Henry Ford famously said, “Whether you think you can or can’t, you’re right.” When it comes to buying your first business, the ability to effectively run a business is a different skill set than what is required to complete an acquisition. As a result, many successful companies and/or executives underestimate the complexities involved in closing a transaction.

Understanding Seller Rationality

By far the largest hurdle that first-time business buyers need to understand is that sellers don’t have to be rational. A buyer can develop all sorts of financial models projecting certain rates of return on various capital structures, but a seller rarely cares. Their internal rate of return is not calculated on a spreadsheet, but rather, by what they’ve been able to provide for their family and what they hope to enjoy in retirement. A successful transaction, therefore, must meet the personal goals of the seller while protecting the financial goals of the buyer.

Key Points to Consider:

• Sellers’ personal motivations and goals
• The importance of aligning financial goals
• The emotional and personal investment of sellers in their business

The Timeline for Closing a Transaction

First-time business buyers also tend to underestimate how long it will take to successfully close a transaction. Not only does it take a significant amount of time to find the appropriate target company, but the amount of time required to woo then wed will probably take longer than a buyer anticipates for a number of reasons.

Factors Affecting the Timeline:

• Finding the Right Target Company: This involves extensive research and due diligence.
• Financing: If outside financing is required, banks might be more measured in their approach.
• Real Estate Involvement: Deals involving real estate include engineers and appraisers, adding to the timeline.
• Advisors’ Responses: While the buyer’s legal and accounting advisors will be quick to respond, the seller’s advisors may delay.

Ensuring Due Diligence and Flexibility

While the closing of an acquisition will likely veer from the original acquisition plan, first-time business buyers must remember to stick to the program as closely as possible. If specific steps drag on, it’s better to close later than to take shortcuts on due diligence.

Essential Steps for Buyers:

• Due Diligence: Never take shortcuts on due diligence to avoid future complications.
• Adapting to Changes: If the seller’s performance or available capital changes, reassess the deal to ensure it still makes sense.
• Sticking to the Plan: Maintain a structured approach to the acquisition process.

Creating an Action Plan

Are you buying your first business? Meaden & Moore can help by creating an easy-to-follow plan of action. With expertise in corporate financial planning and advising, we follow proven methods to deliver insightful and highly effective solutions.

Buying your first business is a complex and lengthy process that requires patience, diligence, and expert guidance. By understanding seller rationality, anticipating timeline challenges, and committing to thorough due diligence, first-time buyers can navigate the acquisition process successfully. Partnering with Meaden & Moore ensures you have the expertise and support needed to make informed decisions and achieve a successful transaction.

For personalized assistance on how to buy a business, contact Meaden & Moore today and let us help you turn your business acquisition goals into reality.

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Read the flip-side of this in another post by Lloyd:
Selling a Business: Avoid First-Time Seller Mistakes