“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.” — William Feather
One recent highlight in regarding the upcoming election is the call for the candidates to release their personal tax returns. There is, in fact, no law that obligates candidates to publicly reveal their finances. However, it does help with transparency and can equate to trustworthiness and the same can be said for sellers when buying (or selling) a business.
I’ve advised on both sides of a transactions, and can provide a basic outline for both. For now, we’ll focus mostly on the buyer.
Proper Etiquette And Due Diligence
Normally I get a call from a client when they’ve identified their target. Of course, it’d be better to receive that call a little earlier but it’s not a dealbreaker. Once you’ve figured out the type of business you’d like to purchase or acquire, you approach the entity politely and respectfully. Send correspondence by mail, and make an in-person visit.
If the owner considers entering discussions and negotiations with you, then it’s during this time when we’d ask him or her to show us the corporate tax returns so that we can conduct due diligence. This is the process we use to view proprietary documents to establish an offer price. It often comes with a confidentiality agreement, so don’t go running your mouth (or fingers) off on social media if you think you’ve hit the jackpot.
Warning Signs
Right off the bat, if he/she declines on the tax return, then it’s time to walk away. A seller not showing a tax return is a sign that something’s amiss. That means that the books are not being well-kept, or that there are some shady dealings happening.
As the buyer, you want to base your purchase price off the number on the tax return. It’s generally a lower number than what the seller wants it to be.
The fact is, though, that you should always assume the other side isn’t being totally forthcoming. I’m not saying they are actually cheating, but act as though you know they are. And that’s fine, because when we do proper due diligence, everything will be revealed.
Ignore The Market
Generally, there is no market that is especially favorable to either side of a purchase. You’re entering negotiations because you want to expand, or because you believe you can run this new business better than it had been and can make more money doing so.
You do it when you’re ready. Plain and simple.
On Thursday, we’ll look at this scenario from the seller’s perspective.
Contact Brinen & Associates if you believe you are ready to start looking at other small businesses for a possible acquisition.
