Don’t buy any business without first doing research

Question: I will be retiring soon and will be looking at buying my first business. Do you have a checklist for buying a business?

Answer: Based on my experience you will need to pull together the following:

1. Establish criteria for the business you will buy. Set minimums and maximums of what you are willing to do.

2. Prepare a current personal financial statement. Both you and your banker will need to review your financial stability.

3. Establish your buying team. Put together a group of advisers, (i.e., your business banker, CPA, attorney, outside consultants, etc.) to help you review and evaluate each business opportunity.

4. Let area real estate agents, chambers and other business professionals know you are in the market to buy a business. You will be able learn about businesses that are not even listed once they know you are a qualified buyer.

5. Learn what key elements to look for in each deal to prepare yourself for the negotiations, (i.e., why the seller is selling, change in market share, forecasted traffic patterns for the businesses in area, etc.)

6. Have ready for a seller a non-binding letter of intent containing a request for documents.

7. Analyze documents solicited by your letter of intent. Begin with the premise lease. Once you feel this business meets your “criteria” pull in the “buying team.”

8. Evaluate the company and the seller by checking credit history, conducting a litigation search and examining the history of complaints at the Better Business Bureau, the Department of Local Affairs, and the state attorney general’s office.

9. Prepare a financial analysis. Include pre- and post-purchase cash flow scenarios and balance sheets by working off recasted financial statements. If the seller states that the financial statements are understating the revenues to minimize taxes, walk away from the deal.

10. Obtain from your attorney a Solvency Opinion to know if the seller’s asking terms violate fraudulent conveyance statutes.

11. Always have several businesses in analysis. Stay objective.

12. Preliminarily appraise value on the top three deals.

13. Analyze the five non-financial factors, which influence value: customers, employees, landlord, bank and suppliers.

14. Identify alternate deal structures and financing scenarios.

15. Update the valuation and alternative financing scenarios. Begin negotiations while keeping in mind the “deal’s key elements.”

16. Pick your top business opportunity.

17. Get a “hand-shake” agreement on significant terms of purchase between you and the seller.

18. Finish your due diligence.

19. Finalize valuation and structure the terms of purchase. A third-party report from your attorney and CPA on their letterhead is convincing.

20. Propose a purchase offer to the seller. Before this point, it is presumptuous for you to disagree with the seller on the price or terms because you could not have known everything the seller knew upon which he based his asking terms.

21. Instruct your attorney to prepare purchase contracts. Verify your tax strategy with your CPA.

You should also be beware of the tactics sellers use to overstate their market value:

* Deplete their inventory.

* Defer asset maintenance and repair for the new seller to take care to perform.

* Neglect to upgrade assets, staffing and marketing to a level of the competition.

* Classify owner compensation and perks as business profit.

* Classify interest expense as profit.

* Classify depreciation expenses as business profit.

* Reduce labor cost with fewer or cheaper employees.

* Discount product price to a level which cannot be profitably sustained.

Have your CPA recast the financial statements so you are working in the real business world, not that of the seller.

Q: What is the quickest way to make it big, real big? I own a small company and it has done well, but it is not growing as fast as I would like. How do I build wealth?

A: There are four ways to enhance your business’ ability to earn great profits. Each will require a major paradigm shift for most small business owners.

First. Licensing. Sell the right to manufacture or sell your product. You need to choose a larger company and one that will throw their resources behind your product.

Second. Franchise. If your business model is successful and you can package it as a turnkey solution, then you are in business. There are many companies out there that will help prepare your businesses to franchise. Beware, most are out to take your money.

Third. Initial public offering. Selling stock to the public is a fast way to profit from a business. However, as with franchising, be sure there is a market for your stock before retaining specialists to arrange the transaction.

Fourth. Merger partner. Combine with a competitor or a company your business will compliment. This is the most common approach and should be looked at first.

Greeley resident Russell Disberger is a founding member of Tekquity Ventures LLC, a Louisville-based specialty venture capital firm investing in technology development and licensing. He can be reached at (970) 7009, (303) 926-3990 or via e-mail at disberger@home.com.

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