If you’re looking to buy something, what do you naturally do? Well, in the “old days,” you’d look in The Classifieds section of the newspaper. Today, there are any number of ways to find something you’re looking to buy…and most people start with their favorite search engine or online retailer.
But here’s the quandary: in a recent blog, I gave you eight reasons to not buy a business that was “for sale." So, if you’re not looking to acquire a business that’s “for sale,” what are you looking for? Better than “for sale,” you’re looking for somebody who has motivations. They have a problem they need to solve. There’s something that’s not right with their business that needs to be fixed, but they haven’t thought about selling it as an approach to resolving the issue.
Their motivation may be that they’re completely distressed and can’t make the payroll at the end of the month. They might not be getting what they wanted out of the business, or they’re not enjoying life enough. They could be ill, or their relatives are ill, and they want to spend more time with them and less time in the office.
Whatever it is, they are motivated. You need to identify the motivation first, then look at the business deal from that angle. It’s about really listening and asking the right questions, as they will probably say everything is wonderful and they just need money. Don’t take that at face value; keep digging until you get to the real issue.
If you are looking to buy a business that is seeking investment, you should ask why it is looking for capital. Perhaps you can meet the motivations without cash. Let me illustrate this with an example I worked on a few years ago. I found a training business based in the UK, but with foreign owners.
1. The company was profitable, with revenues of £3.5 million.
2. On the downside, the accounts were in shambles, and they had not been accounting for sales tax properly.
3. The owners had also lent the company over £100,000 to support cash flow, but it was periodically asking for more, putting pressure on their domestic businesses’ cash flow.
4. A major supplier was threatening to stop deliveries because of non-payment and a strained relationship with the management.
They wanted someone to pay off their loan and give them some cash for the business. Now, that may have been what they were saying, but it was not what they needed.
By listening to them, I realized they just wanted this thing off their plate and were at a loss as to how to achieve this without feeling as if they were giving the business away. (Who wants to part with the dusty painting in the attic only to find out it was a Picasso?!) I was able to take a controlling stake (60% in this case), resolve the problems with the supplier, sort out the cash-flow issue—which was all down to a bad deal with their credit card processor—and sort out their accounts so that they were tax compliant. This is what they needed: a local partner and no more headaches from their overseas venture.
It is far more important to focus your energies on an in-depth understanding of motivations than on the asking price.
Forget About Price—It’s All About Structure
People get so bogged down about price that they forget that they can build a structure that will enable them to buy the business without using any capital and without borrowing any money. If you can de-risk at the beginning, then effectively, it’s all upside. The best way to protect your wealth and protect yourself is to cover your downside. If you always do deals with no downside, you can never really get stuck. The only costs are the opportunity costs. You waste a bit of time, and that’s pretty much it. I tell my Harbour Club members that if you buy a business for $1, you can eBay the doormat, and there’s your profit! It’s all upside from here.
Don’t worry so much about the price: focus on the structure. A great example of this comes from Jim, one of our Harbour Club delegates. He had met business owners in the past and had talked to some of them about buying them. However, he was stuck in the traditional kind of procurement process approach—in other words, you ask them how much they want for their business and, whatever figure they say, you try to haggle them down. They say they want $1.2 million, you say $600,000, and then you argue through negotiations. You end up either annoying them and not getting the business at all or getting the business at a bit of a discount but having to come up with all the money upfront to buy it.
Focus 2: Strategic Acquisitions
A disarming way of approaching these conversations is to agree with people. Yes, actually agree with them. It’s the old ale Carnegie, How to Win Friends and influence people, method. Even when people say something that you don’t like or agree with, you start by agreeing with them and then work your way back to how you get to where you want to be.
In a future blog, I will share more of Jim’s story in a case study and show you how he employed several of the acquisition strategies we’ve talked about thus far (and that we go into great detail at the Harbour Club) to successfully close a wonderful business deal. But before then, I want to share one more quick, seemingly simple, yet frequently bypassed technique: establishing genuine rapport with the seller. I’ve got some great tips to share
beyond what you learn in a Sales 101 course. Join me next time.
Until then, tell me, which surprised you more: that you should look for motivated sellers (vs. a business for sale) or that structure trumps price? Let me know what you think below.