A Buyer's Guide: 7 Ways To Minimize Risk When Buying A Business
Entrepreneurs are risk takers by nature and so are prepared to take chances when it comes to buying a business, but there are certain steps that any buyer can take to help mitigate the risks involved. If you have made the decision to buy a business, especially if this is your first time, then there are several ways in which to protect yourself in any potential deal.
1) DO YOUR HOMEWORK
In this day and age there is simply no excuse for a buyer not to do their homework. The internet is an instant source of countless research resources that can inform you about the industry you are interested in, specific businesses within that industry, and the community your target company is located in.
Whilst many buyers will focus on an industry they have experience of it is not unusual, especially with smaller businesses, for a buyer to look at something outside of their industry and in these instances research becomes even more critical.
Almost every industry has an association that offer conferences, seminars, and meetings so these can be an invaluable way to learn more about the potential challenges and opportunities available to you, as well as the competition you will be faced with.
The more knowledgeable you are about the industry, the lesser the chances of making a poor decision that could lead to the risk of the failure of the business.
2) GET A GOOD ATTORNEY
Having a reputable and experienced attorney is vital to minimizing the risk in any business deal. When looking for an attorney ask for recommendations from your Business Broker, or other business owners who have been through the process.
Not every attorney is equal when it comes to business transactions and so avoid the temptation to use your family lawyer simply because you know them well – they may be great at their particular field of law but that does not mean they understand how business transactions work.
Don’t be afraid to ask an attorney how many business related transactions they have completed in the past 12 months to get an idea of how often they deal with buyer and sellers, and to evaluate their experience.
If the industry you are buying in to is heavily regulated or requires specialized knowledge, be sure to find an attorney with the specific experience needed to get the deal across the line in the shortest possible time – you do not want to be paying the extra hours required for an attorney to be learning a new field of work!
3) HIRE AN EXPERIENCED CPA This follows on from point 2, as having a strong team of experts around you is a simple but effective way to minimize risk. As with an attorney, be sure to ask about the level of experience the CPA (Certified Public Accountant) has in dealing with businesses of the size you intend to buy. A good CPA will be able to provide you with advice on how you should structure your company and what will work best for tax purposes, whether that is perhaps an LLC, S-Corp, or C-Corp. Your CPA will also be able to guide you through the due diligence process and highlight any red flags that you need to be aware of when considering the risk involved in the deal. Your chosen CPA can also be a valuable asset moving forward once you have acquired the business by helping you to maintain the good books and records needed to achieve the highest possible multiple when it comes time to sell. 4) WORK WITH A BUSINESS BROKER Okay, so I am obviously biased when it comes to this point but I do genuinely believe that a good business broker can help a buyer minimize the risks involved in the purchase process. Brokers are excellent negotiators and know what to look for in a deal. Your broker can assist you firstly in finding the right business, and then in any subsequent negotiations, the completion of the contract, removing any contingencies throughout due diligence, and with getting the deal closed in the most efficient manner. Your broker can also advise on ways to ensure your risks post-closing are mitigated by way of a hold back or right of offset on a seller note. Having a broker take you through the whole process and work with you when things come up that are outside of your field of knowledge not only reduces the risks involved in a deal, but will help you obtain the best possible terms and conditions. Buyers can, and do, buy businesses without the help of a broker but when it is typically the seller who pays the commission, meaning the buyer is getting the help of a broker at no cost to them, then it seems a logical choice to utilize an expert in the field of buying and selling businesses. 5) DON’T FORGET WORKING CAPITAL One of the biggest risks when buying a business is not having enough working capital to get you through your first year. Many times I will speak to a potential buyer of a business who, for example, will tell me that the total sum they have to invest in a business is $200k. When I ask how much they want to spend on the business itself, I get the response ‘all of it’. The buyer is not taking into account the working capital they will need to operate the business, which straight away puts them at a higher risk of failure. Even buyers who have working capital available need to be aware of the nature of the business they are buying – does it have slow receivables, or is it perhaps seasonal? Making sure you have excess working capital beyond the purchase price of the business is an essential way in which to minimize the risk involved in any deal.
6) DON’T MAKE BIG CHANGES Any buyer looking to acquire a business can usually see several ways in which they would change how the business operates, but making changes too early can be a high risk strategy. I always advise buyers not to make any major changes within the first 6 months of taking over. This time should be spent getting to know the business, and speaking to clients and staff to see where the value truly is – often times it may not be where the buyer thinks!
The transition period when taking over a business is hard enough for a buyer without them creating additional challenges for themselves. Spend some time observing the business to be sure you truly know what the ‘secret sauce’ is before making those changes.
7) WORK HARD
Although this is the final point on the list, it is definitely one of the most important! Being successful as a business owner requires hard work and a ‘whatever it takes’ mentality.
No business operates without problems, but hard work on the part of the owner can go a long way to overcoming a large number of these problems before they escalate any further and pose a risk to the business.
Owning a business is not for everybody, and those who do know that many times they will work longer hours for less reward than they would if they chose a typical ‘9 to 5’ job, but the freedom to be your own boss and control your destiny is invaluable to many entrepreneurs. By surrounding yourself with a good team of advisors and following these steps to help in minimizing the risks involved in business ownership, you are one step closer to being a success!
For information about buying a business call me on 407-989-6893 or visit www.theharrisongroupfl.com
The Harrison Group at Rockrose Realty Inc.