Buying and Selling a Business. Garrett Sutton
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book “Start Your Own Corporation” on the importance of corporate minutes.)
7. Current registered agent information.
8. All tax returns.
Make sure all documents, especially manuals and policies, are current. Discrepancies between what you say and what you do could lead to perceptions of integrity problems. Such perceptions can muddy the waters for the rest of the purchase process.
It is best to be forthcoming with all the facts as you know them. If you have doubts about disclosing something, disclose it. Sellers are never sued for telling too much, only for not telling enough. Lawyers love bringing cases involving misrepresentations on the sale of a business. Look at it from their perspective. They’ve got you as a seller, who has complete information about the business. They’ve got their client, the buyer, who is a complete innocent, knows nothing about your business but is willing to pay you millions of dollars, based on your representations. Because you, the seller, are about to receive millions of dollars from the buyer, you owe that buyer an ethical and moral duty to disclose everything, warts and all. And if you don’t, if you fail to disclose one little thing, that lawyer is going to paint you as a corrupt and unethical executive, the kind of one-dimensional businessman villain you see on poorly-written television shows, out to take advantage at every turn of innocent and good people everywhere. And guess what? The jury in your case will eat up this portrayal, as they always do, and you’ll lose. The lesson here is to disclose everything.
The Buyer
Buyers analyze sellers, industries and the business up for sale. Buying a business takes preparation, knowledge and a little bit of faith. The better job you do at the first two, the easier the third becomes. And while you are doing all this preparation work and gaining all this knowledge, keep in mind that the acquisition process may take upwards of six months. In some cases, depending on market conditions, team readiness and overall complexity of the deal, it may take several years to close the sale. Don’t quit your day job just yet. In fact, even after all the paperwork is signed and the sale is final, it may be prudent to work both jobs, if feasible, until the income from your new venture can replace that of your old. If double-duty is not feasible (for example, if the hours conflict), make sure you are in a financial position to take such a loss-of-income hit.
If you are not an expert in the industry you are considering entering, become one. Or at least try. Take some classes, read extensively, ask questions of people in the field, maybe even take a temporary job in that field – take the time necessary to come up to speed before the close. Being a new owner of a business is a lot like becoming a new parent. Once you finally have your baby, you won’t have time for anything else – including reading parenting books. You’d best know how to deal with middle-of-the-night emergencies long before they occur.
If you are an expert in your industry, but don’t have much knowledge of actual business practices, consider taking a few business courses – business law, accounting and marketing are a few must-haves. Local colleges and universities are a great resource, but they are not the only ones. Check with the Small Business Administration to see if there is a Small Business Development Center (SBDC) near you. You can access their website at www.sba.gov. SBDCs offer free courses, technical assistance and counseling including excellent help from the Service Corps of Retired Executives (or SCORE), who have their own website, at www.score.org. Also under the auspices of the SBA are Business Information Centers offering free access to the latest in high-tech hardware, software and telecommunications help, as well as training and access to research tools. Your local or state department of economic development may have information and training available as well. Take advantage of these resources. They are there to be used.
Don’t underestimate the value of a mentor. Search your network of friends and family for someone who has found success in the field you want to enter. Then don’t be afraid to ask for help. Most of us don’t mind being considered an expert (it validates that part of us that believes we know everything) and are flattered to be asked. You’ll be surprised how many business people are willing to help an honest and open person who is just starting out.
Business has its own karma in the form of contacts and favors. Networking is the heart of business. Start talking to people you trust and admire about your plans before you sign anything. Let those with more experience guide you. As your business becomes successful, you will be in the position to return the favor. Favors keep businesses running. And being able to help out the right person at the right time adds to the enjoyment of running a business.
Buying a company has more than just financial liability. You are hooking all your horses to the wagon. Your reputation, your personal finances, your family’s future and your personnel are all going to be connected to this new venture. Be sure you have a strategic plan in place before you even begin to look for a company to buy. Some things to consider are:
• Why do you want to purchase a company?
• What can you do to improve your current situation instead of buying a company?
• If expanding or supplementing a current company, how would this purchase affect the current company?
• What finances or financial strategies do you have available for the purchase?
• Do you (or will you) have the time and money to take on this venture?
Once you start evaluating companies, consider the following:
• Is the company in a place you want to live?
• What are the trends in the industry?
• Will the company’s reputation hurt or help your own?
• What can you do to improve the company?
• What is unique to the company?
• What personnel would you want to retain from the company after the sale?
• Is the company moving in a direction that suits you?
Once you narrow down the field to a few target companies, you can start more in-depth analyses and valuation. But remember to double-check all facts yourself. Never take the seller’s word. The due diligence phase of the purchase is time-consuming and expensive, but absolutely necessary. Trust, but verify.
Win/Win
When negotiating the deal it is easy to develop tunnel vision. Dollar signs can distort anyone’s view. Beware. While numbers are important (as a seller, you should make enough on the deal to at least cover your costs; as a buyer, you need to be sure you don’t overextend yourself), there is more to the deal than money.
A deal must work in reality as well as on paper. The repercussions of a sale that doesn’t work out can be far-reaching and long lasting.
Case No. 3 – John and Jeff
John owned a profitable plumbing business, John’s Plumbing & Drain. It had been in business for over twenty years and had a good reputation in town. They weren’t the cheapest plumbers in town, but their service was excellent. John knew that a large segment of the market would pay a little more for great service.
John was thinking of retiring and to test the waters, he allowed a business broker to present him with offers of inquiry. Everything had to remain confidential. John did not want any of his employees, especially his top-notch journeymen plumbers, to learn of any sale until the time was right.
The broker brought Jeff’s offer to John in a matter of days. Jeff had apprenticed as a plumber and found his way into home construction. He had made some money building specialty homes, but given the inherent ups and downs of home construction, Jeff now wanted to buy a steady trade business he could manage and profit from for the next twenty years.
John agreed to meet with Jeff to discuss how the deal could come together. It was tentatively