- Don’t waste a seller’s time by looking at a business that really does not interest you or a business that you really cannot afford to acquire.
- Be prepared to show that you have the ability to consummate the purchase of the business. This could be letters from your bank indicating that you have the required funds available and/or that they will loan you sufficient funds to acquire the business.
- Before you buy a business, set a top price in your mind, that you can afford and that you think the business is worth. Don’t ever be afraid or embarrassed to walk away. Don’t become so involved in the actual “buying” of the business that actually consummating the deal becomes more important and exciting than the acquisition of the business itself. No business that I have ever seen is worth buying at any cost. Do not let yourself get caught up in the “its only another $25K” routine!
- If you buy the shares of a business, you are acquiring “everything”, that includes tax liabilities, lawsuits, and debt. Those that exist now and those that might appear in the future. There are methods whereby you can purchase the shares and the assets and not the liabilities. In this case the liabilities fall back on the seller. However, you must remember that even if you do not buy the liabilities, as you own the shares any and all lawsuits will be directed towards you (the corporation). The previous owner may have given you a multitude of “save harmless” clauses, which basically means that he will be responsible for any lawsuits or claims made against the company for things that occurred prior to you acquiring it. If something were to happen to the previous owner or he looses all his money in the stock market, you will end up being responsible for all of those liabilities.
In other words save harmless clauses are only as good as the person behind them. It is better to uncover any and all potential problems and deal with them before closing then it is to rely on save harmless clauses. As well, even if the seller is prepared to take care of any liabilities that are from the period that he owned the business, that might arise in the future, the time burden of dealing with those liabilities when they surface will still be your responsibility. It will be your company that will have to bare the potentially negative exposure and it will be your company that may be sued, and secondarily it may very well affect your future liability insurance rates as those rates are based on historic company claims.
- An investor is unlikely to work as many hours as an active owner.
- An employee is unlikely to work as many hours as an active owner.
- Look at financing alternatives, owing the seller some money will give him an incentive to transfer his knowledge (he has a very good reason to help you succeed, he wants to get the balance of his money) and it will give you something to negotiate with if there are any financial disputes that appear after you have acquired the business. You can usually obtain much better terms from the Seller, depending on the Seller’s reasons for divesting himself from his business, then you will from a bank or other financial institution.
However, you must be aware of one pitfall in borrowing money from the seller. In most cases his Non Compete Agreement, if there is one, will have a clause that states if you do not live up to the terms and conditions of the Loan Agreement that his Non Compete Agreement is null and void. In other words, you miss one payment and the previous owner may become your biggest competitor.
- The seller’s net weekly, monthly and yearly cash flow is likely to be higher than yours due to the fact that he is not carrying the debt you incurred to buy the company. The seller also has years of experience and is likely to make fewer business errors and he will be much more efficient.
- Cash flow, look at seasonality, if you buy the business just as it is going into its slow period you will need additional cash reserves. Some retailers do as much as 80% of their business at Christmas, your cash requirements will be substantially different between buying a retail business in September versus buying the same business in January.