Listening
We have just touched on the importance of listening and it bears repeating.
An old adage says that the Almighty gave us two ears and only one mouth so that we might listen twice as much as we speak. This is great advice for the process of buying or selling a business. Both sides should be listening for deal breakers and bedrock motivations. Ask the direct questions, but also listen for indirect answers.
As a buyer, listen to why the seller is interested in getting rid of the business. Is he or she just trying to get out from under a financial burden? Is he or she unsatisfied with returns? Maybe the seller simply wants to retire or is facing medical problems that preclude running the business. Or maybe he or she has inherited partners he or she doesn’t want. Any of these are fine reasons and you should feel comfortable with them. However, beware of hidden knowledge. Does the seller know about something coming that will hurt the business – competition moving in, a change in technology that could lead to obsolescence, or new patents about to be issued? Ask. Be blunt; be nosy; listen carefully to the reasons offered by the buyer. Weigh those against everything else you know about this person. If you have doubts, get in writing that withholding information that could affect the future profitability of the company is a breach of the agreement and requires a refund of all money received for purchase of the company. That should send some fur flying. It may also get you the information you need.
Trust/Intuition
Trust during negotiations is crucial. But trust isn’t something you just throw out on the table. Trust is earned. By double-checking facts, a buyer learns to trust a seller and a seller learns to trust a buyer. As the sale process continues, both will reach a level of comfort with the trustworthiness of the other. If you never trust the person across the table, walk away. If you can’t trust your opponent during the process, you won’t be able to trust him or her to follow through with contractual agreements either. Do the legwork, follow your intuition and never be afraid to walk away. Again, he who cares least wins. If your intuition tells you it isn’t right, get up and walk away without regret or remorse. You’ve lived to fight another day.
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Rich Dad’s Tips
• Put yourself in the other party’s shoes. Know what they want and need out of the deal.
• Get to the central issues of the sale in short order. It will save everyone time and money in the long run.
• As a seller, have your documents in perfect order for the buyer’s inevitable due diligence review.
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And when it comes to trust, you are going to need to trust your team of advisors ...
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Assembling Your Team
Buying a business is a risky proposition under the best of circumstances. Attempting to go it alone is the worst of circumstances. Unless you are truly an expert you will want to assemble a team of professionals to help you find your way through the legal and tax pitfalls that might be waiting around any given corner. Not only will your team scout out the lay of the land for you, they may also hook you up with contacts and pass on some of their knowledge while helping you to maintain a professional air. Lenders, buyers and sellers all pay attention to the stability and management skills of opponents in sales. Weakness, even perceived weakness, can kill your deal. You must at least appear to be an expert, and the easiest way to achieve that appearance (short of actually being an expert) is to surround yourself with knowledge. As Robert Kiyosaki’s Rich Dad advised him, business and investing are team sports. Put together a winning team of advisors and you stand a much better chance of winning.
Before discussing how to assemble your team of experts, it is important to understand why so many professionals (especially attorneys) are considered deal killers when it comes to the sale of a business.
Case No. 4 – Kent and Hank
Kent and Hank had been friends since high school. They both went away to college and grad school and moved back to town to start their careers.
Kent had obtained an electrical engineering degree and then an MBA, and inherited his father’s electronics repair business. He quickly expanded the business into electronic component manufacturing, both in the United States and abroad. Under Kent’s more aggressive leadership, the company really started to take off.
Hank had obtained his law degree and had gone to work for a large law firm in town. Kent’s company was the first new client he brought into the firm. In four years, instead of the normal seven year associate track, Hank had become a partner due solely to the fact that Kent’s company provided so much work for the firm.
Kent was becoming known in the region as a leading entrepreneur. He had been selected Businessman of the Year by his state’s Industrial and Economic Authority. He had been written up as a genius in Forbes, Business Week and the Wall Street Journal. Unfortunately, he started believing his own press.
Kent and Hank spent a great deal of time together. Kent was expanding into new markets, thinking about going public, and all the while getting Hank’s sound legal advice for his next move. Kent was demanding of Hank’s time. He needed him 24/7. And Hank gave his time to Kent out of loyalty and friendship, which was more important to him than billable hours.
Kent started thinking about acquiring an established company in a somewhat unrelated field. Time and time again Kent had to spend big dollars to get injection molds prepared for his electronic components. It was so expensive and frustrating for him that he decided to acquire his own injection molding company. Hank had urged caution, but Kent wanted to move forward.
Kent located a target company in southern Illinois. It had an excellent business track record and a good reputation in the industry. Importantly for Kent, his company could get its injection molds for 60% less than they had previously been paying.
Hank was assigned to do the due diligence investigation. All the documents, financials and procedures were in order. Everything appeared to be on the up-and-up. Still, Hank’s intuition told him something wasn’t right. He discussed his vague concerns with Kent over dinner. Kent dismissed his feelings as the inbred deal-killer instincts of a lawyer. Kent assured him that everything was fine.
The transaction closed. And within four months, Kent was furious at Hank for ever letting him do the deal. A number of Taiwanese injection molding companies had suddenly sprung up. They were undercutting U.S. prices by up to thirty percent. No one had seen it coming. The former owner said he knew nothing about it, and there was no evidence to prove otherwise. (Had there been, Kent would have sued in an instant).
The injection molding fiasco was a major financial and business embarrassment for Kent’s company. It indefinitely put off its plans to go public. It challenged Kent’s status and position as a genius entrepreneur. Kent couldn’t live with this. His press clippings had said otherwise.
