Continued from Considerations When Purchasing a San Diego Business, Part One.
The Valuation: Add your own critical assessment to the appraiser’s valuation by personally reviewing the company’s records. For small businesses, the valuation can be done without the assistance of an appraiser if necessary. The process of conducting a thorough valuation will be discussed in a follow up article. Either way, think about the intangibles. Will there be a future market for the goods or services provided? Will the company maintain the same goodwill with existing customers that the current ownership enjoys? Is there a likelihood that competitors will open up in the same geographic area? Is there a potential for a shock to costs such as a shortage of a key ingredient or an anticipated new law that will increase licensing fees and/or taxes? The fact that a business enjoys a positive revenue stream today doesn’t guarantee a future revenue stream.
Compare Other Options: It is common for prospective purchasers to fall in love with a particular business (much like first time home buyers). Recognize that the temptation is there, and look for other options, or if you are working with a broker ask that they provide several options. You may ultimately decide to go with the first business, but at least you have done so after comparing its value with other companies. Where possible, try and perform your own valuation before paying a professional appraiser. Narrow the field first, and then pay a professional to be sure you have chosen wisely. In addition, there’s no reason not to consider starting a brand new business if you have the expertise in a particular area. Put a lot of time and thought into your initial decision before committing your time and resources to a new venture.
Know the business: It’s a good idea to know something about the business you are investing in. If you have been in the restaurant business for twenty years, buying a manufacturing business may not be the best choice. Consider you personal expertise.
Escrow: Purchasers are often tempted to bypass escrow believing it an unnecessary complication. This is not a good idea. Escrow protects both the seller and the buyer. Sellers are reassured that deposits and purchase funds have cleared before closing. Buyers retain the ability to take deposits back upon discovering deficiencies in the seller’s representations during the due diligence period. Escrow also performs a UCC search to ensure that the seller doesn’t have other liens or encumbrances against the assets of the business, and that a “Notice to Creditors of Bulk Sale” is published putting other creditors on notice of the transaction so that they can file claims they may have against the business prior to closing.
Deal Killers: While it may seem counterproductive for this attorney to call lawyers potential “deal killers”, it is in fact a common occurrence. However, lawyers are a necessary part of the contract negotiation. Sellers will almost always have a good business lawyer on their side negotiating the best possible deal. Buyers should do the same. To avoid problems, prospective purchasers should work closely with an attorney they feel comfortable with, and clearly define their objectives. Clearly defined objectives let the attorney know where the client wants the line drawn, and facilitates the decision making process when the attorney has concern about a particular contract clause. Your attorney should understand the art of the deal and relative bargaining power. If the seller has all the bargaining power, it’s a deal killer to insist on every conceivable contract advantage. A reasoned and tempered approach works best.