The Ten Big Steps To Buying A Business
We all make mistakes. But I believe one of the keys to success is knowing enough about what you are doing so that you don't make too many big ones. And at no time does this rule apply more than when buying a business.One of the biggest mistakes small business owners make often happens before they even become owners, like when they are trying to buy their first business without understanding the critical business-buying steps, and how they work together to elevate the parties to a successful transaction.
There are many steps that must be taken in order to properly and successfully buy a small business - hundreds, perhaps thousands of steps. My purpose here is to identify what I call The Ten Big Steps, not to give you all the answers - I want to give you a leg up, but I don't have room in this piece to give you all the answers.
Here are the Big Ten. If you don't know how to conduct ALL of these steps, be sure you correct that deficiency before you proceed. At the end of this article, I'll send you to some places for more help.
The Big Ten
1. The Choice
First you have to decide what industry you want to be in. I know what you're thinking: Duh! Right? Well, believe it or not, small businesses are purchased every day merely because they are for sale and somebody wants to become a business owner - not because the business fits the buyer's background, experience, passion, and maybe not even their interest.
Running a business is tough enough when you know what you're doing. But when you own a business you're not passionate about, well, that's an unhappy situation waiting to happen. And an unhappy owner is usually an unsuccessful owner.
Make sure you look for a business that fits your ability, interest, and passion. When the details of operating the business gets you down, the only thing that will make you show up the next morning is the love of what you do.
2. How Big?
Now that you know what kind of business you want to own, you have to decide how big a bite of the apple you want to take. There are two primary questions that must be answered:
a) What size company will your management skills allow you to handle? Quantities to focus on include, but are not limited to: employees, sales volume, geography, and number of operating units.
b) How much capital can you come up with? In a few minutes you're going to read about The Closing, which is where you will hand over a Big Check. Now is the time to determine how big a check you can cover, not when the seller is minutes away from depositing it. If you don't yet understand how debt, investment capital, and possible seller financing can be combined to leverage the underwriting of your deal, stop the process and don't go any further until you do.
3. The Hunt
Find a company for sale in the industry and the size that you've chosen. This is where good old fashioned shoe leather enters the process. Drive around. Look around. Ask around. Find a qualified, and recommended, business broker. There could also be a lot of pointing and clicking. As with many things these days, a lot of searching and researching can be done on the Internet.
Since this stage could be very long - months, even years - this is where the impatient usually fail. There are many worthy conditions and circumstances that can contribute to failure. Impatience is not one of them.
4. The Meeting
Now that you've found a prospective business to buy, let's meet the sellers. Do you know what you should say? This is not like meeting your steady's parents in high school. Find a professional, or at least someone who has been there before, and conduct a role play session on what you should say, AND what you shouldn't say. Virtually everything you say to a seller has a place and time. If you didn't know that, don't proceed until you've got this base covered.
5. The Qualifying Process
When you are selling a product, you qualify your prospects early in the selling cycle to make sure you're not spending time with someone who cannot, or will not, buy. It's the same thing here. The buyer qualifys the seller to determine if this person can be relied upon to perform, as well as continually qualifying the business opportunity.
The seller must qualify the buyer's ability to perform financially. But often sellers will also qualify a prospect with regard to whether they want to hand over their baby to this person.
The facts and figures are what they are; you just have to find the information. But the interpersonal aspect of this step is a dance. If you don't know how to do this dance, take some lessons before you get on the dance floor.
6. The Letter Of Intent
The LOI is the document that contains information known and understood by the parties to date, including that both parties will forsake other offers long enough for the buyer to conduct the due diligence process.
The LOI is typically not as much of a binding contract as it is an understanding. But there are important strategic points that must be part of this document. Make sure you know what those points are before you finalize this step. Let a contract attorney help you with this, but be careful about letting the attorney meet the sellers at this stage. Attorneys are essential to putting a deal together, but they can also be deal killers. If you don't know how to find, hire, and control a contract attorney, get someone who can before you proceed with the LOI stage.
7. The Due Diligence
This is the granddaddy of all the steps, for three reasons:
a) Other than possibly Step 3, this is the longest step. YOU MUST BE PATIENT!
b) When conducted properly, it produces key information without which an intelligent buying decision cannot be made. YOU MUST KNOW WHAT TO LOOK - AND ASK - FOR!
c) Your interpersonal skills AND your operating detective skills will be put to the ultimate test. DON'T BLOW THIS STEP!
Hundreds of five-pound books have been written on due diligence alone. Find a good one and memorize it. Also, hire professionals, like an audit (CPA) or consulting firm to help you with this stage. It will be money well spent.
8. The Contract
Enter the lawyers, again. Other than the LOI, it's quite possible, depending on the complexity of the transaction, that this is the first time you bring the attorneys in to work directly on the sale. The keys to success here are to:
a) Find a contract attorney who has business sale experience (Flash: all lawyers aren't contract experts!);
b) Get the seller to let you pay for, and create, the contract documents. To use a tennis metaphor, it's better to be serving than receiving.
9. The Closing
Yogi Bera said it best: "It ain't over 'till it's over." MANY sales get all the way to the closing table, after hundreds, maybe thousands of hours of work, millions of spoken and written words, and thousands of dollars spent, only to have the whole deal fall apart when the parties merely sit across the table from each other.
There are lots of reasons: New information surfaces that should have been found, or divulged, in the previous steps; one of the parties gets cold feet; one of the parties lets their attorney get out of control; plus thousands of others.
It ain't over 'till it's over. Don't take a victory lap until someone drops the checkered flag. And if you're the seller, that's when the check clears the bank, a day or two after the closing.
10. The Big Day
After the dog caught the car he was chasing he asked, "Now what do I do with it?" Sometimes becoming the owner, after a long purchasing process, can be a little anticlimactic. Just like a new President of the United States, your first hundred days are critical to your future success. Will you be ready?
One of the challenges of buying a business is to make plans for a successful sale transaction while you are negotiating a deal that may fall apart at any moment. You've heard me say this before: If buying a business was easy, monkeys would be doing it.
Write this on a rock... Just as a house is only as strong as its foundation, the success of the business you buy is directly supported by how well you conduct The Ten Big Steps.
