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Thursday, October 13, 2005

A random walk through the world of buying small businesses

My wife is a business broker, and the progress of her deals is a constant topic of dinner-table conversation. Frankly, her work is typically more interesting than mine; at dinners, I say "I'm a programmer", talk quickly about embedded databases as eyes roll at the sheer geekitude of it all, and turn the conversation over to her, which can yield an hour of interesting discussion. Since she's too busy to blog about her work, I am going to give it a try.

What is a business broker?

A business broker is to small businesses what a real-estate agent is to properties. In California, business brokers need real-estate licenses and work under the same brokerage model as real-estate agents. Real-estate agents can and do sell small businesses, but business brokers are generally more successful at actually moving businesses since they focus exclusively on businesses and rarely deal in property that is not attached to a business.

The skill-sets to be a good business broker include an element of accounting and finance, and solid writing and speaking ability. There is a large sales component in business broker work, so the ability to handle "cold calling" and having a thick skin are important. Good project management skills and initiative are mandatory; frequently, deals get "stuck" because someone or another isn't moving, and the ability to spot this and deal with it quickly is needed to get the deal done. Creativity is also important; small businesses often have poor, incomplete, or nonexistent books, and business brokers often help buyers to verify revenue by examining secondary sources like utility bills, laundry tags, supplier receipts, etc.

Another crucial skill is the ability to explain complex deals to people with limited English ability, since, at least in our area, many if not most business buyers and sellers are first and second-generation immigrants.

One major difference between business brokerage and real-estate is marketing methods. It is often important for business owners to be able to sell their businesses confidentially, as "public" knowledge that a business is for sale can hurt the business by driving away customers and employees. Posting a business on a multiple-listing service is sometimes an option, particularly for "asset sales" of closed or failing businesses, but is rarely an option for operating businesses. So, it is typical for ads to be posted to public boards or Internet sites using general location terms as opposed to specific addresses.

The main actors in a small business transaction obviously include the buyer and seller, but less obviously the landlord of the property, who can make or break the sale by accepting a "lease assignment" to the buyer or not (and is usually under no legal or contractual obligation to do so), various government agencies, banks handling SBA loans, and occasionally franchises. Because of this, good business brokers have to become skilled in working with landlords, dealing with bureaucracies, developing relationships with banks, etc.

Interacting with Business Brokers

As a Buyer

As a buyer, most biz brokers will ask you questions before showing you their business inventory. If you approach the business buying transaction as if you were buying a house, this may seem a bit off-putting, but remember that many of the sellers want to keep the transaction confidential - so they don't want random people walking in off the street asking "Is this store for sale!" Also, it is far from unknown for buyers to try to go behind the business broker's back to transact the sale with the seller directly - cutting the biz broker out of her commission - so the biz broker will almost always insist on some sort of confidentiality and representation agreement before giving out addresses and financial information. This has happened to my wife on three occasions, all of which involved legal action.

If you are looking to buy a business from a business broker, another thing that you should remember is that - unlike real-estate - only a very small number of potential buyers actually buy a business. So, while you always deserve good treatment, don't expect the business broker to spend vast amounts of time with you until the biz broker has determined your "seriousness" as a buyer. Serious buyers typically have at least some of the following attributes:

o Past experience managing or owning a business or at least the willingness to be an owner-operator.

o Realistic cash-flow expectations.

o Access to enough assets to buy the business, to operate it, and to satisfy the landlord that the rent can be paid even if the business loses money for awhile.

o Experience in the desired type of business.

The following are marks of unserious buyers:

o Buyers who ask for the addresses and financials of businesses before signing a confidentiality agreement. If you really want to establish unserious credentials, get angry with the biz broker when asked.

o Buyers who don't know what type of business they want.

o Inexperienced buyers who expect to successfully operate the business as an absentee owner. This sort of buyer often "chickens out" when they realize that being an absentee owner means they have to find a manager they can trust, which is very hard.

o Buyers with unrealistic cash flow expectations.

o Buyers without enough assets to handle the business.

o Buyers who are likely to be "temporary" owners, such as newly unemployed software engineers. Frequently, these sorts of buyers end up getting a job halfway through the business buying process, so experienced business brokers learn to be wary of them.

A Comment about Landlords

Many inexperienced buyers wonder why the biz broker is interested in whether they are able to actually run the business successfully. After all, as long as the money successfully changes hands at the closing table, why should the seller, much less the business broker, care if I go out of business the next day?

The reason is that either the commercial property landlord or the bank lending you money to buy the land the business is on will carefully judge your ability to pay _them_, which means figuring out your chances of successfully running the business. Also, in most commercial lease assignments, the seller is "on the lease" for several years after assigning the lease to the buyer - meaning that if the buyer can't pay the rent, the landlord will go after the seller - so the seller will also want to deal with a buyer who can successfully pay the rent.

If you've read this far, thank you. I'll post something about the "sale side" later.

Wow! Three cheers for your wife. What an incredible job. And hey - I do technical writing (as well as PR and business writing.) Geekitude is a wonderful thing! A great and thoughtful post, thank you.
Hi, I found this post on your blog through Google. I know it's several years old, but I was wondering if you (or your wife) could help me.

I'm looking to buy a business, and I'm not sure where to start looking for one. I know I should contact my local Chamber of Commerce, which I'll do. But mostly I'm interested in browsing around the Internet to see what is available. Do you have any website suggestions?
Depending on your area, Craigslist is good for individual sellers, as is your local paper. Also, if you can get in your local MLS website, look under "Business Opportunities".

Some big websites where brokers post are bizben.com or bizbuysell.com.
Thanks for the advice and suggestions! And yeah, I checked out Craigslist (just like I check out all my other needs) and was able to find some good ones. I checked out bizben.com and bizbuysell.com.
I also discovered this place called biztrader.com , which was also very helpful. It had different articles that the other two didn't have.
Another good source I would recommend to search for business opportunities is BizAg.com
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