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Decision flow in a buy-sell transaction

Know the Score

Posted: May 19, 2008 7:02 p.m.
Updated: July 18, 2008 5:03 a.m.
 
Both the buyer and seller have the same question in mind: What is this business worth? This is where information becomes king! You can never have too much information when making a decision like buying or selling your small business.

Most people see the worth of a business as the total value of equipment and fixtures, inventory, buildings and land. These are definitely important, but the sum of these values does not equal the value of the business. Continuing with our buyer and seller from last week, Bill probably paid a fir price for equipment, fixtures, and the like, but did his price of $40,000 reflect the value of Sam's Market? Obviously not, so then what IS the value of a business?

For both buyer and seller finding the answer to this question is the most difficult and, at the same time, the most important step in the buy-sell process. But this final decision reflects many other decisions made while the transaction is being considered. In other words, the buy-sell process is a flow of decisions. It would be impossible to point out every decision that must be made, but the basic ones are as follows:

- Motivation: A decision to attempt the sale or purchase of a business, and how to find a buyer (or seller) for with specified characteristics.

- Information: A decision on what information must be gathered or given to buy or sell a business.

- Sources: A decision on how, where and at what cost the needed information can be obtained.

- Analysis: A decision on the meaning, importance and reliability of the information gathered.

- Value: A decision on what the business is worth.

- Price: A decision on how much money to take or give for the business.

- Financing: A decision on how to pay or receive the purchase price.

- Contract: A decision on the form and content of the contractual relation.

- Implementation: A decision on how and when to affect transfer of ownership.

Motivation
What leads an owner to sell his business? It may be any of a large number of reasons: A personal health problem, a business disagreement, overextension of the company's activities, a desire to retire from business. The possible reasons are many and varied. For Sam, the motivating factor was change. He found his sales decreasing in spite of his extra effort, competition increasing, empty building space impossible to rent. In other words, both internal and external factors had brought changed conditions that affected the business unfavorably.

Changed conditions should be analyzed carefully before a business owner accepts them as reasons for selling his business. The following questions can serve as a guideline for this analysis:

- Have changes actually occurred in my business?

- Are the causes of the changes beyond my control?

- Are the causes of the changes within my control?

It would be unfortunate for an owner to sell his business because of changes he could control if, by such control, he could recapture a successful and satisfying operation. Every owner, therefore, should examine closely his motives for wanting to sell the business.

What makes an individual want to buy a business? Again, motivations will cover the whole range of human desires, from simple economic gain to social ladder climbing. Bill's prime motivating factor was the desire to expand a special skill into a business of his own. Bill thought he knew enough about grocery stores to handle one of his own. But he didn't. This factor of a special skill represents one of the dominant reasons for wanting to buy a business. It is a natural motive, but, perhaps because of its natural appeal, it can be a dangerous motive.

A business must be managed. An operating skill does not always lead to managing ability. In fact, it often encourages a business owner to spend his time operating instead of managing. Planning for the future, organizing resources, staffing the business with competent people, directing the coordination of people and operations, controlling results - these are the functions of management. Consequently, an individual with a skill seeking to buy a business in which to apply the skill should check his motivation. He/she should ask how important is management ability in this business?

Occasionally, a business that is unique and very simple almost manages itself. But if the business is in a competitive field, management ability is probably the most important requirement for success.

Room for mistakes
Effectiveness with people (customers and employees), eagerness to tackle difficult problems and make decisions, and intelligence about general business operations are key ingredients in management ability. Now most people can learn to manage if they recognize the need. This requires room to make mistakes, however, and the self-discipline to undertake self-improvement programs.

Maureen Stephenson is a local author and owner of REMS Publishing & Publicity. Her column represents her own views, and not necessarily those of The Signal.

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