The rules for how to buy a business have changed, reflecting changes in the ways business is being conducted. The buyer who wants to be successful in this environment needs to understand at least six key principles.
1. Negotiating with landlords and other vendors: It's often no longer necessary for a business buyer to accept whatever terms the landlord wants to dictate for a new lease, or to keep buying at the same price and terms from suppliers of products and services. The supply/demand balance has shifted in favor of the tenant and the small business customer in many markets. The smart business buyer includes a contingency in the offer regarding satisfactory agreements with all vendors.
2. Knowing what to buy: It's no secret that companies polluting the air are bound for trouble, or that businesses positioned to profit from the ecological movement are worth considering. The challenge is to learn enough about emerging industries and market trends to anticipate more subtle changes taking place in the economy. Because that change is happening so rapidly, the smart business buyer makes sure to become educated about, for example, the "buy-local" trend and the use of social media to monitor evolving customer needs and attitudes.
3. Calculating the cost of transforming the business to succeed in the future: Perhaps the company was worth, when business was more robust, what is being asked for it today. The current how to buy a business strategy needs to take into account what it will cost for the makeover so the company is ready to do business today and tomorrow. That means a website able to effectively manage customer relations. It also means using Twitter and other contemporary social media for brand building.
The cost of transformation is part of the investment in a business and should be considered when calculating the company's value.
4. Using seller financing: When business loans were readily available and buyers had enough home equity to back up their promises to lenders, many sellers could expect to receive all cash at close. In today's marketplace however, any business seller motivated to achieve a deal, and at a fair price, must be willing to carry back part of that sum. Buyers now commonly expect the seller's assistance in funding the transaction.
5. Buying with an earnout: An entrepreneur who understands how to buy a business expects to pay what the company is worth today. That can result in a negotiating impasse when the seller wants a price that reflects the company's more profitable performance when the economy was more robust. A solution that might satisfy both sides involves an earnout. It begins with a value based on current performance and reflected in the buyer's initial payments,. But if the business climate improves and the company rebounds to prior levels of sales and profits, those payments will be increased, resulting in a higher price for the business. The smart buyer is ready to engage in an earnout program to acquire a desirable business at a fair price.
6. Getting "real" about inventory value: Business buyers usually have accepted the seller's figures when it came time to purchase inventory of merchandise for resale, as well as other inventory items such as supplies and spare parts for company equipment. But today's careful business purchaser wants to make sure that everything he or she pays for is priced correctly and has value in operating the business. This might mean, for example, that some of that old merchandise is not bought outright, but is taken on consignment and paid for only when sold.
Understanding these principles is important for any entrepreneur who wants to know how to buy a business for sale successfully in the current economic and social climate.
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Nationally known blogger/author Peter Siegel, MBA, has advised entrepreneurs about how to buy a business for more than 20 years. He launched BizBen.com in 1993; adds 200 offerings daily to the site's thousands of featured businesses for sale. Buyers, sellers, brokers, other professionals visit for opportunities, ideas, useful information. Find opportunities at => http://www.bizben.com/
