Any seasoned business buyer will tell you that buying a business can be very risky. The word, “risk” is most often quantified monetarily in business purchase terms, however, before
you start your business purchase program you need to calculate ALL your risks associated with buying a business.
Many business buyers unfortunately pay a heavy price for not investing in appropriate business acquisition expertise and counsel after they’ve bought a business. They clearing bought the wrong business or the right business for the wrong purchase terms and now they end up paying dearly financially and personally. Some business buyers, without adequate contingency funds, loose the business altogether!
Financial Risks and NON-Financial Risks to Buying a Business
Whether you are a veteran business buyer or someone who purchases a company once in a lifetime, you need to take the time upfront to think about what really is at stake in any contemplated business purchase. It is most enlightening for business buyers to evaluate an acquisition from a financial and a non-financial perspective. Let’s take a deeper look at these business buying risk elements:
Financial Risk Elements:
- The $ you personally invest in the business purchase
- The “$ finder’s fees” you pay to locate the business
- The seller’s $ business brokerage fee you indirectly pay
- The lost $ income while you are searching and evaluating a business to buy
- The $ acquisition counsel fees paid, (CPA, Attorney, Market research, Consultants)
- The $ cost of personal guarantees for acquisition debt and asset leases
- The $ interest on acquisition debt
- The $ you overpaid for the business, (determined long after closing)
- The capital needed post purchase for “business surprises”
Non-Financial Risk Elements:
- Your time away from other things important to you
- Your stress levels, negative health consequences
- Your additional marriage stress
- Your self confidence/ esteem damage
- Your reputation
- Your personal credit rating
- Your future employment prospects
Obviously it is much easier to put a monetary value on the financial risk elements than the non-financial. For that matter, putting a monetary value on your personal risk elements may not be appropriate for this analysis. However, it may be insightful to put some numbers next to the financial risk items listed above to give you a better feel of what really is at stake.
Concepts to Consider to Reduce Your Own “Business Buyer Risk”
There are many noteworthy tactics you can consider and implement to reduce your risk levels in buying a business. Some of these concepts listed below may warrant further consideration:
A 3rd party business appraisal that comes in significantly below the seller’s asking price should be leveraged in any way possible to reduce the company purchase price, buyer down payment levels, seller financing interest, buyer debt payment time frames … whatever you can RE-negotiate!
Do what you can to eliminate personal guarantee’s. This is best accomplished within the business purchase terms. The business buyer will undoubtedly appreciate this concept if the business has to close its doors later.
If you hire the “right” business acquisition advisor you can eliminate over half of your common business acquisition “sunk costs”, even legal and accounting fees!
If you can utilize low or no cost means to find viable businesses for sale that do not include a seller intermediary cost augmentation to the purchase price, you can save thousands of dollars and/ or significantly expand the seller’s ability to negotiate.
If you can maintain your current source of income AND search, qualify and negotiate a business purchase you can realize substantial financial risk reduction.
If possible, structure acquisition advisor compensation formats based on actual first year, post closing business results. This concept will intensify advisor involvement and almost guarantee continued support during the most challenging first months of ownership.
Make a conscious effort not to try to do everything yourself. Allocate funds to utilize high value expertise and reduce the time required to either finalize or kill the deal. Lastly, and probably most important, if you are heavily leveraging personal assets and you are married, communicate all the risks and all potential positive and negative consequences of buying a business to your spouse. The personal risks of buying a business are truly the most important!
This article is not intended to demotivate business buyers but to give them another viable perspective about business merger and acquisition risk and reward relationships before limited human and financial resources are further invested in a pending business purchase. As you can see, the risk of buying a business starts at the moment you invest any of your time to pursue a business.
If you correctly purchase a profitable business or obtain “a deal” on an undervalued viable business, you should expect your company’s annual profits and your owner’s compensation to total at least 5% of total net revenues. Remember, best of all, that your personal net worth will increase as you retain your business profits, consistently pay off debt while your company’s market value increases over time … this is the “reward” part of the risk / reward perspective!