Buying or selling any business comes with certain risks. To avoid getting the short end of the stick, it is necessary to have at least a fundamental understanding of the process. Furthermore, it is important to take certain steps to reduce your risk, make the process more efficient, and increase the likelihood of a successful transaction for both parties involved.
Here are a few things that all potential buyers and sellers should consider before concluding a transaction.
Get Professional Advice
It is almost never a good idea to buy or sell a business on your own, and yet, many people do just that. While buying or selling a business may not be rocket science, you typically need an experienced professional to guide you, as well as input from an accountant, an attorney, a business broker, and a banker. This may seem like a small crowd, but it’s important in order to get a full picture of all the pieces in play.
Be Willing To Compromise
While the assistance of an experienced business lawyer can be very helpful when it comes to document preparation and advice on the legal aspects of the business acquisition, your lawyer should refrain from taking too aggressive an approach to getting you the best deal. The idea is to negotiate a deal that is good for both the buyer and the seller by being willing to compromise where necessary. Otherwise, you risk losing the deal completely.
Use the Right Language When Negotiating the Deal
Don’t use phrases like:
- “You are asking way too much” or
- “It’s not worth it”
Instead, say things like:
- “I’m a buyer at x amount of dollars” or
- “I’m comfortable selling for this much money”
You will be surprised by how effective this can be. This type of language keeps the dialogue open and preserves the possibility of a negotiated compromise being reached. Your job is to keep the other party engaged and the conversation going.
Know What Goes Into Business Valuation
Multiple factors affect the value of a business. However, the real value is what a buyer is willing to pay for the business and what the seller is comfortable accepting.
One of the most important factors a buyer looks for when buying a business is the anticipated level of owner benefits. Examples of owner benefits include:
- Cash Flow – This comes in various forms of expendable liquidity, including the owner’s salary, profit, and the ability to service debt.
- Tax Benefits – These include depreciation, amortization, and the distinct advantage of being able to write off dinners, trips, cars, etc., against the business.
- Tangible Benefits – These are items such as health insurance, life insurance, and retirement annuities.
Typically, the greater the owner stands to benefit, the higher the price buyers will be willing to pay for the business. It is also important to note that businesses are valued differently from industry to industry.
Other factors that can affect the sale price of a business include:
- The growth rate of the industry
- The barriers to entry in the industry
- Technological changes that may affect the business’s revenue and product offering
- The level of competition density and ratio in the industry
- The risk that the buyer will be assuming when buying the business
- Comparable sales and listings for similar businesses in the industry and location where the business operates
Buyers: Make Sure You are Up for The Challenge
Owning a business may sound and look glamorous, but it is almost always hard work, and usually much harder work than being an employee. So, ask yourself if you are cut out to deal with the ups and downs of business ownership and inconsistent cash flow.
As an employee, you are far less burdened with the day-to-day obligations of being the supreme leader. But as the owner, you are never off the clock, which can take its toll on you and your family mentally, physically, and emotionally.
Owning your own business can be one of the most rewarding and thrilling endeavors of your life. Just be sure to look before you leap.
Sellers: Be Prepared To Sell
Before you list a business for sale, you first need to prepare information. Buyers will want to see this information to determine if they want to buy your business.
Initially, your focus should be on gathering financial records and at least three years of profit and loss statements. You will also want to provide the potential buyer with other KPIs, such as the cost of acquiring clients and any other relevant information.
Once you have these reports ready, you should prepare a breakdown of the business’s strengths and weaknesses. This can easily be done by doing a SWOT analysis, or by any other method, as long as it is honest and thorough.
Finally, in order to build trust with potential buyers and show that the business you are selling is organized and easy to run, you should endeavor to prepare the answer to as many questions about the business as possible. You should also prepare yourself to explain the business’ day-to-day operations to potential buyers so that they know what they will need to run the business.
Contact Us For The Help You Need
Buying or selling a business is often a complicated endeavor that calls for a great deal of legal skill and expertise. As such, there is no substitute for sound legal advice to guide you through the transaction.
At Davis Business Law, we can help you navigate the process and avoid many of the pitfalls that await those who go it alone. For expert advice on buying or selling a business, contact us today to arrange a free initial consultation.
The content on this page has been reviewed and approved by Matthew Davis: CEO of Davis Business Law.