A recent article titled “The 4 Big Mistakes to Avoid When Buying a Business” It is based on an interview with Josh Tolley, nationally syndicated talk show host and recently published book author. Wealth by Acquisition. Tolley’s message: Given the high risk of failure that new ventures face, it’s often much better to buy an established, profitable business.
His advice struck a chord: Many readers contacted me and said things to the effect of, “I never thought I’d buy a business.”
Ron P. Jones, a business lawyer in Hanford, California, and a longtime friend of this column, sent me a list of “critical due diligence questions that anyone considering buying a company must answer.” “You might ask Mr. Torrey these questions,” he suggested.
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I did, and he was happy to answer Ron’s questions. He began with a warning: “Be curious, but don’t be intimidated by negative feedback.”
“When acquiring an existing business or going independent, it’s important to be curious and get answers to the tough questions,” he said. “But don’t be paralyzed by fear when you hear, ‘Yes, but what about these things? Have you thought about these problems?’ There are certainly plenty of legitimate objections, but too much doubt — and a failure to recognize that all businesses face problems — can sap motivation and creativity. So when you hear, ‘No! This is not a good idea!’ use your common sense.” teeth It’s a good idea to get advice from multiple knowledgeable sources. Jealous It’s the result of our efforts to grow.”
Torrey shares further insights
Below are other questions Tory answered.
Small and Medium Enterprise Agency (SBA) Is this a loan for a purchase or to start a business?
Tory: You don’t need to know it all: If you’re applying for an SBA loan, the SBA will want relevant experience, but if you’re buying a plumbing company, you don’t need to be a plumber. You do, however, need some managerial or trade experience that the SBA feels comfortable issuing you a loan.
This requirement can also be met by promoting someone currently employed by the business to a management position that the SBA can view as an experienced individual in charge of the operational aspects of the business.
Should you be worried about existing competitors or new competitors coming to town?
Tory: Absolutely! These questions are a key part of the vetting process to investigate a business and its potential liabilities, including new competitors.
To search public records for a location, DeadlyFor example, if you’re buying a restaurant, is the city considering digging up the road to lay new water or sewer pipes? That could prevent access and doom your business.
Are labor unions involved? Do labor unions have a say in acquisitions? Are there franchise agreements (which the seller hasn’t considered for years) that require the company to first present a franchise agreement to the seller?
This is how business buyers and sellers I never have You should do this yourself!
How do I know where to order supplies, parts, inventory, similar items, etc., and if costs change over time or with the season? Is there someone who can help me make sure I’m not taken advantage of by a vendor?
Tory: If you do the due diligence process correctly, not only will you get that information from the seller, but the seller will also stay with the company for 6 to 12 months for that very purpose. When finance companies provide financing, they usually require the seller to stay with them for at least 6 months.
What financials should you look at when buying a company? Should you look at audited reports or is a seller’s “scratch shave” enough?
Tory: There are several types of finances to consider. Some of them are created by business owners, also known as chicken scratch. Similarly:
- Professionally compiled financial statements
- Adjust financials (additions, credits, debits) from the seller’s perspective to get a more accurate picture.
- Price, Value and Worth Analysis
Often times, buyers focus on the acquisition price rather than the value or worth of the company.
This is where the concept of goodwill comes into the equation. Goodwill can be manipulated to distort the selling price. Price, value and worth are so different that a business that is in the red on the books and barely priced can be a lot of money for the right buyer, especially if that particular inventory itself is worth a lot of money.
A business broker can help negotiate a much lower selling price if the buyer knows how they can use this inventory.
Tory is deeply concerned about “Instagram gurus” who appear on social media and appeal to people eager to start a business, some of whom are “selling totally worthless guides and business plans for thousands of dollars that lead to horrific financial ruin and the destruction of families.”
To address this issue, his organization is hosting free eight-hour seminars across the country so participants can learn how mergers and acquisitions work and what potential business acquirers should know before investing in a company. For more information, visit joshtolley.com or acquirealwealth.com.
If his seminar comes to my town, I’ll have a front row seat.
Dennis Beaver is an attorney in Bakersfield, California, and welcomes comments and questions from readers. ragonbeaver1@gmail.comPlease visit us! Dennis Beaver.
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This article was written by and represents the views of a contributing advisor, not of Kiplinger editorial staff. The advisor’s record is available at SEC or FINRA.
