Business Buying Process
4. Short Listing
Apply your criteria to the listing viewed and select a short list that best fits your criteria.
5. Interviewing Sellers/Brokers
It is generally impossible to understand a business listing based solely on a short discription. Having a face-to-face interview with the business seller/agent is a necessary step to enhance your knowledge about the business opportunities that you are contemplating. A lot of business listings are represented by business brokers. The majority of brokers are reluctant to give information about their businesses over the phone. This is understandable since business sellers are concerned about the confidentiality of the sale of their businesses. Business brokers have to screen potential business buyers before supplying additional information about the businesses for sale. For this reason, most business brokers will ask you to come to their office for more information. While very time consuming, this is the only way you can show that you are serious about buying a business. The time spent is a necessary cost. As stated previously, buying a business is a full time job. It is an expensive process that will cost you a lot of time and money. Doing it properly will certainly reduce this cost, but not eliminate it.
Talking with the business owner/broker will give you additional information about the business. You should also have a clear written list of questions to ask. Pay particular attention to non-verbal clues from the seller. One of the most important questions to ask is "the reason why the seller is selling." Assess how comfortable the seller is in answering this question. Does the answer make sense?
6. Visiting Businesses
Actually visiting the business premises will give you additional information about the business. Do you see yourself managing the business? Pay particular attention to the day-to-day activities of the business owner. Is this something you see yourself doing everyday for the next five years at least. This will be a serious commitment, which is very difficult to reverse. Too often, buyers focus on profits and forget about the job itself. Buying a small business is more like buying a job. If you do not like the job, chances are you will not be successful. You will need to spend countless hours, days and months learning the business and working hard at it. This will be difficult if you do not thoroughly enjoy your job.
7. Seeing Financial Statements
While financial statements are very important in buying a business, they are not everything:
- Most small business owners are so concerned about paying less tax that they do everything they can to reduce the amount of profit in the financial statements.
- Financial statements only talk about the past and do not reflect the future.
- Sometimes, financial statements do not reflect the reality of the business.
Also, many small business owners/business brokers will not provide financial statements before receiving a conditional offer. Business sellers are so afraid of having their financials in the wrong hands that they are reluctant to provide them to potential buyers who do not show serious interest in the business for sale. A very common practice in Ontario is to provide basic financial information to the buyer, have him/her put an offer on the business (with a deposit to be held in trust in the Real Estate / Business Brokerage company), and then provide all financial information in the due diligence period.
8. Making an Offer
While most business buyers are very reluctant to make an offer before knowing everything about the business they are contemplating, it is not a common practice to provide buyers with complete information before-hand for obvious confidentiality reasons. Offers for business purchase are, in most cases, conditional on a due diligence period. The buyer can only know the "ins and outs" of a business after he/she has obtained some serious documentation and spent time asking all kinds of questions to the business owner, employees, customers, suppliers and other stakeholders. This information, if placed in the wrong hands, could seriously jeopardize the future of the business. For this reason, it is only given to serious buyers who have made an agreed-upon offer that is accompanied by a reasonable deposit.