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.
Just keep hanging on, 2013 is going to be great.
