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 agreed that Jeff would pay $1 million for the business. Jeff would put $500,000 down and John would carry a note at 10% for the remaining $500,000, for a period of seven years. This would give John a payment of over $8,000 a month for the next seven years of his retirement. If Jeff ever defaulted on a payment, John had the right to accelerate the note and demand full payment. If Jeff couldn’t refinance the note or somehow pay in full upon an acceleration demand, then John would get the business back.
The more John met with Jeff the more he realized that Jeff did not have the actual hands-on experience to run a day-to-day service driven business. As a spec builder, Jeff needed to co-ordinate various subcontractors and make sure the brokers sold the homes in time. His was not an intensive customer service business. John became concerned by some of the comments Jeff made about how employees were treated. He did not appear to have a common touch but rather a roughshod “my way or the highway” approach. John knew that this style may work with subcontractors, but it would not work with journeymen plumbers. A good plumber made the company good money and they weren’t easily replaced. You needed to go an extra mile or two to keep them happy and to keep your profits up.
John recalled how a friend of his, looking to retire, had sold his HVAC (heating, ventilation and air conditioning) business to an entrepreneur who didn’t know how to handle tradesmen. Like this deal, his friend had taken a down payment and carried a note for the balance. And what happened? The entrepreneur alienated all the top HVAC talent in the company and within several months they had all found jobs with other HVAC providers in the area. With his talent gone, the company faltered, service went down, negative word of mouth was almost instantaneous and the entrepreneur defaulted on his payments to the former owner. And so, his friend had to come back in and take over a once-solid business that had been wrecked in just six months time, due to poor management. His friend spent the rest of his life trying to rebuild the company again so that he could sell it. He died at his desk.
John did not want such a fate. He understood that if the sale wasn’t a win/win on both sides, then no-one would win. He could clearly see that Jeff was out of his league in running a plumbing business. Jeff clearly would not win, which meant that John would not win. Down the line, John knew he would have to come back in to the business and deal with the wreckage of his once-profitable company.
John told the business broker to cease any further negotiations. Jeff was furious. He claimed bad faith and threatened to sue, and never appreciated what a huge favor John had done him.
As this case illustrates, the only good deal is one that is safe for both parties. So while you are negotiating for your best deal, keep in mind the reality of the other party’s situation. And this is certainly one case where the seller should take the lead. With his or her experience comes an in-depth understanding of the business. With that understanding comes tools to evaluate the safety of the deal for both parties. As communication and negotiations continue, buyer and seller should build a rapport that lends itself to trust. This is necessary for the buyer to be able to comfortably accept the counsel of the seller regarding the safety of the deal. However, this trust should not interfere with healthy skepticism. As a buyer, you need to double-check every piece of data you can. But as well, you need to listen to what the seller is telling you. It may be direct or it may be in the form of offhand or indirect comments, which may be very indicative of the seller’s true feelings. Be it direct or indirect, listen for the seller’s clues. He may be under pressure from a spouse or business associate to sell, but he may let you know in so many little ways that you are not the right buyer, or his is not the right business for you.
Trust is important in any negotiation, but it is absolutely necessary to the process of win/win discussions. Both parties must feel free to offer suggestions and pursue safe outcomes. However, even in situations where trust is established, conversations may turn heated. In such cases, simply take a break from controversial items and leave them for later when cooler heads can prevail. Remember that the goal is to reach the safest deal, not just the
