first seven of 15 key things to consider as you set about on your business acquisition journey.

Below you will find the remaining Laws Of The Business Buying and Selling Jungle, which my friend, Russell Brown offers in his book, Strategies For Successfully Buying Or Selling A Business.

Russ's laws are vitally important perspectives for anyone who's thinking of going into business for themselves, but too long for one article. That's why I broke them into two pieces.

Here are the rest of Russ's 15 Laws, followed by my thoughts on each.

Old Sellers Are the Best Sellers
It's true. The best opportunity to acquire an existing business is when you can buy one that's still viable, but the owners are ready to head out to pasture. But notice I said, "still viable." It's the exception, but sometimes the end of the life of the business can coincide with the end of the owner's career.

There are any number of excellent reasons why buying from a retiring owner can be good. For example:

Their motives for selling are less likely to be related to a problem with the business.

Changing their mind about selling usually doesn't come up.

An older seller may be more likely to offer earn-out terms to help you pay for the business. Consequently, you get time to come up with part of the purchase price and they get a retirement annuity.

But there are also some things to beware of with this profile of business seller. For example:

If you're buying from the founder, selling the business may be akin to selling a child. You may not have the time or patience needed for them to emotionally and physically disengage.

The success of the business may turn on the owners' long-term relationship with the customers. When they're gone, will the customers stay?

Most Prospective Buyers Never Buy
Getting a buyer and a seller together to the point where the deal actually gets done is a very complicated and often difficult process. Not only does the deal have to be acceptable to both parties, but also the buyer has to be able to come up with the agreed upon consideration at closing.

More times than not, selling your business is like the story of the prince who was turned into a frog. His princess had to kiss a lot of toads before she found her lost love. You will meet a lot of toads that will kick the tires of your business before you will find the one who will be able to actually pull off the deal.

Assume There Are Skeletons in the Closet
Every business has baggage. Every business! If you don't find any as you conduct your due diligence, you didn't do a good enough job. Or you may have found the skeletons, but wanting to make the deal work so much may have caused you to rationalize what you found as, "not so bad."

Find the bad news; let the seller explain what happened and why it's there. And then, if you think you can live with it, try to turn it into negotiating leverage. If you can't, walk away.

Someone Always Gets Cold Feet at Closing
After days, weeks, perhaps even months of negotiating, due diligence, lots of hard work, and likely no small financial investment, many deals will literally die on the day of culmination, at the closing table. It's almost a phenomenon. Someone will simply realize they're about to jump into the deep end of the pool and just freeze up.

Unfortunately, the reluctance often leads to the deal not getting done. The key here is to be prepared to deal with this phenomenon when the other party does it. But remember, it might be you with the cold feet. Last minute reluctance doesn't have to kill the deal, but it will likely happen and must be dealt with.

When Negotiations Must Stop
Once both parties have signed the purchase contract what's left to do is complete the details of making the conversion from seller to buyer. There are many final steps that have to be done, such as the final financial arrangements, a number of legal documents to be completed, vendors, customers and employees to be notified, final inventory, etc.

What should not be done is any further negotiation. The contract stipulates the terms of the deal and it is now an official, legal, binding document. Any subsequent negotiation will poison the relationship that the two parties have worked hard to create.

Don't sign the purchase contract until you have no more deal points to negotiate.

After the Purchase, Don't Change Anything at First
It's quite likely that the business you're buying has a successful track record with its customers. And it's also likely that the employees have become accustomed to the way the seller manages and operates the business. So if you make any dramatic changes in the early going after taking possession, you're going to upset some very important people in the future success of your new venture.

Sit tight for a few weeks -- maybe months -- before introducing and installing your new rules and systems that you consider to be pure genius. Launch the new stuff only after much communication and feedback. Sell employees and customers on the virtue of the new methods, don't just give it to them.

Remember, you can't succeed with your new business all by yourself. You must have the help of many other humans. Take care of them and they will take care of you.

Planning Is Key
If you don't know where you're going, any road will take you there. Create and use a written business plan.

Of course, if you just purchased a business you likely got some bank financing, in which case, you probably had to deliver a business plan.

But if you don't know how to prepare a business plan, there are excellent computer programs out there that will literally take you by the hand and lead you through the process of preparing AND managing with your very own plan. The one I recommend is recognized as the world's best, Business Plan Pro 2003, by Palo Alto Software.

You Can't Sell from an Empty Wagon
Obviously, the business you just purchased has products and services to sell. And you must like them or you wouldn't have purchased the business. But you can't rest on those laurels.

Every product and industry has a life cycle. Just as you and I are, your products are aging every day. Make sure that you're checking the position of all of your offerings with their viability and appeal in the greater marketplace. Even if the products you purchased the right to sell are still currently viable, one day they will not be. Begin the process now of replacing everything you sell with the next generation. Initially this is simply an intellectual process that one day leads to you taking the action necessary to upgrade your company's offerings.

In Conclusion
I said it last week, and it bears repeating: Buying a business is likely the most important transaction you will ever make. Do it for the right reasons, be patient, resist urgency of others, conduct proper due diligence, and negotiate the best deal for you, and then operate like a professional.

Write this on a rock... Buying a business is akin to getting married. To paraphrase the minister, no one should enter into this secular state of business ownership unadvisedly.

For part one of Laws Of The Business Buying And Selling Jungle, go to the Article Archives.