The current business-for-sale marketplace offers a smorgasbord of acquisition opportunities for buyers. But despite the brisk pace of activity, buyers continue to make several mistakes that can handicap their ability to achieve post-sale success.
Common Small Business Buyer Mistakes in Today's Market
Barring an unforeseen crisis in the final weeks of the year, 2018 will be a banner year for the business-for-sale marketplace. A growing economy and the sheer volume of financially healthy listings are driving record numbers of prospective buyers into the market.
Although the vibrancy of the marketplace is good news for would-be small business owners, buyers continue to fall victim to oversights and snafus in the acquisition process. To get a more complete picture of buyer challenges, I solicited feedback from experts across the small business sector to identify common mistakes buyers are making in today's marketplace.
Mistake #1: Relying on Other People to Make Important Decisions
Smart buyers rely on the expertise of attorneys, brokers, appraisers and other advisors throughout the acquisition process. Frequently, these advisors are pivotal in helping prospective buyers effectively evaluate, negotiate and close deals.
But according to some experts, buyers may be relying too heavily on outside advisors. Deborah Sweeney, CEO at MyCorporation, cautions small business buyers to "do your research and rely on a diverse set of advisors ... lawyers, accountants, etc. Educate yourself and then make your own decisions. Do not let others make these decisions for you. If you are going to become an entrepreneur, you need to know how to take various inputs and create an outcome that you can live with."
Lesson for Buyers: Third-party advisors play an important role in keeping your acquisition on track. But at the end of the day, you can't outsource key decisions. Use your attorney, broker and other advisors to capture the information you need to make smart decisions.
Mistake #2: Overlooking Digital Rights and the Business' Online Reputation
Whether they hire an appraiser or handle it themselves, most buyers are doing a decent job evaluating the physical assets of an acquisition target. But buyers are less adept at evaluating acquisition targets' digital rights and online reputations.
It's a scenario that Chris Meyer, co-founder and CEO of Magilla Loans, sees all the time: "Many business owners forget to secure digital rights such as web domains, email accounts, social media accounts, and passwords. This information is critical to ensure a smooth transition. Another common mistake, usually made by folks who do not use social media, is failing to check a business's online reputation when completing the due diligence. You should check for online reviews, interactions and which websites have the business listed. This can be a strong indicator about how the business is run. A bad reputation with consumers can be a very tough thing to reverse."
Lesson for Buyers: Incorporate an evaluation of digital rights and social media reputation into the due diligence process. The online channel matters to customers and strategic partners, and the success of your ownership tenure may be determined by the condition of the company's digital presence.
Mistake #3: Failing to Properly Understand Existing Relationships
Like digital rights and online reputation, existing relationships with customers and vendors are frequently under-valued or ignored by buyers. In many cases, owners and executives have cultivated relationships with individuals who are critical to the company's success and those relationships may not continue under new ownership.
"If the buyer fails to account for the concentration of value in key customer relationships and the owner exits shortly after the transaction, the acquisition could fail to create value for the new owners," warns Kyle Seaman, senior vice president of Corporate Development at HB McClure, a mechanical contracting firm in central Pennsylvania.
A similar situation can occur with vendors, especially if the seller cut sweetheart deals to specific vendors. "Don't be surprised if your newly acquired vendor relationships go south. At our company, we keep extremely tight reins over our vendors, costs and products. But an acquisition's existing vendors may not see it that way and stick to the old pricing structure moving forward," says Trave Harmon, CEO at Triton Technologies.
Lesson for Buyers: Robust due diligence on key customer and vendor accounts is a must in today's marketplace. Misguided assumptions about customers and vendors can quickly result in declining revenue and/or disrupted supply chains after the sale.
Mistake #4: Exposing the Buyer to Personal Liability.
Most startup entrepreneurs recognize the importance of strategies that shield them from personal liability. Unfortunately, this mentally doesn't always carry over to acquirers and it can create significant legal vulnerabilities for new business owners.
Due diligence is an important first step in mitigating the risk of unknown liabilities from the previous owner. However, it's also important to insulate personal assets from successor liabilities by removing the buyer's name from legal documents associated with the new business.
Instead of attaching their personal names to the acquisition, savvy buyers are acquiring new businesses through corporate entities (e.g., C corporation, S corporation, LLC). To eliminate personal risk, the corporate entity must be created prior to closing and must appear as the acquirer in closing documents.
Lesson for Buyers: Without the right corporate structure, unknown successor liabilities can jeopardize your personal financial security. Consult an attorney before you make an offer on a small business, establish a corporate entity that insulates you from personal risk and ensure that all signed documents are in the name of that entity and not your personal name.
Mistake #5: Transferring the entire payment at the time of acquisition.
There are many reasons why it's in buyers' best interest to motivate sellers to remain engaged after the sale is complete. But in the absence of proper incentives, sellers are free to simply disappear from the scene, regardless of the promises they made during the sale process.
"One of the biggest mistake small business buyers make during the acquisition process is transferring the entire payment for the acquisition," says Bert Martinez, host of the Money For Lunch podcast. "A better strategy is to transfer a percentage so the buyer can truly understand the business, the revenue, the profits and the skeletons. The balance is kept in escrow until certain thresholds are met."
Lesson for Buyers: Work with your attorney and/or broker to negotiate specific payment thresholds based on perceived vulnerabilities. These thresholds can include things like financial benchmarks, disclosures, post-sale training and introductions to key customers or vendors. If structured properly, this type of arrangement can even result in a higher total payout to the seller if the business exceeds specified performance thresholds.
Buying a small business can be a complicated process. Without the right information and advice, it's easy to make bad decisions. But the best advice for buyers in today's market (or any market, for that matter) is simple: Leave no stone unturned and aggressively engage in due diligence to prevent unexpected surprises after the sale.