ASSESS YOUR RISK
How sure are you that you are about to buy the right business the right way? You’re sure? Leave this webpage. And then buy our creative financing book so you can make more money.
Not sure? Good thinking! Our loyalty is 100% to buyers. We don’t sell businesses.
Let us help you evaluate the deal you think you will make. Chances are you will discover a few things you don’t know you don’t know. And then you can better-negotiate. Or abort the deal and then find a better one.
What if you don’t have a pending deal? We can introduce you to the best small and midsize businesses for sale. This increases your ability to buy the right business the right way. See the extent of our know-how and how it is totally for the buy-side of transactions. Order and read our books. And then contact us for more guidance.
Below are some of the topics that determine the degree to which you are going to make a good deal or a dumb deal.
We’ll show you what’s important and how to dig deeper.
Historical Pretax Net Profit
Prior earnings usually are the most reliable guide as to the future expectancy. (IRS Revenue Ruling 59-60)
Historical performance is important, but not as important as where the business is going and how much profit it will earn.
Terms of Sale
The provisions of the buy/sell contract; defining characteristics, elements and structure of the transaction.
Continuity of Profit
Likelihood that the company will maintain its historical profit level without interruption into the foreseeable future, taking into account change of ownership, industry trends, etc.
“Two guys are walking through the jungle when a lion appears on the path ahead of them. One of the two starts putting on a pair of running shoes. ‘Why bother with running shoes?’ says the first guy. ‘There’s no way you can outrun a lion.’ ‘Who said anything about outrunning a lion? says the second. ‘I just want to outrun you.’” Ichak Adizes
Company Competitive Advantage
Warren Buffett says the most important thing he looks for when evaluating a company is its “sustainable competitive advantage.”
There are no worst types of business—but a particular business may not be worth buying. You can make a street-smart investment by acquiring a strong company in a temporarily troubled or declining industry.
Company Growth – Actual & Potential
Some businesses are for sale because the owner does not want to make an additional investment for more production capacity. Business buyers frequently overestimate the production capacity, only to discover after buying the business that it is under a low ceiling for growth.
Don’t confuse marketability with value. What if too few buyers want to purchase the type of business you want to buy? You could pay a “fair” price only to discover that you can’t sell your business.
Type of Company
Be open minded. Just because a particular type of business appeals to you does not mean you should forego looking at others.
Location! Location! Location!
Premises and other Tangible Assets
How much will they contribute to or detract from the success of the company?
Type of Management Company Requires from its Owner
Don’t underestimate the amount of oversight that it takes to manage a company. Owners of small businesses (except the one you want to buy) will tell you that “passive management” is an oxymoron.
Intangible Enhancer to or Detractor from Value
Goodwill, ill-will and intellectual property are intangible.
Don’t assume the business has goodwill. If a seller cannot present a buyer with a credible rationale for the value of the business’ goodwill, the buyer calls it blue sky. Then the argument begins. Don’t let goodwill mask ill-will.
Local and national economy as it pertains to company and its customers and its suppliers.
Watch out for restrictive agreements, especially poorly conceived ones that invite unintended legal and tax consequences. The more severe the restrictions, the higher the (downward) adjustment to value.
The Fatal Flaw
I believe that the fatal flaw for too many dealmakers is in their misunderstanding of Competitive Advantage. It infects deals. It happens when the parties to the deal do not adequately put a price tag on or deduct a penalty for the elements that contribute to sustainable competitive advantages.
I think I can prove this to you in my podcast, which you can access from my webpage:
A Business Buyer Advocate ® trained by “Partner” On-Call Network ® can show you risks, which you don’t know about, and then tell you how to minimize or avoid them.
Email us your contact info and the type and size of business (not its name) that you are trying to buy (i.e., you’ve negotiated but not finalized the deal). Tell us the price you might pay.
We’ll reply with instructions, plus how-to info and then perhaps offer to help you assess your pending transaction.
We may also share with you details from our proprietary client reference guide: The Street-Smart Way to Buy a Business ®. Click to see its cover and table of contents.
More How-To Info
Here’s a link to articles about dealmaking for advisors and brokers, and for people who want to know what professionals know (such as owners, buyers and sellers of small and midsize businesses).
You can learn more listening to our Podcasts & TeleSeminars.
And if you really want to supercharge your dealmaking skills, sign up for our one-on-one private trainings.
Ted J. Leverette
The Original Business Buyer Advocate ® Since the 1970s
“Partner” On-Call Network, LLC