If you're thinking about jumping into entrepreneurship, now might be a good time to look at buying an existing business. BizBuySell.com, an online marketplace for buying and selling businesses, reported that closed transactions increased 7.4% in the third quarter of 2009. A year earlier, third quarter transactions dropped 30% from the previous quarter. The increase in closed deals, reported to BizBuySell by business brokers from around the country, was the result in part of lower prices, which fell to a median level of $149,000 from $189,500 a year earlier -- a drop of 21.4%.
So, if you're a buyer, the next three to six months could represent a time of seller price flexibility. There are a couple of things to watch for as you explore the possibilities, especially if you've never bought a business before.
Assymetric information: The seller will know more than you, no matter how much due diligence you conduct. He is selling for a reason, and it's not just to spend more time with the grandkids. Assume that something is definitely wrong with the business. Your job is to find out what that is. Depending on the size of the business you are buying, you may be doing most of the due diligence yourself. But make sure you have someone experienced in acquisitions -- whether a CPA, attorney or other trusted and knowledgeable source -- to keep you from making a preventable mistake.
Forecasting the future of the market, not just the business: One of my coaching clients sold her $18 million business a few years ago to a much larger company. No sooner was the cash in his bank account than the market tanked and sales took a nosedive. Timing, as they say, is everything. Could the buyer have known what was ahead? I happen to know they talked to exactly, let me think....zero customers about their expected future orders. They got the best forecast they could from management, which got its forecast from the sales force. Would customers have told them a different story? Who knows, but you have to ask them directly. And you have to look at the macroeconomics of the industry you're buying into and the forces at work that could impact the business you are interested in buying.
Keep the seller's skin in the game: The biggest mistake some buyers make is to put the seller on an employment contract that has little upside. Let's say a seller has run her business successfully for 25 years and now wants out. You come along and pay her $5 million cash, along with a five-year employment contract at $200,000 per year. Now, how hard do you expect her to work? You just made her wealthy beyond her wildest dreams. A better idea would be to pay her less per year upfront with a much bigger upside in stock or profit-sharing.
Listen to the owner: A lot of buyers just want the owner to be a figurehead, because buyers think they have all the answers. They often treat the owner disrespectfully after the deal is done. They blame her for anything that goes wrong (i.e., for anything they failed to discover during due diligence). By doing so, they often disenfranchise the work force, and the customers who are loyal to the owner. So if you're going to buy a business, realize that the owner in large part is the business.