Buying A Business with Realistic Expectations

Serious Buyers Have Realistic Expectations

When purchasing a business, a serious buyer should have a well thought out set of realistic expectations. The expectations should be based on the buyer’s financial qualifications, knowledge of a specific industry or willingness to learn about a specific industry, and to what extent they are able and willing to actively work in the business. A realistic business buyer understands that every business has problems and weak spots, success often involves hard work and dedication, and due diligence requires focusing verifying historical financials. Prior to searching for a business, buyers may wish to consult with a professional business broker in order to better focus their search parameters to match their capabilities. A more focused search that is based on realistic expectations will save a prospective buyer an enormous amount of time. Further, sellers of businesses take well prepared buyers with realistic expectations more seriously than buyers who are unprepared and lack realistic expectations.

Financially Qualified

A buyer with realistic expectations must acknowledge and abide by their financial qualifications. The amount of liquid funds (such as cash, stocks, or bonds) that a buyer currently has is the best measure of their financial qualifications.  A  Non-Disclosure Agreement (NDA) requires the buyer to disclose the amount of liquid funds they have, and many sellers require this amount to approximate the asking price. Additionally, as a practical matter, buyers will need to have a sufficient amount of working capital (or operating liquidity to meet the short-term funding needs of the business) after the sale.  Serious buyers of businesses must give themselves an honest appraisal of their own financial affairs and set a firm target of their search parameter based on their liquid funds available.

External Financing Not Always Available

  • Instead of paying all of the purchase price of a business up front, many buyers seek seller financing or external financing backed by the Small Business Administration (SBA).
  • Seller financing is where the seller holds back a portion of the purchase price in the form of a Note owed to the seller by the buyer after the sale.
  • SBA-backed external financing is funding provided by a bank in which the Small Business Administration guarantees the loan.
  • Seller-financing or SBA-backed external financing are options for many business sales, but buyers still need sufficient liquid funds and industry experience to make a deal happen.
  • Most business sellers who give buyers some seller-financing will still expect at least 50% of the purchase price to be paid in cash at closing by the buyer.
  • The buyer in seller-financed deals must also convince the seller that they will make good on the Seller’s Note after the sale.
  • Buyers seeking seller-financing must convince the seller that they are knowledgeable about the industry and sufficiently prepared and able to run the business successfully after the sale.
  • Likewise, buyers seeking SBA-backed external financing often need industry experience in order to qualify for financing.
  • This is particularly the case in industries requiring special licenses or skills (such as construction-related industries).
  • Moreover, buyers still must pay up to 20% of the purchase price in cash at closing for SBA-backed deals, and must have sufficient personal collateral for the loan amount.

Industry Experience or Knowledge

Buyers with realistic expectations about purchasing a business should have a minimum set of industry skills or experience in which the business operates. For example, buyers seeking to buy healthcare-related businesses often need medical skills or experience running a healthcare-related business in order for the deal to make any sense. Otherwise, the profits that the seller receives from the business will be far greater than the profits that the buyer will receive.  Unless licenses or specific skills are possessed by the seller which the buyer may not obtain, buyers lacking industry experience may still educate themselves about the industry. Many buyers are able to overcome their lack of industry experience through research and preparation. Prior to targeting an industry in which they are totally inexperienced or unfamiliar, most buyers of businesses should use extreme caution and prepare themselves as thoroughly as possible.

Role of the Owner

In order to ultimately determine if one is a realistic buyer of a business, the role of the seller should be addressed. The owner’s role after the sale must be maintained in order for the business to retain its value after the sale. Many businesses, for example, have an active owner responsible for procuring or maintaining customer relationships. The buyer must maintain these customer relationships after the sale or the value of the business will suffer. A buyer in such circumstances may choose take over the seller’s role personally or incur replacement costs. Either way, the buyer is faced with costs and risks of replacing the seller. For businesses with more absentee or passive owners, the buyer’s role after the sale is not that important. The value of the business will be unaffected after the sale.  Absentee-owned businesses generally have higher valuations than businesses with active owners as a result. Prospective buyers must assess the role of the current owner in evaluating potential businesses for sale.

A buyer with realistic expectations of purchasing a business first needs to objectively determine their financial capability (in terms of their liquid funds and their overall net worth). This way, they will set clear parameters of a realistic price range for their business search. Once they are financially qualified, buyers should also be realistic on whether they have the requisite level of industry experience or knowledge necessary to run the business successfully. Finally, buyers must determine whether they are able and willing to take on the current role of the seller so that the value of the business is maintained after the sale.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.