Tuesday, 4 December 2012
Why You Need An Entrance Strategy
Equally important to an Exit Strategy for retirement is an ‘Entrance Strategy’ to buy existing businesses.
While a popular trend today is for business owners to plan their exit, few prospective business buyers take the time to map out a plan to find an existing business that meets their needs
A fundamental trait of an exit strategy is that it is a planned event, meaning, it’s conceived before it becomes desirable or necessary. The same can be said for buyers who are thinking about buying an existing business. I call this an ‘Entrance Strategy’ as it designed to help focus on the steps needed to buy an ideal business.
As a starting point, buyers need to take an honest inventory of their skills, knowledge and interests. They need to truthfully catalogue skills and talents that can be incorporated into a business. And they should be able to articulate their personal interests. For example, does the buyer enjoy interacting with the public or is he more content behind a desk? Is she comfortable with managing people and making decisions? What technical skills or talents does he have that can be incorporated into a business?
At this point, buyers shouldn’t be too concerned if they’re unable to identify exactly what type of business they’re looking for. The more focused and realistic they are in their personal review, the more attentive they can be in identifying attractive business opportunities and eliminating businesses they’re not interested in.
Get a solid understanding of your financial situation. Buyers need to know how much money they are prepared to invest and how much they expect to make. Typically, these two amounts are directly related to one another. Cash in the bank is the easiest benchmark, however, many times a buyer will liquidate securities, borrow from family, re-mortgage property, or leverage credit lines in their other businesses in order to make an agreed-upon down payment.
Along with the variety of resources available to the buyer are the varying timelines and liquidity factors associated with them. Knowing your financial position will save you time and energy during the purchase negotiations and help ensure a successful transfer.
Start searching for available businesses that match your profile. Scheduling an appointment with a business broker with a wide selection of businesses in their portfolio and searching online will give buyers a good sense of what is available. Buyers should start by eliminating those businesses they have no interest in. By narrowing the field of choice they can focus their energy on a smaller pool of opportunities.
Buyers will be required to sign non-disclosure and confidentiality agreements as they dive deeper into their investigation. These agreements ensure the buyer keeps his inquiry discreet and prevents the sellers’ employees, competition or suppliers from finding out.
Move the investigation to the next level. Reviewing and analysing financial data, disclosure statements, and cash flows is important, but seeing is believing. Meeting and asking questions with a business owner will help clarify uncertainty, provide perspective and form a relationship.
The relationship of the buyer and seller is critical to the success of the business transfer. For buyers, it will mitigate the uncertainty and risk associated with buying a business and help in the transition period. For sellers, particularly in the case where there is vendor financing, being comfortable with the buyer’s ability to continue the operations of the business will lessen any concerns associated with financing.
Make an offer. This step is often the hardest for many buyers. A letter of intention is often used by buyers and sellers to outline the general agreement. They are typically non-binding, but form the foundation of a formal binding agreement that will follow. This step is critical to continue to move the discussions forward, as the power of a signed offer is a clear demonstration of seriousness from a buyer.
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 the buyer (and the seller) the required safeguards.
Do your due diligence. Once an offer has been accepted, the due diligence stage allows the buyer’s advisors to inspect financial records, legal documents, properties, assets, and affairs. There is no point in beginning this until the buyer and seller reach an agreement on price, down payment and terms.
Beware that few outside advisors will advise a buyer to buy a business, and they shouldn’t be expected to. If pressed for an answer, they’ll often give the safest one: “No”. In fact, rarely have I met 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 sold their business for enough!
Formalize the business transfer. The last step involves the buyer’s lawyer drafting the necessary binding purchase and sale agreement to ensure a smooth transition. Things such as promissory notes, bills of sales, non-competition clauses, employment contracts and contacting governmental taxing agencies, enable the ownership of the business to change hands properly.
With plenty of businesses to choose from in today’s market, it is more important than ever for buyers to make sure their efforts remain focused on choosing the right business for them. Having a step-by-step plan for executing a successful transfer will help you stay on track, allow you to dedicate the time and energy necessary, and get you a successful business that is ideal for you.
Bill Sivell is a salesperson with VR Windsor Inc., which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. He blogs about selling businesses at Maxbizvalue.blogspot.ca.