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Negotiating a Business Purchase – Relationships are Key

Nov 03, 2017

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Are you considering the purchase of an existing business? What is the most important thing to know as you begin the process? Theshort answer is, buying or selling a business is all about relationships! In a traditional real estate transaction, such as buying a home or a building, there is zero relationship between the buyer and the seller. The property speaks for itself and the parties may never actually meet face-to-face.

 

However, a business sale is all about building trust and establishing relationships. If you’ve found a business that seems attractive, the seller says it is profitable, and you have some experience in the industry, where do you start? Obviously, the financial information is critical, and often we want to begin by seeing the bottom line and “running the numbers.” But, there is often a bit of reluctance on the part of the seller to initially disclose complete financial information, usually due to confidentiality issues.

 

The author of The Guide to Buying a Small Business, Ed Pendarvis, suggests that an alternative way to view a business opportunity is to begin by looking at the top line to determine how the business performs…ask for gross sales (total sales, before any deductions for expenses), immediately make contact with the seller, meet face-to-face, and begin the process of really understanding the business. Is it a good fit for your family and lifestyle? How much money does the owner really take out of the business? Is the seller making a living from the business? Visit the business and see firsthand how it is run, the condition of the equipment, and the general “feel” of the operation.

 

If it still is attractive and something you may be interested in, begin the negotiation process by making an offer (in writing) with earnest money, obtain financial statements and tax returns, then go through the books and perform your due diligence with a CPA. Moving forward with the sale should be contingent on everything matching what the seller represented initially. The Wyoming SBDC Network can help you determine a fair market value for the business, based on the financial information, once you have access to it.

 

What should you focus on as a buyer? We often think that a business should sell based on its current performance, but you should really examine the opportunities. Much of your focus should be on what improvements you can make to the business…less on what the seller has done with the business. Of course, you will only want to pay for what the business is currently doing, but definitely your decision should be based on how you would make it better!

 

So, what’s the bottom line? The deal must work for both buyer and seller, and trust is the basis of the transaction. Of course, the process is never exactly the same for every buyer or seller, so the Wyoming SBDC Network invites you to ask for assistance along the way!

 



Susan Jerke


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