All posts by Richard Parker

Mr. Richard Parker is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo  Corporation and has personally purchased eleven businesses. Learn more  about Richard and his materials at diomo.com (www.diomo.com)

Negotiating Your Way to a Great Deal

Mr. Richard Parker is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo  Corporation and has personally purchased eleven businesses. Learn more  about Richard and his materials at diomo.com (www.diomo.com)

When it comes to buying a business for sale, the most exciting and anxious moments can be experienced when the time arrives for you to enter into negotiations and make an offer. This part of the process completely handcuffs some individuals. There’s really no need for this to happen. Just like every other aspect to the buying process, your preparation will determine your level of success.

Keep in mind that this should be an enjoyable and educational part of buying a business. There is much to be learned during this phase. You must also realize that negotiations will evolve, and so if you approach it with an open-minded strategy instead of a “take it or leave it” philosophy, you will ultimately perform much better and produce a stronger deal.

Likewise, you should also know this is the stage when many deals come apart and never recover. Most of the time this happens because of the inability of one or both parties to truly understand what it takes to get the other side to see their point. Or, a failure to address the other party’s needs in a way that protects your specific interests at the same time.

Negotiating involves many independent personality issues. When dealing with a seller you must bear in mind that this is a very emotional time for them. They are looking to sell a business that has benefited from their hard work and sweat. It can be quite a personal adjustment for many and they do become irrational. They often feel as though they are losing a part of themselves. Be sensitive to their emotions but never at the expense of fabricating a good deal for you.

Your personality traits will come to light as well. Do your best to understand yourself. If for example, you’re not a patient individual, then you must train yourself to avoid giving in on a certain point simply because you’re tired of discussing it. You’re better off to move on to something else and come back to it with the seller.

Find Their “Pain”, Soothe It and YOU Win!

Everybody has their “hot buttons” in a deal. These are the points that, in the mind of the buyer or seller, will make or break the deal. Once you identify them and can find a way to ease their concerns, you’ll win. It works all the time. As an example, if the seller wants to be certain that they walk away from the deal with a specific amount of money in their pocket after broker commissions, paying debt, etc., then the down payment amount of the deal is clearly their “hot button”. There are two ways to determine this: put in an offer and see where and how they counter, or ask them pointedly: “What’s more important to you, the down payment amount or the purchase price.

The former method is usually more effective only because you can read into a variety of issues once you see the structure of a counter-offer. However, asking them directly is a very accurate way to measure this as well.

Getting back to our example, if it’s the down payment then it’s your turn to leverage the deal. Get as close as you can to their figure but, in exchange, get reduced interest rates on the balance of sale, extend the first payment to 60, 90 or 180 days after closing, negotiate the first year without interest, include the ability to payoff the note at anytime without penalty or to make periodic lump-sum payments towards the principal. There are tons that you can do once you know their pain.

An associate of mine who is an excellent negotiator always says that you should make, and get, concessions. In other words, whenever you agree to something, get something in return. It always works.

Preparation is The Key To Successful Negotiating

The average purchase agreement has over fifty individual clauses to be negotiated. There is far more involved than simply agreeing upon the price, down payment and terms. You will have to deal with the specific assets to be included, non-compete clauses, lease assignments, inspection period, adjustments, employee issues, liabilities, and on and on it goes.

Think about the specific point to be negotiated, what your position is and what your rebuttal will be to the seller’s comments. Play the “what if” game prior to sitting down to the table.

Play “what if”

Layout the various points, giving consideration to what the short-term and long-term impact will be of your decision. As an example, if you negotiate finance terms with the seller with one lump-sum payment down the road (i.e. a “balloon payment”) you must also consider that the business MUST be able to make that payment at that time. What if there’s a cash crunch? What if you’d like to use the funds for something else at that time? What if…. you want to balance that with a straight-line finance program so that you’ll know what your obligations are every month and you can budget accordingly. Every situation is different, but again, consider the impact for today and down the road.

Structuring The Offer – and Remember, It’s YOUR Offer!

The offer will, in most cases, begin the ball rolling on a potential acquisition. At times, this is the most effective way to gain insight into the guts of the business. You may also be dismayed to learn that you may in fact have to make an offer without all of the data that you would like to have. As an example, you may only gain access to the true financials after an accepted offer has been put forth.

This is fine; no need to panic. You may be asking: “How can I formulate an offer without all of the information?” A good question in theory, but this is not always reality. Consider the fact that sellers may be exposed to a plethora of buyers and, not knowing which ones are serious, they may choose to hold back certain information.

The offer you present is YOUR offer. You should be comfortable tabling any terms that YOU are comfortable with. Whatever the seller is “asking” is simply a guideline. Remember, it’s an “asking price” not a purchase price. On the other hand, don’t be ridiculous. Table something that forms the basis of a future meaningful conversation. Your offer is, to a certain extent, a tool to prod the seller into playing his or her hand. To get them to demonstrate their pain; the areas that are fundamental to the deal – from their perspective.

There’s nothing wrong if they are insulted. They may or may not be, and you can always refine your offer as the case may be. Additionally, a buyer’s value of the business will certainly differ from a seller. That’s where negotiation comes into play. There are no hard rules for what the terms of your offer should be. Each situation is different. While it’s not advisable to make unlimited offers expecting one to catch on, you MUST make offers. Don’t over-engineer each potential acquisition. Once a business is of interest, you’ve done your homework, and you determine that you would, under the right conditions, like to buy the business, then get your offer in.

There are standard offer-to-purchase agreements available to use. Every business broker will have one and so too will most attorneys. The one thing that you want to be certain of is to retain the ability to rescind your offer at your “sole and absolute discretion” if you determine that the business is not what it was represented to be. However, you cannot have an unlimited time frame to do so after acceptance of the offer.

Generally, once an offer is accepted, you will have a certain number of days to perform the financial due diligence (often referred to as the “Inspection Period”). Allow yourself enough time to conduct this. The idea is that you must be able to retract the offer for any reason whatsoever right up to the last day of this due diligence period.

There are some offer contracts that stipulate that you cannot retract your offer and get a refund of your deposit if the financials are within 5% of what has been presented. This is a ridiculous clause. Never agree to it. You must be able to get any monies returned, for any reason, through the due diligence phase. Conversely, if you sign off after the due diligence and then decide thereafter you do not wish to go through with the purchase, the seller is, in all fairness, entitled to your deposit.

Lawyers and Accountants and Others – Everyone has an Opinion

Let’s understand one thing: lawyers cannot negotiate your deal for you. They can certainly help to ensure your protection from potential liabilities but when it comes to negotiating the actual business deal, they are definitely NOT the ones to act on your behalf. I am certain that any attorney reading this column will disagree. That’s OK. However, I have yet to meet more than a handful of attorneys who demonstrated any proficiency whatsoever in the actual art of negotiating the deal points of a small business acquisition. Most have never even bought a business themselves so even though they may have been involved in deals, it’s not the same perspective. You’ll want to hear their point, but their input should be reserved for the areas in which they are experts: the legal aspects of the deal.

As for accountants, they too have their role: the input from a financial point of view and tax consequences. Leverage their expertise as well, but do not let them influence the actual business deal.

The Last Word

Great negotiators are not born; they evolve. Your effectiveness will increase over time. Be creative. Be reasonable. Keep the end result of putting a good deal together in your mind. Don’t lose patience. Don’t be confrontational. If there is tough news to deliver, let your broker do it. After all, you will need the seller to provide you with training.

Learn from each experience. Understand that there will be set backs; work though each. You cannot win every point. It’s a give-and-take. Prioritize. Prepare.
Win/win is not realistic. The objective is clear: you win, the seller is reasonably happy!

 

Why Some “Ordinary” Businesses Sell For Massive Premiums

Mr. Richard Parker is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo  Corporation and has personally purchased eleven businesses. Learn more  about Richard and his materials at diomo.com (www.diomo.com)

A study was done recently to determine how business valuations have evolved over the years, and it came as no surprise to me that, in the past twenty years, small businesses have typically sold for around two times the seller’s discretionary income total. The same holds true today, yet a certain segment of the market commands an enormous multiple regardless of the size of the business.

I’ve always said that there are certain fundamentals that any business can have which will increase its value when the time comes to sell. These include:

  • § Clean books and records
  • § A reasonable selling price
  • § Good terms, including seller financing
  • § An easy transition period to a new owner
  • § Non-specialized skills required to run the business

These are all things that any seller can work towards implementing so that they ultimately get a higher price. However, there are certain components that some businesses have that can dramatically increase the multiple to five, seven and even ten times as opposed to the general one to three-times valuation.

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Acquisitions–Industry Statistics

Mr. Richard Parker is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo  Corporation and has personally purchased eleven businesses. Learn more  about Richard and his materials at diomo.com (www.diomo.com)

The acquisition of business has some very interesting, yet dismal, statistics. When I have mentioned these numbers to people outside this industry, they are stunned.

  • § 90% of all of the people who begin the search to buy a business never complete a transaction.
  • § Only 20% of all of the businesses listed for sale ever sell.
  • § Business brokers are only involved in 10% of all deals.
  • § 50% of all transactions agreed to between the buyer and seller fall apart during the due diligence stage and never close.

Why is it so important for you to know this? Let’s look at each one individually:

Why 90% Never Buy

Interestingly enough, a recent poll indicated that 50% of all Americans dream of owning a business. One would think that, with such high numbers, far more people would be successful. After all, a 90% failure rate is abysmal. There are several factors why this happens.

Reason # 1: Most people have never bought a business before. They enter this process completely unprepared. Even if they’ve had a successful career to this point, for most, nothing they’ve ever done adequately prepares them for what’s involved in this process. It’s even new to those who have been involved in corporate acquisitions, because now it’s their money at stake. Clearly, a lack of education is the number-one reason for failure.

Today’s business buyer will face an onslaught of life-altering questions, situations, and decisions during the various stages of the buying process. Lacking the critical knowledge to make these decisions, they simply choose to abort the project rather than seek out materials to assist them. It’s crazy, but most people will spend hours online trying to save a few bucks when booking a vacation, but will not invest any time learning how to buy the right business. To avoid this trap, educate yourself, before you start looking, and certainly before you invest your money. Continue reading

The First Steps After You Buy a Business

Mr. Richard Parker is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo  Corporation and has personally purchased eleven businesses. Learn more  about Richard and his materials at diomo.com (www.diomo.com)

It’s One Thing to Buy A Business, Now You Have To Run It!

The first 90 days after you close on a business purchase will prove to be the most critical time in your new venture’s short-term future. There are several key factors that, if done right, will set the foundations for a successful acquisition. It is very important for you to lay out your plan for post-closing before you take over so as to ensure the smoothest transition possible.

Don’t Change Anything…. Yet!

Unless you have an intimate knowledge of the business and the industry, much, if not everything, will be new to you. While it is normal for you to jump in full-steam ahead and implement many changes that you’ve thought about, the best thing that you can do is nothing, at least at the very beginning. That’s right, no major changes at all, at least for now. Most businesses experience a downturn in the first three to six months after a new owner takes over. Don’t panic; it can happen. However, if you avoid any substantial changes, things should rollover effectively.

Since so much is new, it would be impossible for you to set forth any policies or procedures that make sense. What you want to do is to first learn the business: who are the customers, what do they want and expect, understand the employees and determine their role and contribution to the business. Avoid drastic changes. The old saying – you’ve got to learn before you can earn – is most applicable in this situation.

Get in, get comfortable, get smart and get going.

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Buying an Internet or Online Business

Mr. Richard Parker is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo  Corporation and has personally purchased eleven businesses. Learn more  about Richard and his materials at diomo.com (www.diomo.com)

Personally, I love the online business model. My company now does business in over 70 countries. The business has no inventory, no receivables and a handful of employees; we outsource nearly every key function except customer service and support. I have absolutely no technical expertise. The entire business is automated and it’s incredibly profitable. An ideal business model, isn’t it?

Perhaps the best part about an online venture is that you can get into one quickly and inexpensively whether you buy an existing one or start one from scratch. However, multiples for successful online ventures are far greater than most bricks-and-mortar businesses because of many of the factors you’ll read about here. Additionally, because an online business can be run from anywhere at anytime, it’s an ideal business to have if you’re not yet ready to take the full plunge into your own business or you like to travel, work remotely orcasually (it’s 3:00 pm now and I’m in Australia with my family on vacation, looking out at the spectacular Sydney Harbor and famous Opera House… and, even better, people are buying our program right now. Gotta love it!).

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The Best Gift You Can Ever Buy For Yourself: A Business of Your Own!

Mr. Richard Parker is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo Corporation and has personally purchased eleven businesses. Learn more about Richard and his materials at diomo.com (www.diomo.com)

It’s amazing how we see an immediate increase in our business right after the December holidays and the day after every long weekend. The former may be many “New Year’s Resolutioners” as I call them, and the latter is because most people dread the thought of going back to their job after an extended weekend. So, let’s pretend it’s the holidays right now, and sing to yourself: “All I Want for Christmas is a business of my own…”

If you have any desire to be in business for yourself, then now’s the time to make your move! In fact, there has never been a better time to take that step. So this year, buy yourself the greatest gift of all – a business of your own!

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Acquisitions-small companies: Industry Statistics

Mr. Richard Parker: is the author of the “How To Buy A Good Business At A Great Price series which is sold in over 80 countries. He is the founder of Diomo Corporation and has personally purchased eleven businesses. Learn more about Richard and his materials at diomo.com (www.diomo.com)

The industry of business buying has some very interesting, yet dismal, statistics. When I have mentioned these numbers to people outside this industry, they are stunned.

The 90% of all of the people who begin the search to buy a business never complete a transaction.

  • Only 20% of all of the businesses listed for sale ever sell.
  • Business brokers are only involved in 10% of all deals.
  • 50% of all transactions agreed to betwen the buyer and seller fall apart during the due diligence stage and never close.

Why is it so important for you to know this? Let’s look at each one individually:

Why 90% Never Buy

Interestingly enough, a recent poll indicated that 50% of all Americans dream of owning a business. One would think that, with such high numbers, far more people would be successful. After all, a 90% failure rate is abysmal. There are several factors why this happens.

Continue reading

Forget The Asking Price of A Business For Sale!!

Mr. Richard Parker: is the author of the “How To Buy A Good Business At A Great Price series which is sold in over 80 countries. He is the founder of Diomo Corporation and has personally purchased eleven businesses. Learn more about Richard and his materials at diomo.com (www.diomo.com)

There’s a popular saying regarding the asking price of any business for sale: “a business is overpriced the day it’s listed for sale.” Experience shows there’s more truth than fiction to this statement.

The asking price has nothing to do with the purchase price. Good negotiating skills and creative deal-making are what gets a deal done! So, when looking at listings, don’t get discouraged by what they’re asking. After all, if you do this right, that’s not what you’re going to be paying… right?

It’s easy to understand the seller’s desire to price a business higher than what the market will bear.

Most Sellers Have an Emotional Attachment to Their Business

Sellers generally do not receive any professional input when establishing their selling price. Every seller wants to get the most money in his or her pocket from the sale.

The challenge for a potential buyer is to combat these issues with factual information in order to acquire the business and achieve the greatest possible return.

Both buyers and sellers must realize that business valuations are very subjective. It’s an art, not a science. Both parties must also realize that appropriate formulas for that particular size and type business must be applied. Of equal importance is that both parties must acknowledge that a business is only worth what a buyer is willing to pay and what a seller is willing to accept.

All of this sounds pretty basic and generic, doesn’t it? The difficulty, of course, is to come to a common dollar figure. I’ve always felt that every seller’s value is too high and every buyer’s calculation is too low, and somewhere in the middle lays an accurate valuation.

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Financing The Deal

Mr. Richard Parker: is the author of the “How To Buy A Good Business At A Great Price” series which is sold in over 80 countries. He is the founder of Diomo Corporation and has personally purchased eleven businesses. Learn more about Richard and his materials at diomo.com (www.diomo.com)

If you’re thinking about buying a business, you’ll be pleased to learn that financing the purchase is generally quite easy. In fact, it’s far simpler to get the money you need to buy an existing business than it is for a start-up. Most people simply don’t realize how to do it. Don’t get the wrong idea: you’re not going to buy a business, at least a good one, with no money down; that only happens in the infomercials.

Many prospective business buyers mistakenly believe that traditional lenders will welcome them with open arms when they present them with a business they’re looking to acquire. Unfortunately, nothing can be further from the truth. Especially now, banks are simply not lending money for small business purchases. It still amazes me how the banks have got most people fooled. They run these great ad campaigns promoting themselves as “business/client-friendly” but try to get them to lend you money to buy a business. It won’t happen.

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HOW TO VALUE A SMALL BUSINESS

Richard Parker: is the author of the How To Buy A Good Business At A Great Price© series which is sold in over 80 countries. He is the founder of Diomo Corporation and has personally purchased eleven businesses. Learn more about Richard and his materials at diomo.com (www.diomo.com)

Accurately valuing a small business is often the most challenging part of the process for prospective business buyers. However, it doesn’t have to be an overwhelming or difficult undertaking. Above all, you should realize that valuation is an art, not a science. As a buyer, always keep in mind that the “Asking Price” is NOT the purchase price. Quite often it does not even remotely represent what the business is truly worth.

Naturally, a buyer’s valuation is usually quite different from what the seller believes their business is worth.  Sellers are emotionally attached to their businesses. They usually factor their years of hard work into their calculation. Unfortunately, this has no business whatsoever being in the equation.

The challenge for you, the buyer, is to formulate a valuation that is accurate, and will prove to provide you with an acceptable return on your investment.

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