Advice for Buying Your First Business
Henry Ford famously said, “Whether you think you can or can’t, you’re right.” When it comes to buying your first business, the ability to effectively run a business is a different skill set than what is required to complete an acquisition. As a result, many successful companies and/or executives underestimate the complexities involved in closing a transaction.
By far the largest hurdle that first-time business buyers need to understand is that sellers don’t have to be rational. A buyer can develop all sorts of financial models projecting certain rates of return on various capital structures, but a seller rarely cares. Their internal rate of return is not calculated on a spreadsheet, but rather, by what they’ve been able to provide for their family and what they hope to enjoy in retirement. A successful transaction, therefore, must meet the personal goals of the seller while protecting the financial goals of the buyer.
First-time business buyers also tend to underestimate how long it will take to successfully close a transaction. Not only does it take a significant amount of time to find the appropriate target company, but the amount of time required to woo then wed will probably take longer than a buyer anticipates for a number of reasons. If outside financing is required, the buyer may find that banks are a little more measured in their approach than they had been a few years ago. If real estate is involved in the deal, the cast of characters now includes engineers and appraisers who may not share in the sense of urgency.
Finally, while the buyer’s legal and accounting advisors will be quick to respond, the seller’s advisors (who will likely be losing a client as a result of the transaction) may find compelling reasons why this deal just isn’t right.
While the closing of an acquisition will likely veer from the original acquisition plan, first-time business buyers must remember to stick to the program as closely as possible. If specific steps drag on, it’s better to close later than to take shortcuts on due diligence. If the economics change either because of the seller’s performance or the capital being made available, the buyer must stop and make sure that they are working to close a deal that still makes sense, not just working to close a deal.
Are you buying your first business? Meaden & Moore can help by creating an easy-to-follow plan of action. With expertise in corporate financial planning and advising, we follow proven methods to deliver insightful and highly effective solutions.
Read the flip-side of this in another post by Lloyd:
Selling a Business: Avoid First-Time Seller Mistakes