Education & Advice - Buying a Business

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1. Buying an established business offers dramatic advantages over starting a new business from scratch. 
   In excess of 90% of business buyers are still operating their companies two years after acquisition, while more than 80% of new businesses fail in their first two years. 
2. Typical ROI on a business acquisition is 25-50% annually
   Compare those returns to other investments.
3. Business acquisitions are substantially riskier than most other investments, such as real estate and the stock or bond markets.  You should get professional advice on such an important investment, and invest an amount of money appropriate to your net worth, asset allocation, risk profile and tolerance and management capabilities.
4. Many of the best businesses never come on the market.
   To find them, you need to initiate a proactive search.
5. You must strictly protect the confidentiality of businesses you evaluate.
   Most critically, this means not revealing to anyone that the business is for sale, especially any customers, suppliers, employees, landlord, etc. of the business.  You must keep all confidential information private, and never use any such information to your own advantage or against the business.  Violating this confidentiality may expose you to extraordinary liability.  Mesa Airlines was nearly bankrupted by violating such a confidentiality agreement.  You may discuss the sale with your family or advisors provided that you inform them of the terms of the confidentiality agreement.
6. For sale by owner businesses are usually of much lower quality and riskier than intermediary represented businesses.
   These sellers usually avoid intermediaries for one or more of the following reasons:
1. They are struggling financially and can’t afford to pay a intermediary and cover their debts
2. They have unrealistic price expectations, causing business brokers to conclude that representing the seller would be a waste of time
3. They seek to misrepresent the business, or withhold information about problems, and know that intermediaries have an ethical and legal obligation to disclose material facts to a buyer
4. They are otherwise seeking to take advantage of an unsuspecting and uneducated buyer.  For example, they may employ an extremely biased purchase agreement, improperly transfer leases or other key assets, not reveal title defects or debts on the business, and/or close outside of escrow to hide any of the above.  It happens frequently; such buyers often come to us to sell after they’ve been suckered into a bad deal.

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