The Importance of Keeping Perspective When Buying a Small Business

As a buyer of a small business it is important to make rational decisions based on facts. However, it is also critical to maintain perspective when going through the business purchase transaction.
Buying a small business can be a (relatively) straightforward matter but there is the risk in over-analyzing the deal, thereby causing the process to fall apart. This article will examine the ‘pros' of keeping things simple.

If you are buying a relatively small business, around $50,000 purchase price for instance, please try to understand that the process will be different than if you are buying a business 10 or 20 times that amount. Too often, people get focused on the minutia of buying a business that their sense of perspective suffers.

Example, suppose you found a service business for sale priced at $50,000 and it came with some tools, equipment, a non-compete agreement from the old owner, a vehicle and some training from the existing owner. Your job as a buyer might be to negotiate a good purchase price and then verify that a market truly exists for the service being sold. The due diligence process should be thorough, but within reason. As a business buyer, you might want to verify the lease terms, have it properly assigned and then review the financial information of the business for sale you have entered into a conditional purchase agreement with. However, for many types of companies of this size, robust financial information may not be readily available.

If you, as a business buyer, are expecting audited or review engagement financial statements from a chartered accountant or a technical projection of where the business will be in the next 2-3 years then you may be disappointed. Many times, financial due diligence in these smaller ventures is accomplished by a review of PST (Ontario) or GST (Canadian) returns, if available, examination of bank statements, purchase orders, receipts, etc. The point is, you may be forced to review the "source documents" of the business if formal financials do not exist. Work with an accountant who has experience in dealing with business purchases of companies that are relatively small. There may need to be some ‘forensic accounting' work done to get to the bottom of the true economic performance of the business but this is not uncommon for businesses of this size.

Another thing to consider is that if you are buying a small business that requires the co-operation or training of the old owner after the sale, it may be in your best interests to make the actual negotiation and conditional sale period as non-confrontational as possible. You may find that if the deal is structured so that it is ‘win-win' then you might be more inclined to give up on a couple deal points that aren't very important for you. This strategy could pay dividends in the end.

Buying a small business is an important step. No matter how big or how small the business sale transaction is, it is always important to respect the money involved. As a business buyer, find an experienced business broker to assist you. You should also always work with your lawyer or accountant to advise you on any deal you enter.