Blog

Caveat Emptor and Caveat Venditor: What to look for when buying and selling small businesses

 

In any economy, businesses are always coming and going through the creative destruction that is capitalism. However, as you walk down the street in Alaska’s larger towns, you may notice that  favorite or long-time shops are either going out of business or trading hands more so than usual.

Why does turnover seem greater now particularly among established business?

The first reason won’t surprise anyone: it’s harder to survive now than it was five years ago because the state’s economy continues to be in recession and larger businesses are looking for smaller business to gobble up and add value. The second reason is the Silver Wave; the aging and retiring of Alaska’s Baby Boomer workforce. While Alaska remains one of the youngest states based on median age the cohort that moved here during the Pipeline construction boom established many businesses which have constituted the backbone of our small business economy, particularly in the professional and business services and retail trade sectors.  

So, what should you be looking for if you’re looking to sell or buy one of these established small businesses either from the perspective of a sole owner, a partner, or larger business? I’ve watched several peers and mentors go through this process over the last couple of years and here are some of their biggest takeaways. 

For the Seller 

  • Know what you’re selling 

Yes, you’re trying to sell a business, but have you created a great business or a great job? Many small businesses are a great job for the owner, but that doesn’t make them a saleable great business. A great business is an entity that can survive under appropriate leadership without the owner and has the customers, culture, values, employees and financial resources to keep moving forward. Without those elements, you’ve built yourself a great job and the value might be what you’ve taken home over the years. 

  • What’s your goal? 

Seller goals can include monetizing the business value, ensuring that your creation continues forward as an independent entity, or ensuring that your business and your employees continue to have a place as part of a larger entity if you can’t find the right independent buyer. It’s key that you understand your true goal, including the emotional implications of achieving it, because your satisfaction and success of the transition depend on it. 

  • Timeline 

Woe be unto the owner who waits too long to start the sales and transition processes. Finding the right buyer and preparing the firm for a sale takes substantial time; you ideally want to begin thinking about your transition or sale five to ten years before it happens, especially if your goal is for long-term firm survival. 

  • Know your buyer 

Why is this buyer interested in your business? If you’re interested in firm survival, do their motivations match your values and do you believe they have the right stuff for the business to thrive? 

  • Plan for the financial and emotional effects 

You’ve built this business from the ground up and selling will be one of life’s major milestones. Do you know the financial implications? Have you taken the time to understand what the next step in your life might be? Do you want or need to stay involved in the business and does the buyer want you there? 

For the Buyer 

  • What are you buying? 

What are you really buying with this business? If you’re buying a company that manufactures a physical product then it’s relatively easy to see the equipment, the product, and the production processes. If you’re buying a retail shop then you can see the inventory, the books, and the traffic flow. How much of that traffic is because of the owner’s relationships or specific employees? (Yes, frontline staff make a huge difference.) If you’re buying a professional services firm you’re essentially buying the future value of the staff members’ efforts and the firm’s reputation. Will those individuals and clients stay? 

  • What is the company worth? 

Preferably the buyer and the seller can agree on a valuation method such as asset-based or earnings based valuations, but do not be surprised if your value of the business and the owner’s business are different. A good third-party appraiser can help both parties arrive at an independent number and then the parties can negotiate up or down from that point. An uncomfortable spot for a buyer is when a seller has a value in their head attached to a financial or emotional need that is unrelated to the underlying value of the business. If you’re dealing with a selling founder be prepared for this issue. 

  • Deep due diligence 

Imagine buying a company and finding out that the owner drained the bank account in the weeks leading up to the sale, gave themselves a “service contract” to the company for 12-months following the sale, that the check book really hadn’t been balanced in years and the company has less money on hand then expected, or that the company was behind in paying taxes. These are all real horror stories from the Alaska-business community that I’ve encountered over the last several years. It is incumbent on you the buyer to “Trust, but Verify” statements made about the condition of the business. You should treat the transaction like you’re buying the company in “as is” condition. 

  • Prior owner involvement 

How much involvement do you want or need from the prior owner? How will you compensate the owner, will you be able to make changes that you see as necessary and will current employees try to end-run around you to the prior owner? These are key questions to consider before including or excluding the prior owner. A certain amount of transition time or apprenticeship can be very helpful in transferring skills and relationships, but it comes with the potential for conflict when the two parties disagree on direction. 

  • People, culture, values 

Strong leaders recognize that the companies’ successes and failures rest on their people, their culture, and their values. It is not uncommon for purchased companies to see high turnover rates when new management arrives. A certain amount of turnover is to be expected particularly if the prior owner has allowed dead wood to accumulate. However, turnover amongst the best employees is particularly destructive. As important as understanding the monetary value of the company is understanding the culture, strengths, weaknesses and values of the key players. 

Jonathan’s Takeaway: Buying and selling small businesses is very much like a courtship and strong due diligence and soul searching is necessary for all parties to be successful. 

 


Jonathan King is the founder of Halcyon Consulting, an Anchorage firm dedicated to helping clients reach their goals threw accountability, integrity, and personal growth. Jonathan has 21 years of social science consulting experience including 14 years in Alaska. Suggested blog topics, constructive feedback, and comments are desired at askjonathan@apcm.net. 

Share This