Be an Ethical Entrepreneur, Marketer, and Business Builder

Buying a business – Step 2 – The Broker

When buying a business for the first or even second or third time there are a few things to keep in mind to help you a long the way…

The first step is obviously finding a business. I’ve blogged before how I’ve found several offers to buy or otherwise acquire businesses in a short amount of time and even blogged about finding a business for little to no money down. In addition to those few examples, I mentioned 2 other great resources are:

Both have some easy to use tools to find the exact business you’re looking for. Keep in mind that the best businesses have a great Cashflow to Asking Price ratio. In other words, if a business has a cashflow of $100,000 you should want to pay as close to $100,000 (or less) as possible. Ideally you’ll pay less than 1 times Cashflow plus assets. So in our example with $100,000 in cashflow if they also have $200,000 in assets a price less than $300,000 would be quite a deal. 🙂  Convincing the seller and a business broker of that might be a little more tricky so be prepared to justify your valuation. Keep in mind that business valuations can be quite subjective. In my experience, a broker can either be your best friend or worst enemy. If you are able to convince him you’re the man for the job, he’ll do his best to convince the seller you’re price should be accepted. Even though he represents the seller, he only gets paid if someone actually buys a business. It’s important to keep that in mind and use it to your advantage. Now how do you do that?

The game plan is rather simple. The trick (like usual) lies in how well you’re able to communicate it. 😉

  1. Make sure he likes you. – This is important because he’s the gate keeper. Heck, he may even be “screening” potential buyers ahead of time. Without his blessing, you don’t see a Non-Disclosure Agreement or ever meet with the sellers. Be comfortable but confident in your discussions and if you find common ground, certainly use that to build rapport. If you get along well with most people and can speak coherently (even under pressure) this becomes second nature and not a step that even requires planning. Check out How to Win Friends and Influence People and Persuasion: The Art of Getting What You Want for more details.
  2. Make sure he thinks you can do the job. -If he doesn’t think you have the ability to run the business being sold you’re not going to make it very far. Be prepared for questions like “Do you have any experience in this type of business?” (he’s making sure you can actually get the job done), “Are you looking at any other types of businesses for purchase” (he’s determining your commitment and passion to this field), and “Do you have management experience?” (he’s assessing whether you can take over and lead a team effectively especially with the nuances of a new owner/leader). I’ve spoken with enough of these guys that I generally have preplanned stories in mind to respond. Always remember that stories that illustrate your capabilities are the best way to get your point across. If this is your first business purchase and you want to sound like an expert, read my blog, the Best 6 books to teach you how to generate wealth, and practice “interviewing” a few business owners to learn how they implement “book lessons” in the real world. Explanations for leadership styles based on books generally do pretty well with business brokers since they’re in effect consultants themselves. They get to look at and evaluate businesses every day without getting involved with what’s needed day-to-day so the perfect answers that you read in books are what they want to hear. For instance, when a broker asked me if I had any management experience I explained my philosophy on being a Team Leader instead of General Manager. He immediately interrupted me and said it sounded like I was a big fan of the Deming philosophy and Six Sigma and I had a great leadership philosophy. Now that he was on my side I shot back “So do you think my style would work well in this business?” – obviously looking for additional details that could help me in my negotiating.  His response was that for liability reasons he couldn’t respond specifically about how my philosophy would work however “it’s a proven philosophy that would do well in any business.” You think he liked me and thought I could do the job after that? 😉
  3. Make sure he agrees with your valuation. – You always save this step for absolutely last. If the broker and owner trust you, thinks you’re capable, and you’ve done your preliminary due diligence and you still want to proceed you start working on explaining why you think the business is worth less than they do. This is possibly the toughest part, but it doesn’t have to be. In one business I was evaluating the owner didn’t have any cashflow or even profit and loss statements. For that reason it was very hard for me to value the business. Obviously it made it even harder for the broker to value the business which was something that rather annoyed him. So he recommended to myself and the seller that this should be an asset only transaction. The transaction never materialized however it was kinda nice to not have to do much negotiating that time since my goal would have been an asset only purchase as well. 🙂  You won’t always get that lucky, so you need to spend a bit of time educating yourself on proper business valuation models so you can “talk-the-talk”. Check out my blog on why banks don’t know what your business is worth and my other one on EBITDA for more information. Simply low-balling with no justification or explanation is a bad idea. If you’re dealing with an individual who is selling on their own, chances are they have no idea how to truly value a business and so will be more apt to agree with you if you know what you’re talking about. Beyond that, one broker told me there are about 12 valuation models that are “commonly accepted”. With 12 valuation models, do you think they all work out to the business being worth the same amount? Of course not. The bottom line is cashflow and assets so make sure you stick to that. Business growth potential aren’t worth anything and should never be something you pay for.

That’s your quick overview of dealing with a broker (or even seller without a broker) on a business purchase.

To your business buying success, Bryan