Ralph Fain

Buying a Business – The Process Detail; Steps 1 – 2

Our

last two articles on Buying a Business summarized many of the steps involved in the Buying Process – today’s article goes into some detail regarding the initial steps in the Process.
            As written previously, the first step is one of taking a personal inventory:

• Why do you want to go into business for yourself?
 
• What are your expectations?
• What are your strengths and weaknesses?  Do your strengths lend themselves to owning/running a business?  Are your weaknesses of such a nature that they will not be an impediment to owning/running a business?   What do you enjoy?  What are your interests?  Are they compatible with business ownership? 
• How do you feel about risk?  Are you risk tolerant or risk averse?  What is your level of risk tolerance?
• Are you prepared, mentally and physically, to devote the hours necessary to owning/running a business – particular in the early stages?  Is your family supportive of this?
  

Again

, this self-assessment must be brutally honest as the answers you derive here may change the direction of your life (and that of your family).  I have also found it a good idea to get a second opinion and to share this self- assessment with someone who knows you well and get his/her take on your personal inventory.

After

the above, the second step involved in the Buying Process should be the determina-tion and the establishment of your requirements/criteria for a business (both from a financial and general business perspective):

• What business sector are you interested in – manufacturing, service, retail, B2B, internet, etc?  If you don’t know or have difficulty in specifying, try it in the reverse – what type of business do you not want?
• What are the financial criteria?  How much income do you require from a business?  How much can you invest in a business?  How much are you capable of borrowing/what’s your borrowing capacity?  How large a financial cushion do you need after the purchase of a business?  How much are you willing to pay for a business?  How much debt are you comfortable with?
• What’s your exit strategy?  Everyone, when they are looking to buy a business, should consider and determine an exit strategy.  (Note:  in a follow-up article, we will discuss in much more depth the concept and importance of exit strategies).
• Other issues to consider:  location, hours, absentee ownership, exclusive product or territory, labor markets, high barriers to entry vs minimal barriers to entry, high growth potential vs consistent earnings, high margins vs high volume, level of competition, concentration of customers, reliance on vendors, etc.
  

As

you can tell and as has been mentioned previously, this is a complex and very comprehensive process and is one which should not be undertaken lightly.  Our next article will pick up where this one left off and will continue with more detail regarding the additional steps involved in the Buying Process.

Should

you have any questions or require additional information, please feel free to contact the R/Fain Group at 832-646-0832 or via e-mail (rfain@houston.rr.com).

Buying a Business – The Process: Summary - Part II

Our last article on Buying a Business covered the first three steps involved in the Business Buying Process.  Today’s article finishes summarizing many of the rest of the steps involved in the Process and future articles will expand on these steps in more detail.

As you may recall the first step is to take a personal inventory or self assessment.    Again, this self-assessment must be brutally honest as the answers you derive here may change the direction of your life.  I have also found it a good idea to share this self- assessment with someone who knows you well and get his/her take on your self-inventory.

The second step involved in the buying process is defining your purchase and/or acquisition criteria (both from a financial and general business perspective).   The third step is either the selection of/working with a business broker (buyer’s representative) who can guide/assist you in a very complex and complicated process or undertaking, on your own, the process of self education/self research regarding the business buying process. 

As I mentioned in the last article, many would-be-buyers commit what I consider to be a basic mistake at this juncture – the prospective buyer makes the mistake to not work with a buyer’s representative and instead decides to rely on the seller’s broker or representative for his guidance (knowing full well that the seller’s broker is, of course, representing the best interests of the seller and has no duty/obligation to the buyer).

Additional steps in the Process include the locating of/researching of businesses for sale (expand your search beyond the typical business websites – research PEGs, non-listed seller data bases, membership-only data bases, etc); preliminary review of financial and other business data for specific businesses and comparison to your qualifying criteria; qualifying/selection of target business/businesses, on-site visits/interfacing with business owner(s); locating funding sources; formal due diligence; LOI; Offer to Purchase; negotiations (both with business owner and with financial sources/banks); closing; and transition/post closing process.

The above summarizes many, but not all, of the steps involved in the comprehensive process of purchasing a business; it is an endeavor which should be undertaken with a professional experienced guide – a business buyer representative. 

Join us next time in this space when we will go into more detail regarding each of the requisite steps (which we have only thus far summarized) entailed in the Business Buying Process.  Should you have any questions or require additional information, please feel free to contact the R/Fain Group at 832-646-0832 or via e-mail at rfain@houston.rr.com.

For Ralph's archived articles please see here

Buying a Business – The Process

Summary - Part I

            Our last articles on Buying a Business were devoted to the purchasing of a franchise – this was a three part series which ranged from the basics (definition of a franchise, differences as compared to other types/forms of businesses, etc) to the more detailed (advantages/disadvantages and costs to own/operate).  Prior to the franchise articles we had written articles which provided an overview of Buying a Business and Going into Business for Yourself.

            Today’s article picks up on the earlier articles and summarizes the steps in the Business Buying Process.  Today’s summary is the first in a series of articles which will explore and discuss each of the many steps involved in the Buying Process.

            The first step, as we discussed in our earlier article “Buying a Business – Overview”, is to take a personal inventory or self assessment.  A few of the most critical areas/issues to address are the reasons you want to go into business for yourself/why you want to buy a business, strengths/weaknesses and/or skills you could bring to a business, level of risk tolerance (are you risk averse or risk tolerant, and if so, how much risk are you comfortable with?), and, lastly, any areas of interest you may have which could translate into successful business ownership.  This self-assessment must be brutally honest as the answers you derive here may change your life.

Another step involved in the buying process is defining your purchase/acquisition criteria (both from a financial and general business perspective) – what are your financial requirements and capabilities, how much income do you require, how much can you invest in a business, in what types of business/industries (manufacturing, service, retail, etc) are you interested, etc.

A third step is either the selection of/working with a business broker (buyer’s representative) who can guide/assist you in a very complex and complicated process or undertaking, on your own, the process of self education/self research regarding the business buying process including locating/selecting businesses for sale, business valuation, due diligence, negotiation, LOI (Letters of Intent)/Offer to Purchase, closing, post transition process, business ownership fundamentals, etc. 

Many would-be-buyers commit what I consider to be a basic mistake at this juncture – the prospective buyer makes the mistake to not work with a buyer’s representative and instead decides to rely on the seller’s broker/representative for his guidance (knowing full well that the seller’s broker is, of course, representing the best interests of the seller and has no duty/obligation to the buyer). 

This, in my opinion, is being “penny wise, pound foolish” as a business acquisition is generally the largest (or second largest) financial transaction/purchase a person will ever make.  It stands to reason (at least to me) that an acquirer would want to have a knowledgeable and experienced professional looking after the acquirer’s best interests – one who would guide him/her through the complexities of the buying process (and, make no mistake, buying a business is a complex process replete with multiple potential pitfalls).  If you are a prospective purchaser, do not rely on only the seller’s business broker – get someone on your side who has your best interests in mind.

Join us next time in this space when we will finish summarizing the requisite steps entailed in the business buying process.  Should you have any questions or require additional information, please feel free to contact the R/Fain Group at 832-646-0832 or via e-mail (rfain@houston.rr.com).