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Errors Buyers Make When Searching To Buy A California Business

Some of the basic errors are as follows according to some of the top California business brokers and recent owner/sellers FSBO's on BizBen:

* Refusing to sign a confidentiality agreement and/or demanding the business financials before signing a confidentiality agreement. It demonstrates ignorance or complete disregard for the process. In any event, it tells the broker from day one that the Buyer will be problematic. The broker will most likely move on to someone more cooperative.

* Signing and returning a confidentiality agreement and then going directly to the business and talking with the Seller or the Sellers employees without setting an appointment through the Broker. Don’t go around the broker. It is rude, disrespectful and you can seriously damage a Seller’s business. Additionally, you’re likely to be blacklisted with that broker so you better hope that one business was the right business for you.

* Challenging the Seller three minutes into the initial meeting by saying “You’re asking too much. How much are you willing to come down?”. That’s a good way to get the Seller to completely shut down for the rest of the meeting and any great deal you thought you might be able to negotiate just went down the tubes.

* Thinking the only way to win is if the Seller loses. The best transactions are win-win. Don’t brow-beat the Seller or try to chisel him down to the last nickel. It’s a good way to end up without the business. If a Seller is not desperate, he/she will seldom sell to a Buyer that has been rude, obnoxious and disrespectful.

* Sticking their hands in the broker’s pocket. Brokers earn every penny of their fees and then some. As brokers, we see great deals all the time and the Buyers we call for those special non-market listings are the Buyers in our database that are respectful of our time, appreciate our service and don’t try to steal our fees. If you want to be on that “Best Deal Call List”, keep your hands out of the broker’s pockets.

The second category of mistakes can be summarized as lack of preparation and basic laziness.

a. Do your due diligence. Is the business making the numbers that have been represented? If you don’t know how to determine that then get an accountant to review the numbers and explain them to you. Do you know what licenses are required and can you get them? Do you have an associate that has the required licenses for you?

b. Do you have the skills necessary to run the business? What skills do you need? Have you taken the time to identify them?

c. Do you have working capital? Do you have any idea how much working capital you will need? Three to six months worth is a good start. Maybe you have a line of credit set up as a safety net. Have you made any arrangements or even thought about what may be necessary?

d. Do you have a marketing plan? What will you do if the business starts declining in your second or third month of ownership? Have you thought about ways you can increase the business?

e. Do you have any plan at all? You don’t have to have a 100 page business plan; however, have you at least spent some time to really think about what you want to do with the business once you take ownership?

The third category of mistakes can be summarized as fear based reactions, misunderstandings and arrogance.

a. It is normal to get apprehensive and to want to make sure your investment is secure. However, no one can guarantee that you will produce the same as or better results than the previous owner. No one can guarantee what the economy will do. No one can guarantee that the customers will continue to come back forever and ever. There are risks involved in owning a business. If you are not willing to take any risks then business ownership is not for you.

b. All purchase agreements have contingencies. Contingencies give the Buyer the right to walk away from the transaction if certain terms are not met to their satisfaction. Contingencies do not give the Buyer the right to extend the due diligence period or extend the closing date until such time as the Buyer decides he/she is satisfied. There comes a point where you have to fish or cut bait. Make a decision. You either want the business or you don’t. In any event, take responsibility for your decision and don’t accuse the Seller of “breaching the contract” and threaten lawsuits simply because some contingency has not been met to your satisfaction. If it doesn’t work for you then walk away.

c. Buyers only buy businesses because they see that the business will benefit them in some way. One of the biggest mistakes a Buyer can make is letting the fear set in towards the end of the transaction and becoming incredibly arrogant as if they are doing the Seller a huge favor by taking the business off the Seller’s hands. Mind your manners. It will make the transition far easier and your training will go far better if you focus on the benefits you are gaining from the acquisition of the business. The Seller is not a charity and you are not doing him a favor. Show some respect and appreciation and the Seller will most likely surprise you by showing you additional aspects of the business about which you would not have thought to ask.

How about you - do you have some tips for fellow business buyers. Feel free to share those tips and expand on the tips above in the Comments sections below. Feel free to reply to comments posted as well.

#photo#About This Contributor: Peter Siegel, MBA is the Founder And Administrator of BizBen.com (established over 20 years!) and is a Business Purchase Financing expert (SBA and Non-SBA financing). He consults daily with California business buyers, owner/sellers, business brokers, and agents regarding buying and selling California small businesses. Call him today regarding advise on finding, buying, selling, financing a business purchase/getting pre-qualified (ask about the BizBen ProBuy and ProSell Programs for business buyers and owner/sellers, and brokers). He'll also give you referrals to the best resources on buying and selling businesses, brokers, etc and a FREE copy of his eBooks "How To Find And Buy A California Business Successfully" or "Valuing And Selling A California Business Successfully" with any personal consulation/service. Peter Can be reached direct at 925-785-3118 (if you get voicemail please leave some good times to reach you and a detailed message - thanks).

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, How To Buy A Business, Selling A Business


Blog Comments

Posted By: Christina Lazuric: Business Broker - CA, TX

The most important advice I would give a buyer is to do some soul searching on what type of business they should buy. At least once a week a buyer will call me and say they need to buy a business that has X amount of net income. When I ask them what type of business, they have no clue.

First of all, buyer need to know that brokers do not possess an MLS they can research businesses on. Getting information on a listing that isn't yours is a daunting task and asking about too many businesses will surely burn out the broker. I will only work with buyers that are focused and have a very specific requirement.

Second, spend some time thinking about whether the business really suits you or not. Don't just focus on the net income because if you don't really like the business and you find yourself working in it then you will be its demise.

Lastly, please don't think you don't have to put real time into a new acquisition. It took the seller years to trust the staff and understand them and the business. You have to give yourself the right start into the business by spending time in and getting to know it.


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

One of the things I do when working with a buyer is only send them out on three of my listings at a time. If the buyer is looking at too many businesses at a time, I find they become overwhelmed. I initially try to bring them in the office, the first time at least, if they seem like a buyer who is all over the place, such as, "...I want to look at mailbox stores, restaurants, and your tanning salon."


Posted By: Business Broker: LA County Area

I'd like to echo Mark's comments about landlords and lease assignments. It seems like the days of the simple lease assignment may be behind us. We've hit a stage in the cycle where landlords want their goodies. Many of them took huge hits years ago and were willing (forced) to accept rent reductions to avoid crippllng vacancies. So they are teed up, ready to get it back. And they're going to take it out on the new guy. Mark makes an excellent point about sellers who assume that landlords will be cooperative. Maybe. But I believe brokers need to start the conversation earlier than we used to.

So I would ask others to chime in. When do you make initial contact, on behalf of the Seller you're representing, with the landlord/manager and has that changed recently?


Posted By: Transactional Attorney

Great post, Peter. I'd add just three specific mistakes from transactions where I represented buyers:

1. Don't assume you can just take over or extend the seller's current lease. In today's market landlords are looking for any chance to increase rents for leases signed during the recession when rents hit bottom to the much higher rents properties command now.

Unless the lease has a favorable assignment clause and there's enough of a term remaining in the lease for it to make sense to have it assigned, there's a good chance you'll be hit with a demand for substantially higher rent in a new lease.

Just as importantly, don't take the seller's word that the landlord will be agreeable. As early as you can, have a conversation directly with the landlord about the assignment or new lease.

2. Don't be afraid to investigate the seller and the business. One of the first things I do when representing a buyer is a litigation and public records check on the seller and the business. One recent search uncovered that the person my client was about to partner with in a business venture had filed for personal bankruptcy the week before and failed to tell my client. Another search revealed the seller had been sued twice for fraud related to the sale of business--with a very similar pattern of facts.

3. Don't search for a business based just on price, or even price to adjusted net. Buying a business is a long term investment and commitment of your time, money and life. Most people are much better off buying a great business with a good track record and growth prospects (and paying more for those features) than buying a cheaper business that has substantial problems.

If you find a great business it's hard to make a mistake and pay "too much" given how low multiples are for most small businesses in general. Whether your investment is returned in two years or three years won't make much difference if the one you buy goes out of business in the first year after you buy it.



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