How to Navigate a Sellers’ Market
The truth is, it really doesn’t matter whether or not it’s a buyers’ or a sellers’ market. Why? Because purchasing a business is about you – it’s about knowing what you’re capable of.
Think back to our Caveat Emptor article in January. The same applies here. As the business buyer, it is your responsibility to read between the lines, to understand the deal and to know exactly what lies ahead for you and your newly purchased company.
Are You Asking Yourself All the Right Questions?
Buying a business is exciting but be careful you don’t let the prospect of an affluent future cloud your vision. During the selection process, due diligence and closing procedures, it is critical that you keep a straight head.
- Are you overpaying for an asset, and if so, can you sustain such an overpayment?
- Are you independently verifying all information or simply relying on what you think you know?
- Are their problematic elements in the deal?
- Are you sweeping too many issues under the rug?
- Are you suffering from escalation of commitment?
Just because your bank gives you an approval for financing, doesn’t mean this is the right deal for you.
Reap the Rewards of a Creatively Structured Deal
The quality of the business for sale is just as important as the way in which the deal is structured. You may be a shrewd entrepreneur, but you might not possess the skills necessary to configure a business deal strategically and intelligently.
This is what a legal advisor is for.
For example, perhaps it is possible to pay for the company in part upfront, with the remainder to be paid on a monthly schedule over a set period of time after the purchase. This makes it easier for you to manage your finances and smoothly transition into the business.
Or there may be an opportunity for an earnout, in which the sellers of the business must “earn” part of the purchase price according to company performance following the sale. Such a clause ensures your protection and guarantees that the company you purchase will achieve particular financial goals – and if not, then a pre-negotiated portion of the purchase price is deemed non-payable.
Sellers Dictate the Marketplace … Or Do They?
Sellers set the price, outline their terms, and naturally, will do everything they can to get the most for their business. So in a sense, they will certainly try to dictate the marketplace but in the end, there is no sale without a buyer.
And if you think of it in these terms, there is a profound shift in power.