How to pick the right business to buy part 2

Continued from last week’s Part 1 of this article where we learned about timing and where to look for a business, here is how to contact business owners to buy their company and how to use business brokers:

Contacting Business Owners Directly
The most effective way of reaching the hidden market is by going directly to the source and contacting business owners directly. This method allows you to target businesses that meet your criteria and circumvent the intermediaries and competition. However, to be successful, this is a process that requires both professionalism and organization. Understand that owners of successful businesses may be approached frequently by by prospective purchasers. Unfortunately, a number of prospective purchasers may be poorly prepared or unqualified tire kickers, which can make the business owner very cynical of interested buyers. Consequently, you need to be well prepared and capable of convincing the business owner that you are a prospect and not a suspect – that you are credible and capable of buying the owners business. You must first understand that it can take time to build a relationship of trust, so approach business owners in a series of contacts.

Start by sending a short letter to the business owner expressing your interest and suggesting that you would like to follow up within the next few days to discuss your interest. Explain why you are interested in the owners particular business, for example you have researched the industry and find it appealing; you have a specific interest or passion for that type of business; or you have patronized the business for several years and are impressed by the way it is operated and you are interested to know if the owner has considered selling it.

Follow up your letter with a call to the business owner and ask for the opportunity to have a meeting. Try to make the call on a day of the week, or at a time of day, when the business typically would not be busy. If the owner agrees to a meeting try to keep it as short as possible. Your primary goal is to establish rapport and gain a basic understanding of the business owners intentions regarding the business. Do not force the owner in to giving you a decision about whether or not the owner wishes to sell the business at this time. If you do force the owner in to a decision, the answer almost certainly is going to be no. Neither is it appropriate to ask about the selling price. In fact, it is not good negotiating strategy to ask for the owners selling price at any time as in most cases it will be excessively high. If the owners response is “everything is for sale, at a price” the probability is that you will never do a deal with that person, certainly not one that is favourable.

After the meeting, regardless of the outcome, it is appropriate to send a follow up letter thanking the owner for the time and confirming your interest (assuming, of course, that you are still interested). If there is interest on the part of the owner, you can arrange to meet again to initiate further discussion. Maintain regular contact even if the owner is uninterested at this time as you never know when the owner may consider reselling. If this happens, you will want to be the first to know. The key is to appear interested but not over anxious as this could affect the ultimate selling price.

Using Business Brokers
There are advantages and disadvantages to using business brokers. The first thing to keep in mind is that business brokers are primarily salespeople and they are usually paid on a commission basis if successful in selling the business. As sellers pay their commission, brokers are motivated to sell the business for the highest price and the best terms possible for their client. Consequently, do not expect a broker to volunteer negative information about the business. On the other hand, you know that you have a motivated seller if the business is listed for sale with a broker.

The key is to search out the successful business brokers and ignore the rest. Some brokers specialize in certain types and size of businesses, so you should seek out a broker familiar with the type of business you are interested in acquiring. Investigate a brokers reputation in the market place before contact. The successful brokers know that the secret to success is to focus on solid profitable businesses whereas the unsuccessful brokers are not so selective in the businesses they represent. The top brokers know that although it might take greater effort initially to obtain good business listings, it takes less effort to sell them. Consequently, a good broker may have several potential buyers who might be interested in a new listing, so you need to get your name on the brokers priority buyers list. Even then, your chances of finding a business through a business broker are probably less than 50%. Although approximately 90% of homes are sold through realtors, less than 20% of businesses are sold through business brokers. Experienced brokers can also be helpful and creative in structuring a deal. They may be in a position to help you with some financing alternatives if they have established credibility with lenders based on past dealings.

Some business brokers will work on a fixed fee or hourly basis on behalf of the purchaser. This can work well as you only pay for the specific services you require. It is not adviseable, however, to enter in to an exclusive arrangement as this limits your ability to search for a business on your own or to work with other agents. The other benefit is that a broker can represent you annonymously, which could be very important if you are still working and do not want your employer to know that you are seeking a business, particularly if it is in the same line of business.