Thread by @baldridgecpa

A lot of folks reach out to me in the process of buying their business looking for help on due diligence.

I admittedly stand in the “don’t buy, build” camp for the most part, but have had many clients and friends do well ignoring my bias.

Some thoughts on buying -

May sound obvious, but focus on quality - the seller and broker you buy from, lawyers, bankers and CPAs you use in the transaction all matter.

You are better off not engaging with folks who seem unreasonable or unprofessional at the start. It doesn’t get better 4 months in.

Nothing replicates a down and dirty quality of earnings study, but sometimes deals are too small (or you are too early in the deal) to justify the cost.

Here are some ways to think about business value as you get started:

Buffet says price is what you pay, value is what you get.

Laser focus on what you are buying and the value you believe you are getting for the money.

This may seem obvious, but it can save you a lot of time and energy at the beginning of an acquisition or sale..

When paying a multiple of revenue - focus on bank stmts, invoices and deposits.

Be sure you aren’t buying someone’s capital deposit or their PPP loan that was miscategorized

Paying on EBITDA - focus on expenses and add backs as well. Owner addbacks should be scrutinized.

Owner addbacks are items that they claim you should not need to pay once the owner leaves the biz - a personal vehicle lease, a large salary, etc.

You’d rather buy a business that was run cleanly than argue over the seller’s boat payment.

The second layer of diligence is on value.

What “goodwill” are you buying beyond the value of those assets?

Why not just start the business yourself? How long will it take? What will it cost? What are the benefits/drawbacks?

If you are buying a product business think about patents, trademarks, competitive advantages.

Buying a team - look at contracts, personalities, etc. and focus in on the people and the value they bring to your organization. Are these people available in the market to hire?

What shape are the assets in? Do they have debt? Will they need to be overhauled or replaced soon?

Look at the inventory - is it really worth anything? (h/t @BillDA)

If you are buying a franchise - what are you getting for your money?

Will they really bring you better customers, staff, systems, raw goods?

Are you aligned? If you are successful what do you stand to gain vs the franchiser? What if you’re unsuccessful?

Disclaimer-

Understand when you buy a business, you could be taking on debt, employee salaries, vendors, customers.

It’s not a joke.

I post all of this because I have seen bad situations that weren’t going to work from the start that didn’t seem to be well thought out.

The magic -

I have seen people change their careers and lives and have amazing outcomes buying businesses.

There are great deals to be found.

You stand to make a lot if you can buy a business priced to market that is more valuable to you than it might be to anyone else.

People do this in a few ways:

- bolt on a customer base or complimentary operation that you can cross sell. Plumber buys an HVAC business. Business buys a competitor one town over.
- roll up businesses - standardize procedures, cut costs, scale overhead.

- buy distress - debt, death, divorce, or business owners that don’t have a clear succession plan.

- use creative debt or equity financing to gain value in their career.

I love a sale where the owner will carry a note or offer a carry of revenue or gross profit. Incentives.

These are just a few ideas on buying a biz, and are just a start.

Look up business due diligence checklists and see how exhaustive they can be. Download a few and build your own.

My favorite podcast (and one of the only that I know of) on the subject is @acquanon. I was on as a guest a while back - see below. Listen to them all!

overcast.fm/+jTb6U_OD8

Folks who buy frequently - what key points am I missing? What are some of the best resources you have found?