There are so many factors involved when buying a business it could make your head spin. This is especially true when you are negotiating to own a business in the retail sector. You should always ensure that you don’t leave anything unturned so you can provide yourself with the very best possible shot at achieving your dreams in this highly competitive business arena.
So where do you start? You need to understand what to look for and have a good grasp of the challenges you will face in order to bring any retail business up to its best performance levels. It’s also absolutely essential to develop a clear understanding of why some businesses are a resounding success, while others are a complete failure.
Successful businesses share many common factors – crucial components, if you will – and one of the first things you should do is to assess whether the entity you are considering has these factors, or may be modified accordingly.
When you own a business by yourself, you’ll require quite a bit of professional advice and assistance, and this also applies when you’re involved in negotiations to purchase a business too. Look for professionals who have experience in your particular niche and sector of the retail business environment. With regard to brokers and intermediaries, don’t ever forget that the business broker formally represents the seller and has a role to play – you should always remember where their loyalty resides. Always maintain a good relationship with the seller, as he or she will be vital in the post contract stage and you should therefore maintain a professional relationship with the broker during the negotiation stage.
When you’re actively going through a list of businesses for sale, ensure that you’ve categorized the essential criteria. Depending on your requirements, there may be as many as 70 key points that you should go over when looking through the listings, so always look for all of these important elements – both good and bad. Extra care at this stage will whittle your list down to a manageable number.
When you’ve reached the main discussion phase, bring a comprehensive list of essential questions to ask the seller. You have to really focus and search for important indicators. Often, you can get a great insight into their background by couching your questions in a particular way. You should always ensure that when you’ve complete this stage you’ve acquired a solid understanding of the business.
Financials are often very difficult to understand, especially for a layman. This is where your independent accountants and advisers come in and help you to understand the numbers. There are a variety of things to look for and quite a few pitfalls to stay clear of, at this phase. Learn how to analyze the figures and then develop your own conclusions based upon this information.
Whilst it is important to know how to value a business and you should use proven and tested formulae, you should make sure that you bring in your advisers at every stage to help you understand this process. You certainly do not want to over pay when you purchase business assets and goodwill. In some instances it just doesn’t make sense to utilize a strict formula to value a business, which might or might not rely on quite a bit of supposed “goodwill”, and it might be necessary to put together an earnout formula to assist you in such a case. If you do decide to buy a retail business based on your findings to this point, you will also need to make sure that you have covered all the financing elements and it is important to try and get the seller involved at this stage. This will inevitably focus the attention of the seller, as he or she will be involved with you for the forseeable future and it is in their best interests to make sure that they are also structuring a great deal.
When you come to the formalities of closing a deal, there are of course numerous legal and documentary issues to address. As you look forward, make sure that you have a very clear plan to help you through the transition, and on into the future. This is a whole new topic in itself, but you do need to make sure that the smooth running of the business suffers the least disruption, and that you do not “spook” the customers!
Richard Parker is the author of the How to Buy a Good Business at a Great Price series. As President and founder of Diomo Corporation – The Business Buyer Resource Center, his materials, seminars and consulting have helped thousands of business buyers realize their dream of buying a business.
