I am proud I paid more for my business than I could have. That’s right, I am proud of this fact. “You’re a sucker!” you say. Maybe so, but I will let you decide.
Paying a fair price for something is a business philosophy. I believe that everyone needs to make money. This includes me, vendors, team members, and the person I bought my business from. I didn’t always think this way but my former boss and mentor drilled it into my head over four years. Even now, I can’t imagine how painful it was for him. Sorry Mike!
In mid 2015 I came up with the great idea to buy a small internet business and create a portfolio. Notice I didn’t say original, but great. In my opinion, there aren’t a lot of original business ideas but there are a lot of great ones that people don’t execute on. We have all had ideas that we saw someone else execute on and though “I thought of that years ago”. Yeah, you did….but didn’t do jack about it.
One of the things you realize when you start on this journey is that there are a lot of bad businesses for sale. No kidding you say? Yeah, it makes sense but I have never bought a business before so had no idea how many there were. Finding a solid business is like finding a needle in a haystack and threading it with eye shades on. It is hard and takes work. (Here is a list of people who can help)
In the process of buying my current business I vetted around 50 or so deals. By the time I tell this story in a few years, it will be hundreds but about 50 is the truth. After a while, you figure out which brokers have deals that they vetted and which don’t. You also may go into diligence and find out you were almost the victim of a scam (like I did).
Somewhere in the process you also figure out how to quickly scan a proposal, see if there is something there for you (i.e. passes your screens) and if there is anything fishy on the surface. If there is something that doesn’t add up and it seems too good to be true, run. Especially if the business is inexpensive. The other thing to know is that all the good businesses seem to get locked up within 30 – 45 days of listing. This isn’t to say that a business that has been on the market longer isn’t solid (especially if its a 7 figure deal) but every time I was interested in something that was on the market for longer than 45 days, there were major red flags.
I would love to hear your experience with this from a buyer or broker perspective.
When I found my current business, I knew that it was a good one. Let’s be clear. It was not perfect. However, it was a real business with employees and a long track record. There were some issues that needed to be addressed and an explainable loss in 2013 but at the end of the day, it felt solid.
The company passed third party due diligence and all the challenges that I could discover were out in the open. Most importantly, I had a rational basis on which to make an offer. Note to the buyers out there: if you have a rational basis to make an offer, it is more likely to get accepted than just saying here is what I want to pay and lowballing.
Four Reasons I Paid More for My Business Than I Could Have
Reason #1: I had a strategic goal
Buy a sustainable internet business with which to build a platform for other complimentary businesses.
That was my strategic goal plain and simple. In order to do so, I needed to actually have a business.
Reason #2: I only know what I can discover in 30 days.
You are at a disadvantage in diligence. You can ask for the world, but even an experienced analyst in the industry can’t discover everything. Having a good relationship with the seller will help a lot. The seller can tell you things you may not discover otherwise (“hey, this piece of mission critical code somewhere is cobbled together with duct tape but I will fix it for you before the sale”….. or “there is some piece of data that tells you a false story but let me tell you what is going on”)
Having a pissed off seller because they feel you took advantage of them or were difficult does not help you. You are tied to he or she for 60 – 120 days (including transition) or more. You need them to be happy with you and the price.
Reason #3: I am not buying the business for where it is today but where it will be.
This is a take on Wayne Gretzky’s famous comment about always being where the puck is going not where it is at a moment in time.
This concept is important and is a bit of a mindset change for many people. To accomplish this requires a bit of modeling, intuition, and conversation with experienced players.
Where is the business going directionally? Where do the experts (or you if you are one) see opportunities and can I execute on them? Are there low hanging fruit that can increase profitability day 1. Where does the seller see opportunities, why hasn’t he/she done them, and how realistic are these opportunities? Think a seller won’t tell you this? See reason #2.
Note: any seller that says “you simply need to put more product up and you will have more sales” is selling you the Brooklyn Bridge. If it was that easy, he/ she would have done it.
Reason #4: If you are financing a business the price is not as important.
Let this sink in. When you are financing a business the price is not as important. This point was made to me by an experienced entrepreneur friend who is mentoring me. I say again, the price isn’t as important when you are financing.
Why? You only need to service the debt on a monthly basis and that drives how much you can spend. For example. Even if you over paid by 10% and its $100k, its about $1,000 a month in debt service. Assuming the business is a million dollar business and takes home ~330k (assumes a 3x multiple), you are well within the margin of error and it doesn’t even move the needle for your take home.
I estimate that I paid about 5% more than I could have (not a small sum). I actually made a single offer and it was accepted. Honestly, I was a little disappointed in myself and thought I made a rookie move. My mentor gave me a verbal slap and walked me through points 1 – 4. Ok, he wasn’t as nice and said “STFU. You hit his price, you got your business, you can service the debt no problem, figure out how to close the deal and make more money,”
Now that’s some perspective.
What did I get for my 5%?
- Understanding when I re-traded after the LOI was signed. I didn’t know I should put in a holdback in a deal this size. It was my first rodeo
- Automation of tasks that I didn’t even know existed. I quote “it’s been something I have been meaning to do for a while and didn’t want you to have to deal with it”
- Easy negotiations for the contract. Gold for me and hopefully you too
- Tons of information about every supplier, things I should know, pot holes to avoid
- Vetted ideas of how to grow the business. He has had the business for 12 years, he knows the opportunities, and was honest why he didn’t pursue them. If I had ideas that required deeper understanding, he gave me more data
- Helping sell the deal to the team – I have 4 team members that I need. Having them be weary is normal and is fine. Having them petrified that they may lose their jobs is bad
All in all, I am happy I gave the seller a fair price. I just finished week 1 of ownership and everything is going well. I am enjoying working with him and believe that starting the relationship off on the right foot set the tone.
For those of you who think that I am saying that negotiation is bad, you are missing the point. Negotiation is fine but being unreasonable or low balling is not a smart strategy. Large acquisition or small, you need the seller. Focus on your strategic goals (See reason #1) and everything else will fall into place.
What is your experience with buying? Do you agree with or disagree with me?
I wrote 90% of this post before I took over. At some point over the first few days the seller and I had a conversation about the sale and the price. It was really eye opening for me. I asked him why he sold to me. His answer was “after the first conversation, I told the broker that you were the one I wanted to sell to” Why? I fit the profile of his ideal buyer (tech background, business background, understanding of the business fundamentals, challenges, opportunities,etc..), and most importantly I wanted to take care of his team.
When I asked him about the price and told him how I thought I could have gotten the business for maybe 5% cheaper but decided to give him what I felt was pretty fair given the fundamentals. He responded “I didn’t have a number in mind. Yes, I had a price but truthfully I figured that if I got a fair price and someone fit my profile, it was good for me. I could have pushed for 5% more in negotiation but I liked you, you fit the profile, and thought it was better to get the deal done than haggle over some cash that would get hit with a lot of tax anyway.”
Lucky for me, it turns out we both share a similar philosophy.