Confessions of an Entrepreneur: Buying an Existing Business

Many people are scared at the prospect of buying a business. But buying an existing business is one good way to get into entrepreneurship. It’s also a way to ramp up growth in your current business.  
 
Still seems risky to you?  There are some good ways to reduce that risk. First and foremost, get yourself a good attorney—and that means someone who is specialized in buying and selling businesses, at a minimum—and perhaps even specialized in the industry you want to buy a business in. This is not your dad’s old roommate, or whoever handles your wills and trusts, or whoever it was who fixed your kid’s traffic ticket.  It is someone who is entirely focused on, and experienced in, buying and selling businesses.  This person — if the right one—can really guide you through every step of the process.  And it can be a lengthy process. Although it can happen sooner, most of these deals will take at least 90-120 days to close once you have an interested seller who wants to move ahead. And it could easily take six months or more just to find that seller in the first place! So, 9-10 months from the time you decide you want to buy a business until you have the keys to it in your pocket would be fairly typical.  
 
Whatever business you want to buy, it helps reduce your risk if you are very familiar with the industry the company you are buying is in. Working in a specific industry for years before buying a business in that industry will be valuable experience to have. You will know what to look out for and what questions to ask, and may even have done business with—or are least familiar with—the very business you are trying to buy.   
 
When you don’t know anything about the industry you are buying a business in, you are bound to make mistakes. My friend, Larry Bryan, for example, was a banker and real estate developer who some years ago acquired a building supply company he thought would be a good vertical integration move to support his development and construction projects. As a part of that transaction, he bought the inventory of the supply company. But because of his lack of experience in that business, he paid for tens of thousands of dollars of useless nails and staples that were completely obsolete because they fit guns that no one used. And that is just one example of many I could give you. Industry knowledge is crucial.  
 
Finding sellers who are realistic is always a challenge. I have no problem contacting any business owner who has a business I may want to buy and simply asking them if they would be willing to meet to discuss that. Once I have the basic information on the business’s financial condition (and I will ask for that after the FIRST meeting), I’m going to be quickly ready to talk price and terms. One way to save a lot of time is to give the seller a non-binding letter of intent (LOI) or a preliminary term sheet that outlines your thinking, and to get a reaction from them to that. If the seller turns out to have a wholly unrealistic idea of value and is unwilling to finance all or part of the deal, then we can avoid wasting any more time on it. Time is money, and it also kills your momentum, so it’s best to get to this topic quickly, in my experience. 
 
A lot of buyers (and sellers) have the expectation that a business broker (if one is involved in the transaction, and they often are), will help structure the deal. My experience is that while these people can be an invaluable source for finding companies to buy — companies owned by motivated sellers—negotiating a deal is not usually part of their services. They are match-makers more than deal engineers.  
 
Due diligence is beyond critical. Once a seller has indicated that a potential deal is a real consideration for them, buyers need to develop a thorough understanding of both the assets and liabilities of the company they are trying to buy. That takes some real digging into their financials, their people, and their customer base. Again—industry knowledge is super valuable here so you know what to look for. Being able to meet and talk with key managers and employees is necessary, but usually difficult to arrange because most sellers don’t want to let the cat out of the bag on the fact they are considering selling. It is usually not good for morale and could cause some valuable employees, as well as current and potential customers, to jump ship. So while this needs to be accomplished, it either has to happen very late in the process or under some false pretense. Just remember that lying to the employees may be a great way to start out your relationship with a new group of people! 
 
Buyers want asset deals and sellers want stock deals. It’s pretty simple. Buyers don’t want to buy any liabilities they are unaware of. Sellers, on the other hand, don’t want to be paying for something out of their control later on, either. So the form of the transaction is crucial and once again will require competent advisors to figure that out.  
 
I have always been a fan of buying distressed companies. As my late friend Jerry Allen, former CEO of Carter & Burgess and acquirer of roughly 20 companies in the architecture and engineering business used to say, “Everyone talks about cultural compatibility as a must for mergers and acquisitions, but my idea of that is a short payback period.” Motivated sellers will sell for a lower price and give better terms than those who have profitable, growing companies. Sure, there are challenges in any turnaround situation, but there are challenges buying profitable companies for high prices and keeping them that way post-acquisition, too.  Another benefit of buying financially-troubled companies is their employees are glad you are buying their firm, whereas that isn’t often the case when a business is doing well.  
 
Non-compete agreements with sellers are crucial to have and can be a big point of negotiations leading to either an asset purchase agreement or purchase and sale agreement to finalize the deal. This, along with proper structuring of the seller’s warrants and representations, are two of the critical functions an experienced M&A attorney will help you with. I once read about the owner of a muffler shop who sold his business to a neophyte buyer and then broke ground the next day on his NEW muffler shop directly across the street from the old one! You don’t want a seller to be able to do that to you.  
 
In any case, buying a business may be a real consideration for those who want to get out of their jobs in corporate America and do something else, or those who want to more quickly grow their existing businesses. You get clients and employees and facilities, and you may be able to get the seller to finance the deal for you, which could be easier than funding internal growth or an all-new venture.  
 
Some people, like your author here, would rather buy something than start with a clean sheet of paper. It just seems less risky, and I enjoy fixing things more than I like building something new and unproven.  Although, of course, I have done both, and as an entrepreneur, would never rule out either as a possibility!