March 30, 2009

Considering buying a business? In case you haven’t realized it yet, there are a lot of moving parts. Even the smallest acquisitions are complex and challenging. And of course emotions run high. Obviously, these are not the best conditions for thinking through myriad problems, conducting a detailed, objective analysis and making levelheaded decisions.

We asked Wharton lecturer Robert Chalfin, CPA, JD, author of Selling Your IT Business: Valuation, Finding the Right Buyer, and Negotiating the Deal (Wiley & Sons, Inc.) for a few recommendations for entrepreneurs who are thinking about making an acquisition – not only in today’s economy, but any time.

“Develop a team of advisers,” says Chalfin.  “Talk to other entrepreneurs, and ask them for recommendations.” Chalfin says it’s best to stick to an advisory group of no more than six people. Otherwise, you might wind up with too many conflicting opinions and bottlenecks in the decision-making process. Most important, he says, “You need people who are not afraid to tell you ‘no’, that you are doing something wrong.” He cautions that you should to be willing to walk away if your advisers recommend it. A buyer risks getting emotionally involved and can lose the capacity to make objective decisions. So, as hard as it is, if your advisers (or a clear majority of them) say it’s a bad idea … they are probably right!

Another must, says Chalfin, is appropriate due diligence. “Don’t rush, but don’t over analyze either.”  He has known buyers who obsessed over reconciling small items and worried about insignificant items when the big picture was passing them by.  “I’ve seen buyers get caught up in the seller’s time table,” he says. “The seller says the deal has to close by the end of the month and so the buyer falls in line.” That end-of-the-month deadline may be arbitrary – or worse: It could signal that the seller knows something that the buyer does not – some bad news, for example, that’s right around the corner. Says Chalfin: “Be careful when the seller is overly anxious.” All the more reason to take a step back, consult your advisers and avoid reacting emotionally.

Chalfin says it’s essential for the buyer to have a plan that answers questions such as: What do you want? What goals do you want to accomplish? Why you are buying the business? Do you have the wherewithal to buy and operate this business? What do you have in terms of suppliers and customers?

“When you buy a business, it’s the ultimate make-or-buy decision,” Chalfin advises.  “Do you want to start or build the business yourself or buy what someone else has? Does it make sense to buy it? You are buying a revenue flow and hopefully an income stream. How important is that to achieving your goal?” To determine whether of not it’s a good buy, you’ll need to compare the costs and benefits of starting up on your own.  Assembling a strong team to help answer these questions will help determine if the acquisition is a good idea.