If you are in the market to buy a business, then one of the steps you will have in your future is the walk-thru. Much like buying a house, you will want to see the physical location of a business before you make any decisions on moving ahead with a sale.
Unlike a house, there will be a few more steps before you can see a business. It’s far less important to see the physical space when you are buying an existing business, and as such it’s a step that happens much farther along in the process than most new business buyers realize. When you buy a business the most important aspect is cash flow, not the color of the walls or what the machines look like. You will likely see the physical space after you’ve seen the marketing package, after multiple conference calls or meetings with the sellers – often after you’ve made an initial purchase offer.
How do you start? First you will need to sign a confidentiality agreement, most often called a non-disclosure agreement. You will be required to sign this agreement before your walk-thru for a few reasons.
Existing businesses can face terrible consequences if the entire world finds out that they are for sale. There is a powerful misconception that any business for sale is a business moments away from closing its doors for good (although typically nothing could be farther from the truth). If the for-sale status is disclosed the entire staff could quit (taking their regular clients with them), vendors might cancel contracts, customers may decide to shop elsewhere – you get the idea. Non-disclosure/confidentiality agreements protect sellers and their businesses from these potentially disastrous leaks of information.
Once the non-disclosure agreements have been signed, you will not just be able to waltz into the business whenever you please. An appointment will need to be coordinated between you, the seller and the brokers involved. You will likely need to see the business before or after hours (so curious employees can be avoided).
Why do the brokers need to be there? One of the most important roles that a business broker plays is that of a buffer. We have seen too many deals fall apart because initially innocent communications directly between a buyer and a seller devolve into a major issue.
Some sellers (whether appropriate or not) find questions about the legitimacy or profitability of their business offensive. If this happens and your deal begins to unravel, you will want your broker around to smooth things over. Your own broker will also be able to tell you if they think the things that were seen or said during a walk-thru were on the up-and-up. You will want their experienced eyes with you.
You will need to be flexible on meeting times for your walk-thru, especially if the business is one that has more than one or two employees that can be easily avoided. You will likely need to do your tour either before the business opens or after they close to keep the staff (or observant regular customers) from finding out about the for-sale status.
If you really want to see the business during business hours, then you certainly can. You just need to talk to your broker about whether or not it would be appropriate to do so. It would be tough, for instance, to walk in and see a manufacturing floor where the public is never allowed – but if you were considering a café, you could go in and grab a cup of coffee. Have your broker let the seller know that you are planning on dropping in as this is seen as common courtesy to the other side.
If you do grab that cup of coffee, it is important that you keep a low profile. Don’t ask any strange questions of the staff that will make them suspicious or do something like demand to see the manager or owner. You are there purely for observational purposes.
Now that you’ve made the arrangements — like signing the appropriate non-disclosure agreements and making an appointment with the brokers and the sellers – keep your appointment and don’t be late. Getting a walk-thru together requires a lot of moving parts, so buyers who fail to show or fail to show on time show a lack of respect – and sellers may refuse to work with you.
Bring questions with you. This visit is a really great chance to find out about the ins and outs of this particular business – and you don’t want to waste the opportunity.
You should feel free to open doors, examine equipment, etc. – just ask the seller first. It is important to remember that not only does the business still belong to the seller, it is a huge part of their life. Again the message is just to be respectful of the other parties involved.
You should never feel like you have to rush through a walk-thru, but on the same token eating up a ton of everyone’s time because you love to tell long-winded fishing stories isn’t fair to anyone. Stay on point and make the most of this unique opportunity because there are many things about a business you can’t learn from reading a P&L.
Once the visit is complete, have a conversation with your broker about the things you saw, your concerns (especially those you weren’t comfortable bringing up in front of the seller) and ask if they saw anything they think the two of you should discuss further. Use their experience and knowledge to your advantage when using the information you gained via your visit.
Are you considering buying a business, but would like to know more about the walk-thru process? Do you want to know what types of questions you should be asking during a visit? Ask us! Please feel free to leave comments or questions below.