Yes, we know. Obviously, a business is not a house. Here’s the point we’re trying to make:
Some prospective business buyers approach the business buying process as if they were buying a house or maybe even a car. This is an enormous mistake.
They typically call us when they’re already in town, a trip that’s been planned for weeks or months. Did they have the foresight while planning this trip to think of talking to someone about looking at businesses? Nope. They just call to say they’re here. They want us to drop all of the clients we already have meetings and calls with that day to drive them around so they can look at the physical locations of all of the businesses that are currently on the market. They then expect that we can waltz into any business that seems to interest them, introduce ourselves to the staff and management – and ask why the business is for sale.
This is NOT how you go about buying a business.
You can’t treat a business like a house for a lot of reasons. An operating business is just that – operating. It has a staff, vendors and competition. It has customers on site.
There is a misleading perception that any business for sale is a business on the brink of failure. It is this perception that can cause catastrophic losses and serious ramifications if the for-sale status of a business is disclosed to the wrong people (think the staff, vendors, the general public and the competition). An entire staff can quit. Customers can cancel contracts. The list goes on. Confidentiality in business sales is key, so anyone who is serious about buying a business needs to play by the rules of confidentiality. Those rules take planning and they take time.
How should you buy a business?
If you’re looking for businesses that aren’t in your current area, you should call and talk to a local business broker while you are buying your plane tickets or setting up your travel plans to visit your future relocation spot. Talk to the business broker about your goals for business ownership, the industries that you’re interested in and the areas where you have practical experience. You and the broker can spend a few weeks researching and searching – looking for the right business opportunities in your new area.
Once you have found a few businesses that interest you, you will be required to sign non-disclosure agreements before you are allowed to know the business name or location. The non-disclosures will also give you access to further information, things like P&L statements and past tax returns. You can use that information to narrow down your choices and then request a conference call with the sellers of the businesses that still interest you. By looking at the cursory financial information and talking to the other side you can decide if any of the businesses on your list will still fit with your goals. Those that do will be your final list, and these are the businesses worth seeing in person.
Some buyers have a hard time with this concept – that they can’t tour physical locations as the first step. Here’s what you need to remember: an operating business has value because an operating business creates cash flow. You are buying this cash flow – not a physical space, so seeing it in person isn’t as important as it would be for something like a house.
The veil of confidentiality is also so crucially important, even for you as a buyer. You wouldn’t want a business that you are seriously considering to be destroyed by someone else’s careless disclosure of the for-sale status – so understand that the process is built to protect the business that might be yours someday. You will need a bit of patience to see the process through to the end.
Don’t treat buying a business like buying a house. Remember that you are buying yourself a future life, and for such an enormous endeavor some pre-planning must take place – so call a business broker long before you get to town.
Are you thinking about buying a business and have more questions about the business buying process? Would you like to know what types of businesses are currently for sale in the areas you’re considering? Ask us! Please leave any questions or comments, we would be happy to help.