"It's amazing how, regardless of the level of sophistication, experience and business acumen of a prospective business buyer, the acquisition process always seems "easy" to those who have never experienced it."
The above is from Richard Parker, one of America's foremost experts on business buying. He is the author of, "How to Buy a Good Business at a Great Price" (Diomo, 2009), which is, in my opinion, as good a book on business buying as you will ever read (http://www.diomo.com?m_a=1355). Richard has also written many industry-specific buying guides and writes a blog on business buying for BizQuest.com (www.bizquest.com) or by RSS at http://feeds.feedburner.com/bizquest.
Richard wrote the above to me during an email exchange we had about business buyers (in general). Too many of the buyers Richard describes think buying a business is like buying a house. While there are similarities there are crucial differences in many important areas, three of which are described below.
Search
Finding a house to buy is easy. Ninety-nine percent of those for sale are available via the Internet whether or not you have a real estate agent. You can filter, compare and contrast all from the comfort of your home.
Buying a business is more like finding a job. First, most of the good businesses, like good jobs, are never advertised. In fact, the International Business Brokers Association and other industry groups state that business brokers sell only 20% of the businesses that sell (follow some of the discussions on LinkedIn and other sites and you'll soon realize this is a frustrating issue for many brokers).
Confidentiality is a huge reason. House sellers want the world to know their house is for sale. Business owners' fears that employees, customers and vendors will find out the company is for sale and leave or demand a change in terms. This and other reasons mean that a wise business buyer can't just peruse the Internet like they would do if buying a house. They must access the hidden market.
Deal and Finance
Buying a house means the buyer gets pre-qualified by a lender and can pretty much be assured that if the price of the house meets their downpayment and borrowing capacity restraints they can do the deal. There are usually many comparable sales to keep prices in-line with reality.
While businesses and buyers may say they are pre-qualified for financing it has a completely different meaning. Yes, a business may get a lender to say they will finance up to a certain amount but the big if is the quality and capacity of the buyer. Similarly, a buyer may be told by a bank they will qualify for a certain loan amount based on their downpayment but the big if is the collateral and cash flow of the business. Finally, comparable business sale information has never been as comprehensive although it was still important. However, there is little to no comparable sales information for deals since the Great Recession so using historical sales as a benchmark has lost almost all of its validity.
Inspection & Negotiation
Negotiation with the sale of a house is almost exclusively on price with maybe a little bit on things that need fixing per the inspection. It's a given that the seller will be cashed out. Not so when buying a business. The chances are high there will be seller financing, even if a bank is involved. In fact, there's a good chance the bank will insist the seller have some "skin in the game."
So negotiations are about price and terms with conditions thrown in for good measure. Conditions may include the seller's transition time, his or her health benefits, what happens if a key customer leaves, employment agreements for management and more. Once price is agreed to the real fun starts (whereas in home-buying, price is everything).
Home inspections have become a commodity. Due diligence for an acquisition is part science and part art. A buyer is always making a leap of faith and wants to be sure of what they are getting. They have to ask the right questions and get the right answers without getting bogged down in minutia (for example, as pointed out to one client, you don't need to know what every employee does every quarter hour of the day; they have tasks to do and the firm's profitability tells you those tasks are getting done).
Every business has warts and it's what happens when the warts are discovered that makes or breaks a deal. If red flags are disclosed early the buyer is a lot more confident about the deal than if those blemishes are kept under cover and are found during due diligence (buyers don't like to be surprised in due diligence they want to prove what they've been told).
Conclusion
Richard Parker is right. It is not easy to find and buy a business. The above shows some of the reasons why. However, one of the more complicating factors is not mentioned above and that is emotion. A seller may be selling their "baby." A buyer is committing to millions of dollars that includes draining investment accounts, signing over their home and personally guaranteeing loans, leases and vendor accounts. Even if the process was easy the emotion would still be a complicating factor.
