Avoid Buying Headaches
Edward Jacobson: If you are interested in buying a business, you should watch out for a company where the value walks out the door right after the sale is consumated.
Fred Provorny: You need to do some due diligence.
Edward Jacobson: As a buyer I would like to see the seller around for a significant period of time to help with the transition, so that I am buying something that's not going to evaporate when the seller leaves.
Eliot Wagonheim: If the owner of the company you just bought rides off into the sunset, is there anybody else that has the relationships that's sustained the business? Does anybody know how to work the business, if the salesmen aren't locked down? If there is no contract with them, and so they can take the relationships out the door right after you buy the company meaning that they can take 70% of the revenues of the door after you buy the company. That's a problem.
Fred Provorny: And also get some idea from outside experts as to what are prospects are.
Eliot Wagonheim: There are several ways to find out. One is to work with an experienced business broker or depending upon the size in industry an investment banker. These people will have a feel for what a business is worth.
Edward Jacobson: Not knowing what its worth is the biggest question mark that any prospective buyer or even any seller has.
Eliot Wagonheim: There are many people who are available and qualified to do business evaluations.
Edward Jacobson: It's amazing how many people come to me and they say, what's my business worth. They have no idea.
Eliot Wagonheim: If for example, you are purchasing a business that is in a different industry. An industry with which perhaps you are not as familiar, it maybe a good idea to get a business evaluation.
Edward Jacobson: In simplistic terms, the business is worth what it can generate in earnings.
Fred Provorny: You really need to get in effect into the bowels of the company and see what see what makes it tick.
Edward Jacobson: Some business is will run through personal expenses, some businesses will either overpay the owner or underpay the owner.
Fred Provorny: In the words of the late President Reagan, "Trust, but verify".
Edward Jacobson: Inherently, there is a lot of risk associated with the small business.
Fred Provorny: And the due diligence phase is the verification.
What buyers are interested in is not getting any liabilities that they don't understand or that might crop up later and perhaps or not even none about at the time of the sale of the business.
Make sure that what you are buying is going to be the same company after closing as it was in the days leading after closing.
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