Buying Businesses for Sale by Owner: Disadvantages and Precautions

FSBO or business “For Sale by Owner” is a business owner’s attempt to sell his company. Offers like FSBO can easily attract a lot of potential buyers, but you have to be wary and cautious before considering such offers. These opportunities come with significant risks most of the time. Buying an already established business, on the other hand can be a fulfilling decision. The only question is what needs to be done to lessen the risks involved and increase the chances of success in buying a business for sale.

FSBO businesses as challenging opportunities As a general rule , you should never trust everything a seller says about his company. Even inexperienced entrepreneurs and first-time investors are aware of this. Why, then would it be any different in buying a business for sale by owner? Consider the following facts:

First, it is possible that the owner is just attempting to increase the profits of selling his company. Surely, you would not want to shell out a lot of cash for a company that keeps bleeding “red ink”. When you buy a business for sale by owner, the seller might even be unaware of the actual value of that particular FSBO. Most likely, you will be overpaying for the sale transaction. In addition, negotiations are not easy because the value of businesses is oftentimes uncertain. What you will gain or lose generally depends on your negotiating strategy. Fortunately, there is a solution to this problem.

Every business will eventually change ownership and the decision to sell a company can either be viewed by the owner as the most agonizing event or the most liberating. Some owners are ill prepared for a business transition and are caught off guard by deteriorating health, unanticipated financial calamities, divorce, or personal stress. These owners are forced to sell without proper planning and often receive less than optimal remuneration for their company. Other owners recognize that in order to maximize the business value, similar strategic planning done during the years the company was being built is also required prior to selling the enterprise.

The goal of this article is not a crystal ball analysis as to why selling a business now is the perfect time; the article’s intent is to review the factors that can influence the timing of this decision and the necessity to prepare well in advance for the eventual business transition or sale. Life’s circumstances are ever changing and proper succession planning is the single most important way for an owner to take control of the terms and conditions of exiting a business. There are a variety of reasons for business control transfer and those who are proactive in an exit plan implementation are often able to realize greater opportunities to maximize the businesses value, minimize tax liabilities, retain key employees, and mitigate emotionally charged family issues.

Determining the best “time” to sell a privately held business will depend upon a number of factors, both internal and external. Ultimately, the timing decision is influenced by the reason(s) behind the sale, especially given the fact that not all business sales are pre-planned. While value maximization is historically near the top of the wish list when a sale is contemplated, it is often balanced with the owner’s personal goals and lifestyle needs. Some of the most common reasons for a business sale or transition include:

• Quality of Life/Retirement – Owning a privately held business consumes a considerable amount of time with corresponding opportunity costs. Most owners reach a point where they are interested in other life pursuits, whether that be spending time with a spouse/children/grandchildren, engaging a personal hobby, or taking the time to travel the globe.
• Diversification – A privately held business typically represents a significant component of family wealth and the owner will be keenly interested to diversify this asset into other investments.
• Burn Out – Many long term business owners lose the “fire in the belly” that they once had when the company was founded. As a result, highly successful and functional businesses can show lower sales and profitability as a result of reduced ownership commitment and drive. Most experts recommend that the proper time to sell a business is before this condition poses a threat to the business operations and/or value.
• Illness – Encountering a personal or family member illness is one of several “unexpected” reasons that can cause a business sale to be pursued.
• Divorce – The break-up of a marriage has been responsible for the sale of many family run enterprises.

Company performance, tax implications, buyer activity and the economy are all contributing factors involved in creating “perfect timing” for the sale of a business. Timing a sale at the peak can be very difficult due to the unpredictable variability of the many internal and external factors. Sales contracts are won and lost, new competitors come into the market, technology becomes obsolete, and business expenses can skyrocket (e.g. health care costs)…any of these events can affect future sales and earnings and thereby have a material impact on the company valuation.

Company Performance
The profitability and cash flow of a business is one of the key drivers in determining the company’s value and marketability. While buyers are looking for companies that have potential to grow and generate reliable earnings in the future, the valuation in the majority of cases will be tied to past performance and achievements. A business with a solid earnings history that is equipped with stable personnel/management in an attractive industry will be highly marketable and should capture a fair price regardless of the economy. Other business specific factors that can influence valuations and play a role in the timing decision include:

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