business. Jeff would put $500,000 down and John would carry a note at 10% for the remaining $500,000, for a period of seven years. This would give John a payment of over $8,000 a month for the next seven years of his retirement. If Jeff ever defaulted on a payment, John had the right to accelerate the note and demand full payment. If Jeff couldn’t refinance the note or somehow pay in full upon an acceleration demand, then John would get the business back.
The more John met with Jeff the more he realized that Jeff did not have the actual hands-on experience to run a day-to-day service driven business. As a spec builder, Jeff needed to co-ordinate various subcontractors and make sure the brokers sold the homes in time. His was not an intensive customer service business. John became concerned by some of the comments Jeff made about how employees were treated. He did not appear to have a common touch but rather a roughshod “my way or the highway” approach. John knew that this style may work with subcontractors, but it would not work with journeymen plumbers. A good plumber made the company good money and they weren’t easily replaced. You needed to go an extra mile or two to keep them happy and to keep your profits up.
John recalled how a friend of his, looking to retire, had sold his HVAC (heating, ventilation and air conditioning) business to an entrepreneur who didn’t know how to handle tradesmen. Like this deal, his friend had taken a down payment and carried a note for the balance. And what happened? The entrepreneur alienated all the top HVAC talent in the company and within several months they had all found jobs with other HVAC providers in the area. With his talent gone, the company faltered, service went down, negative word of mouth was almost instantaneous and the entrepreneur defaulted on his payments to the former owner. And so, his friend had to come back in and take over a once-solid business that had been wrecked in just six months time, due to poor management. His friend spent the rest of his life trying to rebuild the company again so that he could sell it. He died at his desk.
John did not want such a fate. He understood that if the sale wasn’t a win/win on both sides, then no-one would win. He could clearly see that Jeff was out of his league in running a plumbing business. Jeff clearly would not win, which meant that John would not win. Down the line, John knew he would have to come back in to the business and deal with the wreckage of his once-profitable company.
John told the business broker to cease any further negotiations. Jeff was furious. He claimed bad faith and threatened to sue, and never appreciated what a huge favor John had done him.
As this case illustrates, the only good deal is one that is safe for both parties. So while you are negotiating for your best deal, keep in mind the reality of the other party’s situation. And this is certainly one case where the seller should take the lead. With his or her experience comes an in-depth understanding of the business. With that understanding comes tools to evaluate the safety of the deal for both parties. As communication and negotiations continue, buyer and seller should build a rapport that lends itself to trust. This is necessary for the buyer to be able to comfortably accept the counsel of the seller regarding the safety of the deal. However, this trust should not interfere with healthy skepticism. As a buyer, you need to double-check every piece of data you can. But as well, you need to listen to what the seller is telling you. It may be direct or it may be in the form of offhand or indirect comments, which may be very indicative of the seller’s true feelings. Be it direct or indirect, listen for the seller’s clues. He may be under pressure from a spouse or business associate to sell, but he may let you know in so many little ways that you are not the right buyer, or his is not the right business for you.
Trust is important in any negotiation, but it is absolutely necessary to the process of win/win discussions. Both parties must feel free to offer suggestions and pursue safe outcomes. However, even in situations where trust is established, conversations may turn heated. In such cases, simply take a break from controversial items and leave them for later when cooler heads can prevail. Remember that the goal is to reach the safest deal, not just the one that brings you the most dollar signs.
Listening
We have just touched on the importance of listening and it bears repeating.
An old adage says that the Almighty gave us two ears and only one mouth so that we might listen twice as much as we speak. This is great advice for the process of buying or selling a business. Both sides should be listening for deal breakers and bedrock motivations. Ask the direct questions, but also listen for indirect answers.
As a buyer, listen to why the seller is interested in getting rid of the business. Is he or she just trying to get out from under a financial burden? Is he or she unsatisfied with returns? Maybe the seller simply wants to retire or is facing medical problems that preclude running the business. Or maybe he or she has inherited partners he or she doesn’t want. Any of these are fine reasons and you should feel comfortable with them. However, beware of hidden knowledge. Does the seller know about something coming that will hurt the business – competition moving in, a change in technology that could lead to obsolescence, or new patents about to be issued? Ask. Be blunt; be nosy; listen carefully to the reasons offered by the buyer. Weigh those against everything else you know about this person. If you have doubts, get in writing that withholding information that could affect the future profitability of the company is a breach of the agreement and requires a refund of all money received for purchase of the company. That should send some fur flying. It may also get you the information you need.
Trust/Intuition
Trust during negotiations is crucial. But trust isn’t something you just throw out on the table. Trust is earned. By double-checking facts, a buyer learns to trust a seller and a seller learns to trust a buyer. As the sale process continues, both will reach a level of comfort with the trustworthiness of the other. If you never trust the person across the table, walk away. If you can’t trust your opponent during the process, you won’t be able to trust him or her to follow through with contractual agreements either. Do the legwork, follow your intuition and never be afraid to walk away. Again, he who cares least wins. If your intuition tells you it isn’t right, get up and walk away without regret or remorse. You’ve lived to fight another day.
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Rich Dad’s Tips
• Put yourself in the other party’s shoes. Know what they want and need out of the deal.
• Get to the central issues of the sale in short order. It will save everyone time and money in the long run.
• As a seller, have your documents in perfect order for the buyer’s inevitable due diligence review.
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And when it comes to trust, you are going to need to trust your team of advisors ...
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Assembling Your Team
Buying a business is a risky proposition under the best of circumstances. Attempting to go it alone is the worst of circumstances. Unless you are truly an expert you will want to assemble a team of professionals to help you find your way through the legal and tax pitfalls that might be waiting around any given corner. Not only will your team scout out the lay of the land for you, they may also hook you up with contacts and pass on some of their knowledge while helping you to maintain a professional air. Lenders, buyers and sellers all pay attention to the stability and management skills of opponents in sales. Weakness, even perceived weakness, can kill your deal. You must at least appear to be an expert, and the easiest way to achieve that appearance (short of actually being an expert) is to surround yourself with knowledge. As Robert Kiyosaki’s Rich Dad advised him, business and investing are team sports. Put together a winning team of advisors and you stand