Buying and selling a business: Part II

Doing your homework.

Jim Huston

Published February 22, 2010

www.lawnandlandscape.com/lawn-landscape-0210-jim-huston-ego-friendly.aspx

Just today I talked with two clients. One was in the process of buying a company and one was in the process of selling his company. Both companies are run very well with great teams in place. I called some clients for the selling company and found some very interested potential buyers. The company exploring an acquisition is going to meet with the prospective seller, do his homework and get back with me. Now is the time for both owners to do their “due diligence” – their homework.

Do Your Homework
Due diligence is a term with which you should familiarize yourself. Basically, it’s the legal term that means do your homework. Buying, selling or merging with a business isn’t just a numbers game. Many of the big consolidators have tried to turn this process into a Monopoly game of sorts. In some cases, I’ve seen heavy-handed tactics used, and that’s one of the reasons for their failure. It was a shotgun wedding of sorts.

There’s a psychology involved with mergers, acquisition and divestiture (MAD) transactions. (Maybe that’s why it’s often referred to as going mad.) But by psychology, I don’t mean you’re trying to psych out the other party. Rather, there’s a psychological process you need to understand, especially from the seller’s perspective, to be successful.

If friends or family are involved, you particularly want them all to do their homework, and to look out for their best interests. Encourage participants to obtain their own counsel or accountant to independently verify the numbers and the process. Go the extra mile to protect the relationships of all concerned.

Too often I hear “friends” encourage other business associates to violate or ignore good business practices because they’re “friends.” This often takes the form of borrowing or lending money without any written agreement about paying it back. My position is that, if you’re truly friends, you want to have everything above board and in writing to protect the relationship.

I’m not going to discuss how you should structure the deal or value the assets. That’s between you and your attorney and CPA – the team that we discussed in my last article. The buyer might even want to carry a life insurance policy on the seller, with the buyer named as beneficiary. You should also consider how you’re going to pay the seller. Here are some options worth considering:
  • After the sale, pay the seller a consulting fee for work done, or a salary as an employee for work they do.
  • Pay the seller for a non-compete agreement.
  • Pay the seller a signing bonus. This can sometimes be an incentive to close the deal.


Going Mad
One of my main goals in helping a client put together some sort of deal is that the deal has legs, and that no one suffers from buyer’s or seller’s remorse. The more we pay attention to certain key psychological factors in the due diligence phase of the process, the more successful it usually is.

Someone who wants to buy a business is motivated for many reasons. They want to make a career change, gain market share, assets or staff, or eliminate their competition.

And someone who wants to sell a business is also motivated for many reasons. They want to retire, make a career change, eliminate the headaches of ownership or partner with a larger, better-financed team.

Reasons for merging with another company vary. They can even be a combination of the reasons for buying and selling.

Conclusion
And you thought that you were out of school and didn’t have to do your homework anymore. As every entrepreneur soon learns, the homework never stops. Learning is a constant improvement process. Learn the acquisition process and it can serve you well. Next time we’ll get into the nitty-gritty process of how to use the gross profit margin (GPM) evaluation model.

To view the Web Extra "EGO-FRIENDLY" click here.

 

This article was adapted from James Huston’s books “A Critical Analysis of the MORS Estimating System” and “How to Price Landscape and Irrigation Projects.” For a free audiobook version (plus shipping) of “MORS,” visit www.jrhuston.biz.
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