Buying & Selling: It's Not Just About Price & Terms
Whenever you buy or sell something, there are usually more factors
involved than price and terms in rendering a decision. Think about it.
When you purchased your home or your most recent automobile, what was
your biggest reason for doing so? It was probably not the good price or
the great financing rate. Now, I am not saying that price and terms
aren’t important. They are. However, they aren’t the reason
that you decided to buy. The reason you purchased that particular house
or car was because it made you happy by fulfilling an emotional need.
You accomplished a milestone. You achieved a dream. You can brag to your brother-in-law about it. As humans, emotions influence our personal and business decisions….whether or not we like to admit it. Then we justify those decisions with reasoned logic. “Well, I needed a new car. My old car had 100,000 miles on it. It was time. The new car is more efficient….blah, blah, blah”. Does this sound familiar?
Making a business purchase decision is not exempt from emotional influence. However, the stakes are much higher since the business likely needs to support you and your family. That’s why it is a good idea to hire experienced advisors to protect you from yourself.
As a business buyer, you may want to pursue a lifetime goal of being an entrepreneur and leave your corporate job. You have saved some money. You have some management experience and your credit score is good. Now, you just have to find a business at the right price and terms. You want to do it this year. But how do you find a good business to purchase? What is the definition of a “good” business? How do you know if the business can support your financial needs?
Most business buyers and sellers of small businesses (those with EBITDA* of $1,000,000 or less) will only do so once. There are multiple variables in a business purchase transaction and finding a profitable, cash-flowing business is just step one. Analyzing and interpreting the company’s financial statements, tax returns, strengths, weaknesses, opportunities, and threats are some variables to consider. As a buyer, you may be able to do these things on your own. However, negotiating, writing and presenting an offer to a seller without alienating him or her is another scenario.
From the seller’s perspective, the business is viewed much the same as his or her own child. The seller created and nurtured this business (the “child”) through good and challenging times. The seller has a tendency to view her business through rose-colored glasses. From the seller’s perspective, there may be some remorseful feelings when letting a cherished business go to a new owner. It's the end of a dream, an era, or a lifestyle. It's both happy and sad for the seller. The business will always be worth more to a seller than a buyer because of the perspective difference. The seller will likely want more for the business than you as the buyer believe it is “worth”. The seller sees the potential, which she was never able to create, but believes that you should pay for anyway. This is emotion. If you are unable to bridge the gap with logic the seller can accept, the seller won’t sell to you.
Buying and selling a business is a challenging undertaking. Many people believe that the decision is all about the numbers. Is the business “worth” the asking price? Will the business have sufficient cash flow to pay for the acquisition debt and pay you, as the new owner, a reasonable salary? Will this be an asset or a stock transaction? How will you finance the purchase? Do you want the seller to carry part of the purchase price in a note? Will you pay cash? Will you apply for a bank loan? What happens when the seller refuses to negotiate on price or terms? Do you know the nuances of structuring a transaction to allow a seller to accept a lower price but receive a bigger net?
While analyzing the financials is a critical part of any financial transaction, emotions of both buyer and seller can negatively influence the outcome. In a business purchase and sale transaction or lawsuit, it is nearly impossible to negotiate the best deal for oneself thus proving the 19th-century adage, “the man who represents himself has a fool for a client”. It is important to have trusted experienced advisors to guide you through this process. An experienced business broker will quarterback the transaction with knowledgeable attorneys, CPA’s and business valuation experts to make sure both buyer and seller receive the best possible conclusion.
Join Peter Butler and me on June 15, 2016 from 11:00 a.m. to 1:00 p.m. at Zions Bank Business Resource Center for the workshop titled “Buying a Business: What You Must Know”. To register, please email idresources@zionbank.com or call 208-501-7573.
*EBITDA means Earnings Before Interest Taxes Depreciation and Amortization. If reading and interpreting business financial statements and tax returns is not your thing, you will likely need the guidance of a business broker to buy a business.
You accomplished a milestone. You achieved a dream. You can brag to your brother-in-law about it. As humans, emotions influence our personal and business decisions….whether or not we like to admit it. Then we justify those decisions with reasoned logic. “Well, I needed a new car. My old car had 100,000 miles on it. It was time. The new car is more efficient….blah, blah, blah”. Does this sound familiar?
Making a business purchase decision is not exempt from emotional influence. However, the stakes are much higher since the business likely needs to support you and your family. That’s why it is a good idea to hire experienced advisors to protect you from yourself.
As a business buyer, you may want to pursue a lifetime goal of being an entrepreneur and leave your corporate job. You have saved some money. You have some management experience and your credit score is good. Now, you just have to find a business at the right price and terms. You want to do it this year. But how do you find a good business to purchase? What is the definition of a “good” business? How do you know if the business can support your financial needs?
Most business buyers and sellers of small businesses (those with EBITDA* of $1,000,000 or less) will only do so once. There are multiple variables in a business purchase transaction and finding a profitable, cash-flowing business is just step one. Analyzing and interpreting the company’s financial statements, tax returns, strengths, weaknesses, opportunities, and threats are some variables to consider. As a buyer, you may be able to do these things on your own. However, negotiating, writing and presenting an offer to a seller without alienating him or her is another scenario.
From the seller’s perspective, the business is viewed much the same as his or her own child. The seller created and nurtured this business (the “child”) through good and challenging times. The seller has a tendency to view her business through rose-colored glasses. From the seller’s perspective, there may be some remorseful feelings when letting a cherished business go to a new owner. It's the end of a dream, an era, or a lifestyle. It's both happy and sad for the seller. The business will always be worth more to a seller than a buyer because of the perspective difference. The seller will likely want more for the business than you as the buyer believe it is “worth”. The seller sees the potential, which she was never able to create, but believes that you should pay for anyway. This is emotion. If you are unable to bridge the gap with logic the seller can accept, the seller won’t sell to you.
Buying and selling a business is a challenging undertaking. Many people believe that the decision is all about the numbers. Is the business “worth” the asking price? Will the business have sufficient cash flow to pay for the acquisition debt and pay you, as the new owner, a reasonable salary? Will this be an asset or a stock transaction? How will you finance the purchase? Do you want the seller to carry part of the purchase price in a note? Will you pay cash? Will you apply for a bank loan? What happens when the seller refuses to negotiate on price or terms? Do you know the nuances of structuring a transaction to allow a seller to accept a lower price but receive a bigger net?
While analyzing the financials is a critical part of any financial transaction, emotions of both buyer and seller can negatively influence the outcome. In a business purchase and sale transaction or lawsuit, it is nearly impossible to negotiate the best deal for oneself thus proving the 19th-century adage, “the man who represents himself has a fool for a client”. It is important to have trusted experienced advisors to guide you through this process. An experienced business broker will quarterback the transaction with knowledgeable attorneys, CPA’s and business valuation experts to make sure both buyer and seller receive the best possible conclusion.
Join Peter Butler and me on June 15, 2016 from 11:00 a.m. to 1:00 p.m. at Zions Bank Business Resource Center for the workshop titled “Buying a Business: What You Must Know”. To register, please email idresources@zionbank.com or call 208-501-7573.
*EBITDA means Earnings Before Interest Taxes Depreciation and Amortization. If reading and interpreting business financial statements and tax returns is not your thing, you will likely need the guidance of a business broker to buy a business.
Comments