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Buy A Business That Is Not For Sale - Strategies For Business Buyers

As he contemplated the time, fast approaching, when he would retire from his accounting job, Steve started to worry about what he would do afterward-not only how he would occupy his time, but also how he could leverage his retirement savings into an income so that he and his wife could maintain their standard of living.

The solution to this problem, he decided, would be to buy a small business for sale, and so Steve contacted some business brokers and started responding to business for sale ads/postings - a process, as many buyers know, that can take several months to a few years to produce results.

Months into this effort, and with his retirement date fast approaching, Steve decided to become more proactive. That meant trying to find an enterprise to buy that appealed to him, but was not openly being offered for sale.

Starting this campaign by considering the companies with which he did business, Steve settled on the idea of investigating the oil-change franchise where he brought his car for periodic service. The company looked successful and efficiently run and the owner appeared to be about ten years older than Steve. Those were good signs.

Here's what Steve did.  He learned from the franchisor that there were no other franchises that could be opened, or purchased, in his immediate area. And he got some basic information about the franchise company's stores-typical gross sales, basic cost factors as a percent of gross, what the owners expect to earn, and an idea about the rules of thumb used for pricing the businesses.  Next, he offered to save the time and trouble for friends and neighbors who needed to have their cars serviced. He would do it for them, always bringing the cars to the company he had targeted, and the car owners would reimburse him afterward for the cost of the oil, filters and service.

Then, with the business owner now recognizing him as a good customer (and curious why he showed up so frequently and always with a different car), Steve made his move, inviting the man to lunch.

After assuring Allen, the owner, that their discussion would be treated with complete confidentiality, Steve explained what he had in mind and learned that indeed, the man had been thinking about selling, but had been so busy he hadn't gotten around to doing anything about it. Steve presented to Allen a document he'd prepared, called his 'buyer's resume." It listed the money Steve had available, the assets on which he could borrow and it detailed his business experience.

Allen immediately was put at ease. He liked Steve's professional approach and was impressed that this prospective buyer had done his homework and had some understanding of what was involved in running the company. Clearly, Steve was not there to waste his time.

The two met a few times afterward, and then sat down with their lawyers to start a negotiating and contracting procedure that culminated weeks later, in a successfully completed campaign for Steve, the new owner of the oil-change franchise.

There were buyer candidates who'd put their name on the list for a local franchise with the parent (franchise) company. And there were buyers asking their business brokers if there were any automotive service companies in the area that had been newly listed.  In other words, Steve had competition among others who wanted what he wanted. But he wound up with the business.

And the way he went about it can be instructive for anyone wanting to purchase a good company and impatient because nothing appropriate has yet been found.

PREPARATION

That buyer's resume which Steve prepared is a very useful tool, not only to show to brokers and to prospective sellers selling a business who've been formally introduced by an intermediary, but also to business owners who are being directly approached about selling. It shows that the prospective buyer is serious, up-front and business like. And it lets the seller know what the buyer can and cannot do-a time saver for everyone involved.

Learning about a business of interest is another way the buyer demonstrates that he or she is being professional.  That's what Steve did by obtaining and studying the franchisor's literature. And it also saves time, since the prospective seller does not need to go over the basics of the industry. The smart buyer-candidate can discover plenty of information that will help him or her be prepared, by contacting local business groups (Better Business Bureau, Chamber of Commerce), the associations representing the industry in which the subject business is involved, and by conducting a key word search on the Internet. And, of course, if the targeted company is a franchise, the interested buyer can find out, from the franchisor, much of what's needed to know for initial discussions.

The smart buyer also is prepared by knowing the importance of exploring this idea with prospective sellers in a way that is private, respecting an owner's usual need for confidentiality. Even if a business owner is interested in speaking with people who might want to purchase the company, anyone approaching that owner in a way that might expose the topic of conversation to others, is bound to get a negative response.  Very few prospective sellers want customers, employees or vendors to learn that they are considering the idea of getting out of the business. If any outsiders hear someone ask a business owner "Do you want to sell?" they most likely will hear this answer: "No." Even if that's not the case.

NETWORKING

Steve's experience makes this process sound easy-a lot easier than it is in most cases. Of course his idea of checking out companies with which he did business is just one of many strategies a buyer can employ to find an appropriate business with a willing seller that isn't officially for sale. A productive part of the network involves vendors in any industry of interest-people who know all of the owners in the market area for the businesses they sell to. Furniture, gift and housewares wholesalers may know of customers-owners in the retail end of their business-- who seem ready to retire. Commercial washer equipment sales people know all the owners of coin laundries in their territories, and may even want to encourage a less active owner to sell out to someone who may be more involved in the operation, particularly if the new owner is likely to purchase new equipment from that sales person. Similarly, route drivers calling on food and liquor stores have a pretty good idea about what's going on with their customers. If someone is getting ready to sell out-perhaps because the next generation in the family doesn't want to take over the business from aging parents-the guy, or gal, who makes deliveries to that business several times a month, is probably pretty well informed about the situation.

Speaking with these people is an excellent way to get tips about an owner who is getting in the mood to sell, before that owner contacts a business broker or posts a for-sale notice. The offer of a finder's fee to people in a network might encourage them to pass along valuable information about likely sellers in their industry. They might even be willing to arrange the introduction, telling an owner about someone who might be a prospective buyer for the business, if the owner is so inclined.

Part of the network, of course, are the social, community and religious groups in which a buyer is involved. While visiting with other parents at a PTA meeting, or enjoying beers with fellow players on the local amateur soccer team, or chatting in the locker room at the gym or yoga center, a person who wants to find a small business to buy can put that fact into the "grapevine" in hopes the word will reach someone, who knows someone, who is getting ready to sell a good business. And the professionals who advise small business owners-lawyers, accountants and insurance brokers-represent a productive network.  These people often are the first to learn when a client is planning a life change that involves selling a business. The buyer wanting to take advantage of this network should make sure to distribute a "buyer's resume" with a carefully worded cover letter to some of these professionals. Days or weeks later, that information may come out of the counselor's desk or file drawer to be shown to a client who begins expressing an interest in retiring or moving on to another enterprise.

An effective strategy followed by some prospective buyers is to hire a business broker to approach specific business owners, or all business owners in a particular industry and market area. The arrangement between buyer and broker can vary, but usually is based on the understanding that the broker represents the buyer-the reverse of the typical circumstances-and the buyer pays the broker a specified fee-or percentage of the purchase price-upon completion of a successful transaction.

Once a buyer identifies an interesting business headed by a cooperative seller, and negotiations begin, it is useful if that buyer has planned out the steps that will lead to a completed transaction. What if the seller resists the offered price, expressing the idea that the business might command more money if exposed, through a listing broker, to the full marketplace of potential buyers? One intelligent response to that objection is to remind the seller that dealing here and now, with a ready, willing and able buyer, eliminates both the need for the seller to pay a broker's commission, and the risk that the seller's confidentiality will be compromised.

Some buyers who take this proactive approach to finding a business, without benefit of a broker involved, have learned the benefit of paying for a lawyer-drafted agreement-for review by the seller's attorney-and the benefit of agreeing to pay for escrow and filing fees. These tactics can be reassuring to a seller, reducing the seller's expenses and promoting a quick and easy conclusion for the deal.

Many, perhaps most buyers are not likely to adopt the strategies suggested here-not when there are many brokers willing to help in the search, and a number of resources that list businesses for sale. But for those buyers-maybe the more impatient ones--who want to expand their hunt for a good business, these comments suggest actions they can take today.

It is also estimated that for every business for sale on the market there are 30 others that could be for sale if the right buyer presented themselves. All potential buyers should register themselves on BizBen.com and let both owners and intermediaries alike know what their search requests are just in case a business owner decides their time is up and they want to move forward in selling their small business.

Categories: BizBen Blog Contributor, Buying A Business, How To Buy A Business

Contributor:

Peter Siegel, MBA
Areas Served: Nationwide - All Areas
Phone:  925-785-3118 Cell, 925-785-3118 Text
Peter Siegel, MBA - Founder Of BizBen.com (over 25 years), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.

Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

Posted By: Joe Ranieri, Business Broker: LA, Orange Counties, California    

It's possible that the buyer could buy a business that was not for sale, but he should understand that much of the leverage would be with the seller, as opposed to if the seller had the business listed for sale. Even someone who lists their business and exposes it to many potential buyers, it's important to remember that the list to sold ratio is low, and so the fact that all stars align, such as price agreed, transferable lease, right conditions, etc., due diligence being satisfied, it's a miracle that some of these deals close, but it does happen. If a buyer were to use a broker, they can use what's called a "One Party Showing" meaning that the owner of the business understands that they are only obligated to pay a commission if this one person buys it, and they are not listing their business for sale. Most sellers, even the ones who list their business, I've found the ones who are successful are also the ones who are motivated, the sellers who have the attitude of "If it sells, it sells, but if it doesn't, it doesn't" hardly sell, because they over price and never have the motivation to sell in the first place.


Posted By: Timothy Cunha JD, Business Broker: San Francisco Bay Area    

As Peter says, often the best possible business acquisition is one not on the market--a business broker can help greatly in improving the chances of success.

While a broker is customarily compensated by a commission from the seller, the pro-active buyer can engage the services of a broker to seek out the unlisted business that might be for sale as well. Of course, one way to compensate the broker is by paying a commission based on a percentage of the price, buyers may be more comfortable knowing that the broker does not have an incentive for a higher price and, thus, a higher commission. Brokers can be retained by prospecting buyers (those looking for unlisted businesses) on a fee for service basis -- by the hour or by the day or by the specific project, or on a "success fee" basis -- a set fee on the conclusion of a successful acquisition within certain parameters, or on the traditional commission bass, or on a combination of two or more of these methods.

Why use a business broker for such a search?

1. The broker can maintain confidentiality until advantageous for the buyer to reveal his/her identity; and, then, provide a strategic advantage by maintaining control over the process and establishing a protocol for the transaction.
2. The broker can lend a sense of legitimacy, professionalism, and credibility to what otherwise might be looked upon as a "poaching" or scamming exercise.
3. Business valuation is tricky; the broker can provide experience and expertise in determining fair market value.
4. Negotiations and contract terms are complex; the business broker can act in the best interests of the buyer in structuring the deal and preparing a draft contract for final review by the parties' respective attorneys.
5. Business brokers understand the nuances and techniques for the effective advertising and management of "business wanted" campaigns. They also know how to proactively identify and approach potential acquisition targets.
6. Business brokers have access to myriad resources for purchase money financing.
7. The due diligence and escrow processes are complex, and the business broker can help navigate them to a successful conclusion.






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