Entrepreneurs Buy a Business With One Eye on Selling It

Entrepreneurs don’t do this because they are in a hurry to sell the business; they do this because it’s a great double check on the value of what they are thinking about buying. When you change your perspective to selling a business sometime in the future, you force yourself to think about whether that product or service will still be demand at that time. Maybe you can see it even more in demand — maybe less so. If you think it will be less in demand then you need to start thinking about how you are going to change the business, or maybe forget about getting involved altogether.

At the same time you are going through this exercise you will be thinking about who will be the likely buyer. Will it be someone like yourself, or will you have grown the business so that it will be beyond the reach of an individual, that it will be bought by a company or by an investment group, or by a wealthy non-owner investor. If that’s the likely scenario, then you should be thinking about how you will operate the business. You should give more thought to operating it as a by-the-book, pay-the-taxes business and not as your personal cash cow. It takes a lot of explaining to get someone to buy into the fact that the business is worth more than the books show because you have been taking cash out and not including that money as sales or that you really don’t need all those family members listed on the payroll.

Having an idea what you might do in the future will help you make decisions about the entity you choose to take ownership or whether you buy or lease assets, or how you structure the relationship with any investors or minority partners you might take in. It’s always much more difficult to unwind a situation that has become a hurdle than it is to set the relationship up correctly at the beginning.

Keep in mind no thoughts you come up with or plans you might hold in your head have to be put in place. It’s just better if your actions are based on as complete a plan as you can envision.

For example I know a fellow who bought a business and took title as a Limited Liability Corporation (LLC). He put in all the money, gave himself ninety percent ownership and named himself the Managing Member. His named each of his four children as members with two and one-half per cent ownership each. It was his plan to gift each child a percentage of the business each year, to the limits of the tax gift rules, so that at some point in the future he would have five percent and they would have ninety-five per cent of the ownership tax-free. This was a great idea.

Problems arose when one or two of the children, now grown with families and adult issues of their own shaping their interests, looked at their individual holdings in this “family business” as assets they would like to do something with more in keeping with their own priorities. The father, now unable or unwilling to raise the cash to buy out those who wanted cash, was forced to sell the business he envisioned would have been in the family for years. Had he formed a family trust and made the trust the eventual owner of the business, then no single person could have forced a decision — the trust would have had to act as a unified voice.

As the buyer of a business you should look at the future with realistic eyes and as much imagination as you can bring to the questions you see ahead. If the future is strong and you are capable you may very well be launching a business that someday may be a great candidate for a public offering. Don’t be constrained by what is in place or by your own seemingly limited background.

Remember — management is cause, all else is the result.

You will find more about this topic in chapter nineteen in my book.

The next articles I post will be dealing with making the business opportunity you buy become successful, I hope you continue to read about and profit from what I have learned in my thirty-year career as an entrepreneur.

The author can be reached at http://www.businessstrategyartconsoli.com