Buzz Harris: Buying a business? Have a good ‘entrance strategy’ (Voices)

As of late, I’ve been writing about owners developing “exit strategy” plans for retiring from their businesses. A fundamental trait of an exit strategy is that it is a planned event, meaning it is conceived before it is desirable or necessary.

The same can be said for buyers who are thinking about buying an existing business. We’ll call this an “entrance strategy”

As a stating point, buyers need to take an honest inventory of their skills, knowledge and interests. For example, do they enjoy interacting with the public or are they more content behind a desk? What technical skills or talents do they have that they can incorporate into the business?

At this point, buyers shouldn’t be too concerned if they are unable to identify exactly what type of business they are looking for. Normally, most buyers know what they are not interested in, but really don’t know what would be attractive to them.

This cataloguing also included a solid understanding of their financial situation. Buyers need to know how much money they are prepared to invest and how much money they will make. Typically, these two amounts are directly related to one another.

Buyers then need to start their search to find the availability or businesses that match their profile. Scheduling an appointment with a business broker who has a wide selection of businesses in their portfolio will give buyers a good sense of what is available.

The next step is often the hardest for many buyers — making an offer. To show their seriousness, they should stay away from letters of intent. Since they are non-binding, most sellers do not take them seriously.

A well-written offer to purchase will contain all the language necessary to successfully transfer a business while offering a number of contingencies that will give both the buyer and seller the required safeguards.

Once an offer has been accepted, the next step is for the buyer to begin their due diligence. There is no point in beginning this until the buyer and seller reach an agreement on price, down payment and terms. This is the point in time where a buyer’s accountant comes in and verifies the seller’s cash flow.

Beware that many outside advisors will seldom tell a buyer they should buy a business and the they should not be expected to. If pressed for an answer, an advisor will often give the safest answer, “No.” In fact, rarely have I meet an accountant who thought his client didn’t pay too much for a business.

Conversely, I’ve seldom met an accountant who didn’t feel their client didn’t sell their business for enough!

The last step in the plan is to bring in the third disinterested party who will complete the necessary paperwork to ensure a smooth transition. This includes lien searches, UCC filings, contacting government taxing agencies, promissory notes, bills of sale, etc., enabling the ownership to change hands properly.

Buzz Harris, a Licensed Business Broker with The Liberty Group of Nevada, writes a recurring Voices column for the Northern Nevada Business Weekly. Contact him at 775-825-3948 or via email at BHarris@TheLibertyGroupofNevada.com.