Question: Whom should I contact for professional advice during these transactions?
Answer: A variety of resources are available for those buyers and sellers wanting to obtain professional advice. These resources include business owners in the industry, some business brokers, professional intermediaries, business valuation experts, accountants and attorneys. Each of these resources can be of assistance and each has its limitations. Business owners, consultants, and intermediaries are the best source of industry information and operating suggestions. Business owners may be able to give free advice, and they are often the best source of information. No one knows more about an industry than someone who is running a business in that industry. Business valuation experts can appraise independently a business’s value. You can do your research as well, however, they have thorough experience in this field and are usually pretty accurate. Bear in mind, that they rely on the representations of the seller to make their evaluation. They render a conditional opinion based on the assumption that the financial statements are accurate and complete. They will attempt to independently verify only certain information.
Accountants are best used to perform an audit (if one is needed), help interpret financial statements, or provide advice in structuring the transaction to minimize tax consequences for the buyer and seller.
Probably the most often consulted advisor in the purchase or sale of a business is an attorney. Attorneys are asked to do everything from assessing the viability of a business and appraising its value to negotiating the purchase price and preparing the necessary documents. Attorneys, however, cannot assess the viability of a business undertaking. That is something only the buyer and seller can do. Attorneys also generally cannot value a business, but they can occasionally help negotiate a price between buyer and seller. The involvement of an attorney (or any individual other than the principals) can, however, strain the lines of communication between buyer and seller, so they should not be allowed into the negotiation process.
The primary function of an attorney is to prepare the purchase and sale documents as negotiated by the parties. It should include reasonable and balanced protections for both parties. Experience and reputation are important criteria when selecting an attorney. The attorney chosen should have experience handling similar transactions. It may make sense to choose one attorney to represent both buyer and seller. This avoids the adversarial relationship that opposing attorneys often adopt and improves the odds of successfully completing the transaction. It also eliminates some of the emotion in the negotiation process, improves the lines of communication between the parties, expedites completion of the deal, and is less expensive.
Question: How will a professional’s evaluation help me in my buying decisions?
Answer: Firstly, it will enable you to confirm the seller’s real reason to sell the business. Is his or her representation accurate? Is this business truly a deal or is he “taking you for a ride”. The evaluation will also help you determine the true market value of the business. By analyzing many facets of the business, you will be able to uncover any problems or weaknesses that will affect how you negotiate. It will equally enable you to forecast the business’s future potential. And, finally, it will help you in arranging the financing of the business. Naturally, the evaluation criteria will vary depending on the nature of the business, whether it’s a manufacturing firm, retailer, service business, or wholesaler. Unless you have your own deep roots in this business, don’t attempt to evaluate it on your own. Don’t be a “Lone Ranger”: Although it is in the nature of an entrepreneur to be independent, most experts in this field agree that you should not give into the “do-it-yourself” temptation when it comes to evaluating your business.
Question: Who should help me with this evaluation?
Answer: “Pick a deal-oriented C.P.A (Certified Public Accountant),” recommends Lionel Haines, a widely read authority on no-cash acquisitions. Says Haines, “It is not necessary to bring your C.P.A in on each and every part of your deal, but when you get to the due-diligence evaluation, you’re going to want him there.” What Haines is referring to is the ability of a C.P.A to interpret and evaluate the business’s financial statements, specifically the balance sheet and profit and loss (P&L) statement. Even if the seller’s finances were rendered more arbitrarily, which often happens with smaller businesses, you will need professional assistance to unravel them. You should be very careful when a seller is in a hurry to get rid of his business. Even though financial statements can be falsified and show good health, it is important for you to go with your instinct. A good accountant can filter out most of the “unkosher” deals, but can’t always be there. There is so much a seller can hide on paper; however, his facial expressions or behavior can be a sign for you to walk out of the deal. It can be to your advantage that the same business has been through an audit. The reason is that our great friends from the IRS went through the same financial statements you are going through at the moment of evaluation. These same statements show all the true values with no possible falsification. You can always trust audited financial statements.
Note: Don’t make it a habit to request an audited financial statement. This request may offend the seller.