Tips for Business Buyers in Pittsburgh
We understand your frustration. When you were first interested in buying a business you went to listing websites, searched for businesses that met your criteria (probably cash flow being the predominant factor) and filled out the form requesting additional information. You signed the confidentiality agreement and then received an email with information from a broker. The information included financial statements and some information on the business that made the business sound like the next Google. You likely even went and met with several business owners.
What did you learn after wasting several months?
You probably discovered facts like these:
- Cash flows stated on websites are overstated, way overstated. This is the most common complaint mentioned by buyers. We have seen brokers counting salaries of multiple owners, unreported cash, rent, and more in cash flow. It has somehow become common for Proformas to be used for the basis for cash flow. So, you’re going to pay for a business based on what money the business COULD maybe make in a perfect world?
- Important facts are hidden on the business creating a “Buyer Beware” situation. For example, you find out 3 weeks into diligence that there is 1 customer that accounts for 60% of the sales.
- Many of the key employees are relatives of the business owner.
- The owner works >60 hours a week and you’ll have to work at least as much.
- The statements used to report cash flow are from a year ago and recent sales are down.
- Other negatives in the business were never disclosed.
We recommend that when you find the first situation of suspect ethics on behalf of a broker, stay away permanently.
There is a better way. You can build a relationship with a broker or two, explain what you are looking for and convince him/her you are serious and well-funded. Follow up frequently and be patient. If what you are looking for isn’t available (and it likely isn’t), you are better off being patient than talking yourself into buying the wrong business that isn’t a fit. What is a fit? The biggest mistake buyers make is chasing cash flow. They search on-line and are attracted to businesses with the lowest multiples (Price/Cash Flow or EBITDA). The lower the multiple, the more interested they are.
We recommend each buyer makes sure they understand the type of business that is the best fit for their skills. “Best fit” includes:
- The location of the business, though you need to be flexible and not require a business within 15 minutes of your house.
- Owner duties that match your skills. You will likely be doing what the current owner is doing. If the current owner is a vivacious, outgoing, extroverted sales type who knows everyone in the industry and you are an introverted technical person, you will likely be frustrated trying to be someone you are not.
- A risk level that makes you comfortable. Many buyers are simply looking to replace lost income. This type of buyer needs to look for stable and predictable businesses, not high-growth businesses with large fluctuations year to year.
- The size of the business. We recommend talking to bankers before looking at a business so you know the price you can afford. Thinking that the owner will finance your shortfall is a mistake. If you require owner financing, you will likely pay a higher price or the owner will be selling to someone else.
- The culture of the company. Businesses within an industry have similar cultures. The construction industry has certain attributes that are very different than the telemarketing industry or the accounting industry. Understand what environment makes you the most comfortable.
We can site numerous cases when people purchased businesses that fit their skills and they were not just successful but had a great return on their investment. More important is that these people enjoyed the journey and enjoyed going to work each day. We have also seen cases where accountants purchased sales type businesses (like a swimming pool business) and the accountant hated going to work because he was forced to sell all day when he didn’t like dealing with people.
Patience can be the hardest quality for a buyer. There are thousands of good business for sale on online websites. The reality is the best businesses never get posted online. The majority of businesses we sell never show up anywhere, ideal for the owner since there is less chance anyone learns of the sale. We always have aggressive buyers in waiting that we contact with our best businesses. At least one of them typically pulls the trigger within a short time. The market never knows about the business being for sale.
What is a “good” buyer? First, you need to be seriously interested and ready to make a purchase. There are a lot of window shoppers we meet and once they are identified as such, they see no more opportunities from us. Second, you need to do your homework. Just like going to an interview, the more research you have done on the business prior to meeting the owner, the more respect the business owner will have for you and the more likely he will want to sell to you. Owners are generally able to choose their buyers, you need to make yourself stand out. Third, you need to know what size business you can realistically buy. Looking at a business that is worth more than you could ever buy will frustrate everyone. Finally, you need to make the owner confident you can replace him. We have seen situations where an owner will not sell to someone because the owner is convinced the buyer could never run the company. This is not real estate where people don’t care who the buyer is. You will be taking over an owner’s business and employees, his/her reputation will be impacted by how you perform.
We get calls a lot of times from naïve buyers who are looking for a situation where the buyer can work in a business for a year and then decide if they want to buy the business. The buyer wants to test drive the business and defer the buying decision until later. What the buyer is really looking for is a job. No business owner who is interested in selling is going to do this. In our years of selling businesses it is apparent that the difference between window shoppers and people who are serious has nothing to do with intelligence but has everything to do with GUTS or the ability to stomach the risk of forking out real cash and signing for a loan. You need to be in a situation where you are comfortable taking on the risk before seriously moving forward. Our clients who purchased a business and then sold it for five to ten times their original purchase price later were just as scared when they initially bought the business. It takes a lot of guts to make the first transaction, but you miss 100% of the shots you don’t take.
It is a mistake to ever say you are looking at buying a business or getting a job. The owner hears this as you’re unemployed and looking for something to do. It is also a mistake to talk about buying the business and running it on an absentee basis if the owner is currently working a lot of hours. The current owner will believe you have no idea what it takes to be successful in the business and is probably correct in his/her thinking.
We’ve presented you with some observations, mostly on what not to do. The best buyers we have met also have common traits. These include the following:
- Coming into a meeting having researched the business and industry and background of the owner and company, including competitors, and asking specific questions about the company.
- Explaining to the owner your situation, why you are interested in buying a business like the one you are looking at, that you are prepared to move forward, for the right situation, and have the supporting team already in place.
- Explaining the timing of following up, when you’ll decide whether you’ll make an offer or not.
- Focusing on the business and learning how to grow the business and not asking detailed questions about financial statements, save that for later. People ask questions like “Why did Office Supplies Expenses go up 10% last year” than ask about what skills or resources the business needs to grow to the next level.
- Focus on asking questions and listening to the owner.
We also recommend having a solid understanding of the current state of the financing market. Serious buyers know the maximum price they can pay for a business. The financing market is fluid and lenders change their underwriting requirements frequently. Have a good relationship with 2-3 lenders and you will have an edge on others.
We wish you the best of luck in your search.