Easy Negotiation Techniques

Top Five Mistakes in Buying a Business

Most inexperienced buyers of businesses make their mistakes before they even get to meet the seller. If you make it to a signed offer you probably avoided a few of them. However if it is an offer where you offered so much money that the deal is not bankable, you simply have wasted your time. In the deal business time is usually on the seller’s side since he is collecting a paycheck from the company in question. So, in an effort to save you, the Buyer, from wasting your time, here are the mistakes and some solutions:

1. Overbidding and overreaching. A guy with not much money called me yesterday trying to put together a $10 Million all cash deal on a company with no hard assets. Give me a break. The individual buyer generally cannot do private equity deals (unless he/she goes out raises the money), he must do small leveraged buyouts. Getting stars in your eyes from a business that looks beautiful is no way to get a deal done. You have to know how your deal will be financed. You need to know that the price is a good one, that the structure is safe and bankable. Above all you need to know that the deal is within your means. This means getting acquainted with valuations, creative financing techniques, bank requirements and investors if necessary. You are missing pieces of the puzzle if you are attempting to do a $10 Million cash deal and don’t have the $10 Million waiting somewhere to put on the table.

2. Dwelling on a deal. With small leveraged buyouts you can chew up six months in what seems like six minutes if you are not careful. The deal has to have some key ingredients in place before you move forward, otherwise don’t waste your time. If it does not have those ingredients, you must discard the deal like garbage and move to the next. If you get bad vibes from the seller, drop the deal and move on. If the balance sheet looks weak, drop the deal. If the company isn’t profitable. Drop it. If something does not smell right drop it. Remember it is a numbers game and you must run through many deals before you find the right one. Do not hang in there forever wrangling with the Seller about deal terms if the company is bleeding red ink.

3. Not qualifying the seller. The seller is the buyer’s biggest wild card. If he isn’t ready to sell you are wasting your time – and the seller is probably wasting it too. An offer needs to be made quickly so that the seller’s mindset can be assessed. The buyer needs to value the deal fast, put together a cogent written offer, preferably in letter of intent form, and then get it in the seller’s hands as soon as possible. This is not only to forestall competition but to start the negotiation process as soon as the seller is in the mood. You must also like the seller and be able to work with him through all the bumps that occur in the transactional process. If the seller does not appear motivated and cooperative, then you do not have a qualified Seller.

4. Not understanding the numbers. People who cannot understand a few numbers often write poetry but generally stay away from businesses. You have to understand a few financial basics in order to cut loose your ability to move on a deal. Understand the balance sheet. Understand the income statement. That’s it just those two things. If you see enough deals you will understand the numbers. Grab the financial information of every opportunity you can. Compare year to year and understand the differences. Your goal should be to be able read the numbers and value the business in one minute or less. That is what I do (of course Warren Buffet does it better).

5. Not pulling the trigger. The deal business is not for the faint of heart. If you get through two-thirds of a deal process and then it falls through you may be out some significant amount of money. This is reason enough to fail to pull the trigger on any given deal. Such failures occur at certain pivot points, which often coincide with significant money outlays, such as engaging attorneys, locking in bank financing, due diligence, etc. It is generally because of a lack of confidence the Buyer has in the ultimate completion of the deal. Once again, the Buyer faltered at the starting gate. Always view yourself as a buyout group, a business that buys companies, not a one shot to the moon player. This way you fully understand your capabilities, both money and people, before commencing the process. Once you fully understand your own risk tolerance and deal parameters you can avoid trigger paralysis and move ahead to completion.

http://www.lbo-deals.com is a blog dealing with the business of acquiring small businesses.