Expanding through acquisition? Watch out! Make this mistake and you could be
in for an unexpected cash-flow cut! - How to Buy a Business.
How can buying a business make its’ value go down?
I had a chat with Sarah Mullins from UpTree HR in Halifax.
Sarah and I discussed some of the issues relating to HR when
you buy a business or merge two companies in a strategic acquisition.
She’s been through dozens of them.
She even explains how buying another company can reduce its’
profitability. If you haven’t done the
right due-diligence, you could end up with less cash flow that you had
forecast.
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I made this video a few weeks ago to explain the different
scenarios that someone might conceivably buy a business with no money and the
dangers for the buyers and sellers in each. Watch: https://youtu.be/NVTgDT7Cc2g
Cody, one of my viewers, sent in this thoughtful question in
reply to the video:
Hello David, thanks for all the videos. Have a question: I have heard of
people buying businesses through 100% financing, but not technically no money
down.
So they first go to a lender and borrow against the assets of the
business to raise cash, which they then give some or all that cash to the
seller, as a down payment.
Then they get the Vendor(Seller) to carry some kind of financing on the
rest, the seller is in a junior position to the lender in case the business
fails.
In theory this should work great, the seller will get about as much cash
at closing as they would if the seller liquidated.
Have you heard of this?
Does it work?
If it does work, is it easy to put together?
If it does not work, why not?
Great questions Cody!
The problem with this scenario lies in two places… are we
actually talking about buying a business or just a collection of assets? The reason I ask is that if a seller is happy
receiving an amount which approximates a liquidation then we’re not receiving
operating capital or paying for goodwill.
If there is no goodwill value, is the business a profitable
money maker?
Also, if you’re buying this as your first business then what
would your opening balance sheet look like?
The banker will want to see.
I must admit though, this strategy would work for a
different kind of buyer. See my video
response to learn who could pull this off. Watch: https://youtu.be/xZqJTa_YZj4
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I had the
pleasure of speaking to a business owner in Toronto while I was away on
vacation. It was just a brief consult done from a park bench in Brussels.
He and the
other owners had become aware of a competing firm that had been acquired by a
larger company and wanted to try to do the same thing.
The
conversation centered around the best strategy… hiring an intermediary, hiring
someone in-house to try to find a suitor, etc.
During this
time, my client made a little comment about how he and the other founders of
the company were working almost 16 hours a day and how they found it impossible
to hire people to help them out.
I made this
recording telling the story and how you can go about fixing it. Listen here (audio only on YouTube): https://youtu.be/9n68EuvNXfw
Needless to
say, it is quite difficult to convince someone to pay money to buy a business
that needs this kind of management engagement.
Proper
businesses have structure, organization and everyone knows what they’re
responsible for and what duties they need to get done. Without this, it’s impossible to grow and it
sure does look scary for anyone looking at buying.
The topic
was very apropos as I’m in the middle of creating my latest workshop; Building
a Business that Someone Will Want to Buy.
It’s going to be presented on October 18 in Moncton, NB and will likely
become an online course.
Please
remember to like and share this article, it’s the only way the people who run
the internet have of knowing if the content is any good or not. The more you
share, the more likely someone who needs this information will be able to find
it.
If you would
like to hear from me weekly before anyone else, you can sign yourself up just to the left of this post. If you need my help with your
project, give me a call at (506) 381-8416.
Do you live
in the Maritimes? I’ve got workshops
coming up on buying and selling businesses in the fall. Book now http://davidbarnett.eventbrite.ca
I received a
question from one of my viewers in South Carolina. Ben has an opportunity to buy part of a
business and wants to know what he needs to do to figure out what it’s worth.
Splitting up
businesses is a funny thing. Usually
businesses want to combine to realize synergies.
Think of two companies merging
and eliminating some of the administrative staff. The result of the merger should be lower
overheads as a percentage of sales.
So if you
buy part of a business and this leads to dis-synergies how do you figure out
what a part of the business is worth?
Well, all you can rely on is the sales figure.
Start by
taking the sales of the existing company for the department or product lines
that you’re going to be acquiring, then build yourself a new income statement.
Be prepared
for a tough negotiation though, the parts may often be worth less than the whole
and the sellers expectations may be very different from yours.
Please
remember to like and share this article, it’s the only way the people who run
the internet have of knowing if the content is any good or not. The more you
share, the more likely someone who needs this information will be able to find
it.
If you would
like to hear from me weekly before anyone else, you can sign yourself up at www.DavidCBarnett.com If you need my help with your
project, give me a call at (506) 381-8416.
Do you live
in the Maritimes? I’ve got workshops
coming up on buying and selling businesses in the fall. Book now http://davidbarnett.eventbrite.ca
If you’d
like to learn how to create high returns by making local private lending and
lease deals, check out http://www.LocalInvestingCourse.com The Local Investing Academy enrollment
is from September 26 to October 10 only.
For a quick
introduction, read Invest Local. It’s
available from Amazon stores worldwide or as a .pdf here: https://gum.co/quoB
Please
remember to like and share this article, it’s the only way the people who run
the internet have of knowing if the content is any good or not. The more you
share, the more likely someone who needs this information will be able to find
it.
If you would
like to hear from me weekly before anyone else, you can sign yourself up at www.DavidCBarnett.com If you need my help with your
project, give me a call at (506) 381-8416.
Do you live
in the Maritimes? I’ve got workshops
coming up on buying and selling businesses in the fall. Book now http://davidbarnett.eventbrite.ca
You see for
a ‘market’ to exist, you need many buyers, sellers and a product or
commodity. For example, there is a
market for 4-door used cars and a market for 3-bedroom homes in each town and
city, but small businesses are very individual.
They’re unique.
Therefore,
they each have their own market!
In the video
I give an example of the process engineer who will never buy the highly
profitable flower shop. I used to see it
all the time when I owned my business brokerage.
As far as
pricing goes, it doesn’t change much over time except if certain industries are
perceived to be more or less risky.
Business are valued on their cash flow and what the buyer is willing to
pay is based on their perception of the risk that the cash will continue to
flow into the future.
There is one
exception though. It’s an old story
about market manipulation.
I’ve seen
first-hand that government programs meant to encourage immigrant investors are
causing price bubbles in certain categories.
Convenience stores, franchise food locations, Laundromats, gas stations.
Anywhere
someone with limited English can run a simple business and quickly learn enough
words to make change and serve customers.
I recently
worked on a case where a newcomer was willing to overpay by 40%... because he
was up against a time-limit and if he didn’t buy a business he would lose a
$75,000 deposit that he had made to get into the country.
Welcome to
Canada, let us into your wallet. I bet
he feels all warm and fuzzy about igloos, beavers and maple syrup.
Just like in
any market where politicians and civil servants decide to meddle, an artificial
urgency has been created and business sellers are taking full advantage of
these victims created by government policy.
If you’d like to learn how to create high returns by making
local private lending and lease deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts in September. For a quick introduction, read Invest
Local. It’s available from Amazon stores
worldwide or as a .pdf here: https://gum.co/quoB
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com If you need my help with your project, give
me a call at (506) 381-8416.
Do you live in the Maritimes? I’ve got workshops coming up on buying and
selling businesses in the fall. Book now
http://davidbarnett.eventbrite.ca
Ed recently downloaded a copy of my 2015 Best-seller, Franchise Warnings from www.franchisewarnings.com
He wrote me an e-mail saying that he was looking at
franchises and enjoyed the book. He
thought that the central theme of the book was ‘do your homework.’
It’s not. The book’s
purpose was to dispel the myth that buying a franchise is less risky than
starting a business from scratch. Watch
the video here: https://youtu.be/JUItDU5cn-E
Ed also asks what I would look for if I were buying a new
franchise. Interesting question.
My first idea is that I would want a fee based franchise
over a royalty based one. It allows you
to grow the business and keep more of the gravy for yourself.
Secondly, I would need to ensure that the business systems
were actually provided and worked well.
I know of a two franchises who provide no operating manual and one where
the systems are very poor. (I’m sure they’re not alone.)
If you’d like to learn how to create high returns by making
local private lending and lease deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts at the end of September. For a quick introduction, read Invest
Local. It’s available from Amazon stores
worldwide or as a .pdf here: https://gum.co/quoB
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
Do you live in Toronto or the Maritimes? I’ve got workshops coming up for Toronto in
September on buying and selling businesses and in October-December in the
Maritimes. Book now http://davidbarnett.eventbrite.ca
