July 5, 2024 • By Dennis Beaver

Our article “Buying a Business? Get Proper Help,” was based on my interview with Josh Tolley, a nationally syndicated talk show host and author of recently published, Acquisitional Wealth.

Tolley’s message: Given the high risk of failure a new business faces, purchasing an established, profitable enterprise is often far better.

His advice touched a nerve.

“The idea of buying a business never occurred to me,” so many readers said.

Hanford business attorney Ron Jones, who has been a friend of this column for many years, sent a list of important “due diligence” questions that anyone thinking of buying a business must have answered.

“Why not run these by Tolley?” he asked.

I did. He was happy to answer Ron’s questions.

‘Be curious, but don’t let the naysayers frighten you away’

“When buying an established business or going out on your own, it is important to be curious and get answers to tough questions. However, when you repeatedly hear, ‘Yes, but what about these things? Did you think about these issues?’ do not let yourself become frozen with fear.

“Yes, there are many valid objections, but too much doubt, and a failure to realize that every business will encounter problems, can wreck motivation and creativity.

“So use your common sense when told, ‘No, this isn’t a good idea.’ Perhaps it is a good idea, so obtain advice from several, knowledgeable sources and be alert to those jealous of your efforts to grow.”

1) How much knowledge and experience do I need to qualify for an SBA loan?

You do not have to know everything. If you apply for an SBA loan, they want some relatable experience, but if you are buying a plumbing company you don’t have to be a plumber. You do need some experience in management, with the trades, something relevant where the SBA will feel comfortable issuing a loan.

Also, this would be satisfied by elevating someone currently employed by that business to management so the SBA sees a person with experience in charge of the operational side of the business.

2) Should I be concerned about existing competition or new competitors coming into town?

Absolutely! These questions are an important part of the vetting process where you are examining the business and its possible liabilities including new competitors.

A public records search on the location is critical. For example, if you buy a restaurant, is your city looking into ripping up the road, laying new water and sewer pipes, preventing access, which could destroy your business?

Is a labor union involved? Do they have any say in an acquisition? Is there a franchise agreement — that the seller hasn’t looked at for years — where corporate requires it to be offered to them first? This is why business buyers and sellers never should do this on their own.

3) Do you know where to order supplies, parts, inventory, and like items? Does the cost vary with time or the time of year? Who can help prevent you from being taken advantage of by vendors?

If done correctly in the due diligence process, not only will you get that information from the sellers, but they should remain with the business for six to 12 months for that very purpose.

When a finance company puts up the funds, typically they require sellers to stay at least six months.

4) Have you carefully reviewed the company’s books? Do you understand what you have read? Are these audited reports or just the seller’s chicken scratches?

There are several types of financials. Some are created by the business owner and:

(A) Professionally compiled financials;

(B) Adjusted financials — adjusted from the seller’s perspective (add-backs, credits, debits to get a more accurate picture.)

(C) An analysis of price, value, and worth.

Too often buyers focus on the price of an acquisition, rather than its value or worth.

This is where the concept of goodwill enters into the equation which can be manipulated to distort the selling price. So different are price, value and worth, a business that is losing money on paper — priced at next to nothing — could be worth a small fortune to the right buyer, especially when its inventory has great value in itself.

Combatting Social Media Insta-Experts

Tolley is deeply concerned about the “Insta-Experts” who appear on social media, appealing to people desperate to get into business and then “selling them thousands of dollars of often plain worthless guides and business plans which lead to horrible financial carnage and families on the rocks.”

To combat this, his organization is holding eight-hour, free seminars, around the country, explaining how mergers and acquisitions work and what you need to know before investing in a business.

More information can be found at Joshtolley.com or acquisitionalwealth.com. If his seminars come to my town, I’ll be in the first row.

Dennis Beaver Practices law in Bakersfield and welcomes comments and questions from readers,
which may be faxed to (661) 323-7993,
or e-mailed to Lagombeaver1 – at – Gmail.com.