When looking to purchase an existing business, there are many things you should think about prior to and during the purchase process. However, the first question a potential buyer must ask of the seller is ‘Why are you selling the business?’
That may seem an obvious question to ask, but it is amazing to see how many buyers avoid that question altogether. Some are embarrassed to ask, some think the sellers won’t answer truthfully, and some don’t think it is an important question at all. They are, however, all mistaken.
There is no reason to be embarrassed; all sellers will be expecting that question.
Whether they answer truthfully or not, their answers will reveal considerable information and of course, it is a key factor in understanding the mind-set of the seller.
Why Do Businesses Sell?
It may well be the case that you can easily find various businesses that are up for sale, willing to sell and ready to do a deal. However, you should consider, what reasons are normally given for putting a business up for sale in the first place and why?
- Looking for a change of direction, having been doing the same thing for so many years
- Directors and company owners getting older, therefore not really having the energy to run the business as it should be run
- The business has reached a certain level and has plateaued, and is unable or unwilling to take it to the next level
- The management team have different views on how to grow the business and move it forward, for example, taking a business online or across new countries and continents
- New opportunities have suddenly appeared, which are too good to miss
There are many cases where the above explanations are the truth. But, in various other cases, the above explanations may be ‘code’ and strongly indicative of the truth and the following real answers:
- I’ve run out of ideas
- The business has grown more than is manageable
- The competition is expanding, leaving us behind
- None of the approaches we try seem to work and the business may be failing
- I think I’m better off trying something different
How Do You Determine What is Really Going on With a Business?
In general, although there are exceptions, one simply has to apply the following rules when seeking to determine why a business is for sale and why the directors or owners are potentially so keen to sell up and move on:
If the business is growing and profits are increasing, then the first set of reasons are almost certainly real, but, if the business is declining, and profits are falling, or no longer exist at all, it is reasonable to assume the second set of reasons are the reality.
If indeed it is the second set of reasons that apply, and the business is struggling, it is vital that you work hard and seek the facts in order to get to the bottom of the matter of the business in question for the following reasons:
- You need to approach the buying of such a business with much more care than you may otherwise expect
- You will have to determine exactly what problem the business is facing, so as to be sure that you have the skillset and experience to handle such problems
- In extreme cases you may need to have the courage to walk away from the deal and leave behind the option of buying the business in question
So What Should You Do?
There have been several articles written claiming that if a business is for sale, you should simply avoid it and not buy it at all, but we don’t agree. There are several good reasons for selling a business and in fact, we would apply the reverse logic.
If a good business is for sale, perhaps because the owner needs to retire for personal reasons, that may be the best opportunity for a good deal.
When looking to buy a business, always remember not to rush in to the deal. Take the time to analyse the underlying factors in order to comprehend whether this may be an opportunity to seize or to ignore.