Guerrilla Billionaire™

The Guerrilla Billionaire™

 Guerrilla Billionaire™

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How to Buy a Business: The Role of the Broker

How accurate are the numbers the broker gives you on the business?

It all depends. In some cases, they may not represent an accurate picture of the present condition of the company. There are two reasons for this. First, the broker relies on the seller for all the information that he passes onto prospective buyers.The point I am making here is that a broker doesn't verify any of the claims of the seller. He simply packages the information into a standardized format and releases it to qualified buyers. In other words, he is trusting that the seller is being honest about the business. It's totally up to the buyer then to conduct a proper due diligence on the company and unearth any discrepancies in the information, outright lies, as well as potential threats the owner may not even be aware of.

Second, the seller may be supplying accurate information to the broker but dragging his heels about doing so. With some sellers it's very difficult to get the last month's numbers in a timely fashion in order to update the 12 month trailing average results. This can be because they're simply too busy or because they are resisting disclosing numbers that show their business to be declining.

The only way to get accurate numbers is with access to the tax returns.

How to Sell a Business: Websites

How do you sell a website?

Answer: Not this way.

A few months ago, I got a call from someone involved in flipping websites. During the conversation he mentioned proudly that he had recently bought a site for $500, fixed it up, and sold it for $40,000 a few months later.

So far, so good.

Then he added that he had paid a broker $10,000 in commissions on the sale.

You don't need a broker for such a small transaction. 

It's a waste of money.

List your business on the websites where people trade in online businesses and use an online escrow agent to handle the closing. That way you can be assured of receiving the agreed upon payment as you hand over the keys.

You don't need a broker for small transactions.

How to Buy Businesses: Who is More Naive?

I just caught this at the NYT DealBook blog. Apparently sellers of businesses are far more gullible than buyers of businesses.

Sellers Beware: Study Finds Distrust in Buyers

Businesses may want to be a bit more skeptical when dealing with potential suitors. That’s because a new study in the Academy of Management Journal has found that acquiring companies tend to trust less and deceive more than the businesses they buy.

The study examined the issue of trust between 12 entrepreneurial businesses and eight acquirers, and found that tensions between buyers and sellers appeared to start right at the screening phase and continue throughout the deal process.

“Sellers tend to eliminate partners they distrust, while buyers did not,” the study’s author, Melissa Graebner of the University of Texas at Austin, said. “So this creates a fundamental asymmetry in which most sellers trust their buyers, but most buyers distrust their sellers.”

Such material deception includes misleading sellers about post-integration plans like layoffs, relocation of personnel, changes in strategic direction or diminished roles for senior managers, the study finds.

These deceptive tactics tend to be very distressing to the seller after the deal is complete, as they tended to be extremely trusting, according to the study. That’s because the sellers often did not heed the advice provided by their own bankers and lawyers to protect their businesses and hold the sellers to their word.

“Unlike buyers, they believed they were dealing with trustworthy parties,” Professor Graebner said. “Due diligence and contractual safeguards simply did not seem necessary to sellers when dealing with trusted buyers.

As I was reading this my hunch was that these were small business sellers divesting themselves of companies under $10,000,000 in price. Turns out that the average transaction studied was $175 million. How does anyone build a company to that size and still remain naive?

Based on my humble experience, both sides need to exercise a healthy dose of skepticism when negotiating a transaction. Sellers of small businesses (<$20 million) are frequently tempted to exaggerate the facts about their business's profitability. For example, it's rare that an owner doesn't confess to additional, yet unverifiable, income which he then expects the buyer to pay for.

The original document is here.

How to Buy a Business: Finding Deals

My brother and I have been looking for a small business to buy since early March. We have talked to local brokers and followed the listings on the big business buying and selling websites. The listings are really disappointing. Is it the economy? Are only mediocre businesses available for purchase these days?

Your main problem is that you are looking in the wrong places. Online listings tend to be stale businesses which didn't sell in the usual ways. What you need to do is look for fresh prospects which includes businesses that aren't technically for sale. The best way to find these is to compile a list of local businesses that interest you and then call the owners or drop by in person if there's a chance that you can meet them. What I mean by that is that you stand a far better chance of meeting the owner of a retail business than the owner of, say, a manufacturing business. One will most likely be on the shop floor while the other will be hidden away behind a barrier of gate-keepers. 

Once you start talking to them butter them first by telling them that you have heard good things about their business and would like to one day own something similar. Then ask them what advice they can give you in your quest to own and operate such a business. Be prepared to have the owner start asking you about your qualifications as a buyer. This is a good sign as it may mean that he's suddenly considering the possibility of selling the business.

Who knows where such a conversation will lead to?

How to Buy a Business: Main Street Businesses Are Selling

The Hot Sector in Business Sales

Main Street businesses are the the best selling sector today. This category includes small specialty retailers, restaurants, gas stations, coffee shops, and diners. Basically any business that you might find along Main Street in Anytown, USA fits into this category.This is happening because people who have been laid off are now looking to basically buy "jobs" for themselves in order to have reliable source of income.

When you're looking to buy a job, your criteria tends to be the following:

• An affordable down payment in the $50K to $100K since outside capital is almost impossible to obtain these days.
  
• Seller financing in the 75% to 80% range.
• Owner's income of at least $4500 to $5000 per month after the debt payments are covered.
• The ability to pay oneself starting with the first month of ownership.
  

As I have said elsewhere in this blog and the newsletter, now is the time to buy.  Not only are Baby Boomer entrepreneurs and small business owners seriously thinking about selling, but the economic conditions have made it a buyer's market.

Subscribe to my newsletter for more details on how you can put together the financing for a small business.

How to Buy a Business: The Best Strategy for First Time Buyers

How to buy a business help.

... and honestly I'm getting a bit frustrated with business brokers to say the least.Over the past two and half months, we have contacted seven different brokers in [our state] about listings of interest to us. Each time we were made to feel as if we had to jump through hoops to be taken seriously enough for even just the briefest of information. What advice can you give a buyer on dealing with brokers? We're not doing this to waste anyone's time.

This is a common experience had by most first time buyers. Having been a broker for ten years, I know that I'll get flack for this at the next annual conference, but here's my advice for business buyers looking at buying a small business. Avoid businesses listed by brokers.

It's that simple.

First, let me say that business brokers bring tremendous value to the business seller. They do this by letting the owner focus exclusively on managing the company so that the trailing 12 month average numbers are climbing (or at least declining as little as possible in this recession). Any seller who tries to sell his company without a business broker risks having that critical 12 month trailing average take a nose dive which then leads to a drop in valuation and final price.

One of the key functions that a broker performs is to screen out the 99 lookie-lous who never get past the window-shopper stage. This often means that some real buyers get thrown out with the bath water as well.

My recommendation is to first learn the process of buying a business through a course or books and find an adviser who has experience with business sales. This could be an accountant or lawyer. What you want is someone who will sit in the background and advise you, when asked. You do not want someone who will try to lead you around by the nose.

Then once you have done your homework on the art of buying a business and found an advisor, go direct to the types of businesses you want to buy. The best way to make contact is with a letter to these companies asking if they know anyone in their industry who is interested in selling.

Why do I recommend this route? Because by the time you have done what I advise, you will know far more about valuations and the business buying process than any owner you are likely to come across.

I will post a list of recommended resources shortly. In the meantime, if you want more information on buying a business subscribe to my free newsletter.

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Got a question on how to buy a business or need help with the process? Send me your question. My address is on the About page at top left.

How to Buy a Business: It's a Buyer's Market

Business Valuations and Prices Plummet

Inc. magazine's June issue has the annual article on business valuations which began four or five years ago. The latest data covering January 2007 and early March 2009 show the grim picture for sellers. However, that means that it's a buyer's market if you know what you're doing.

The entire article is online if you miss it at the newsstand.

This is the opening article A Buyer's Market: What Is Your Business Worth Now?

This page has a number of easy to miss links Valuation Guide 2009: The best Businesses to Buy

All in all, this is a superb resource on current market conditions for both the buyers and sellers of businesses.

How Your Failures Become the Foundation for Your Success

MythBuster Adam Savage's Colossal Failures

This is a superb 32 minute talk where Adam explains how his two greatest professional failures served as the foundation for his success today. It's an hour long if you stick around for the Q&A session with the audience.

Michael Lewis: Wall Street Made This Mess And is Making a Fortune Cleaning It Up

Michael Lewis: Wall Street Made This Mess And Is Making Fortune Cleaning It Up

Michael Lewis is always worth listening to. This is a 16 minute interview.

The message is that Wall Street makes fortunes making messes and then new fortunes cleaning them up afterwards. I think most of us have caught onto to this.

How To Sell a Business: Retail Leases

Leases can be deal killers.

Let me share a real life lease horror story with you. A few years ago an entrepreneur I know "had come into some money," as the old expression goes. While I won't say how much it was it enabled him to buy almost any small business selling for $2 million or less. After looking at business for sale opportunities for a few months, he found a three store chain selling to the tourist market. He contacted the two owners and began his due diligence on the company. Everything looked pretty good during this phase, so he decided to make an offer on the company.This led to a counteroffer and the negotiations phase was in full swing.

As the deal looked like it was going to go through, both parties decided that it was time to let the landlords know about the proposed sale. The landlords were two businessmen who had acquired substantial holdings in the downtown core and owned the three buildings that the three stores were located in.

This is when the nightmare began. After reviewing the buyer's personal financial statement the landlords decided that he would increase their risk because as an individual he didn't have the net worth of the two current store owners. This resulted in the sale being canceled. The store owners pleaded with the landlords to let them sell off the stores. After running them for over two decades, they were ready to retire and enjoy their sixties. However, the landlords wouldn't hear of it.

After a frustrating month of attempts to meet with the landlords and offer additional ways of increasing their comfort levels, the buyer finally gave up and walked away from the deal.

I know that the stores didn't sell for another two years because I kept tabs on the situation out of curiosity. After that, I lost track of the business die primarily to ceasing my trips to the city they are in.

This is an example of what can happen with leases. You have a motivated buyer and seller who have agreed on a price, want to do the deal, and a third party kills it.

The takeaway here is to have a thorough understanding of the lease early on whether you're the buyer or seller, lest you waste several months like my friend did.