A topic that is not often discussed is that of buying a business that is already an ongoing concern. There are websites, television shows, and endless scripts that will show you how to start a small business, however very few offer advice on how to buy an existing business. In corporate America this is known as M&A, or mergers and acquisitions. The question that needs to be asked is whether it is cheaper and more efficient to start a new product, or buy one that is already on the market. The numbers are crunched by the MBA’s and a decision is reached. You do not have a staff of financial experts, so what should you do? Let’s take a look at some ways to increase your odds of getting the best deal possible.
Begin with Oral Communication: Whether it is you or your attorney or other proxy, do as much oral communication as you can before ever thinking about submitting a written offer. The goal is to get to know them and the business, to address as many questions as possible, and to understand their valuation rationale and deal terms. The more of this that can be ironed out orally will make you better able to present a more appropriate offer in terms of what the seller may be looking for. I bring this up often, but it is generally true. Your attorney will be looking to minimize your risk and liability associated with the purchase. As such, language of a written contract may be more draconian than if you were to talk things out with the seller ahead of time. Lawyers and accountants have their role, but early in the negotiation process it is best for you to establish an amicable rapport with the other side.
Caveat emptor: Although there are two parties to each transaction, it is the buyer who assumes the risk in the deal. It is your money, your future and your risk. If you calculate a valuation that is far below what they are asking, but your methodology is sound, then present it. Don’t worry about insulting them. Sometimes sellers need a good dose of reality to bring them to the table.
Type of Offer Agreement: Typically in smaller deals a Letter of Intent (LOI) is used prior to a full blown Definitive Purchase Agreement (DPA). It is easier to get the process started with an LOI which is generally broader in scope, not getting the deal bogged down in minutia right from the start. You can also save money with the LOI as it is a non-binding agreement, whereas the DPA is serious business with serious legal fees associated with it.
Never Deal in Fear: This is one of the best lessons I learned in running a business. It can also be utilized when purchasing something. Fear will lead to angst and emotion, and more times than not will lead to a bad decision. As in real estate and other asset sales, sellers will often employ the tactic of playing you against other alleged bidders. Don’t succumb. Although this can be tough to do when it is a sellers’ market, it is better to walk away than to make a bad deal.
According to Richard Parker, president of The Business Buyer Resource Center, “Ego usually gets in the way of negotiations when one side focuses more on winning the point rather than understanding it or exploring other options.” Find solutions. There is usually another way. Be creative. Before you take a tough stance, take an open-minded one. Be reasonable and the other side probably will be as well.