We understand that buyers can be nervous about purchasing an existing business, especially first-time buyers. Buyers who have never gone through the process before undoubtedly have many questions about how it all works when you purchase a business. We wanted to take the time to address some very common buyer worries. We hear these concerns from buyers often, and if you understand the answers to these questions, it will hopefully help you to appreciate some of the realities of purchasing a business.
How Can I Guarantee that the Employees Will Stay?
The most honest and simple answer is that nobody can guarantee that any of the employees will stay on after the sale of the business. Employees aren’t business assets, and they have the freewill to choose where they work. In the same way that if you are not happy with the current employees, you have the right to replace them once you purchase the business. If keeping the employees is important to you, then find out during Due Diligence how long they’ve been with the company and what their history with the company is. That could give you some insights into how loyal they might be or their appetite for staying with the company. Ask the seller about the employees and see what their thoughts are regarding longevity.
Many buyers request to meet with employees during the Due Diligence period to ensure that they will be staying on if the business’s ownership changes hands, but that just isn’t the way things are done in small business sales. Understandably, due to confidentiality, most sellers will not allow prospective buyers to meet with employees until the sale is either imminent or has already happened. Most of the time employees want to stay in their current roles, but if they get wind of a sale, sometimes they fear that they may need to find a new job, so they start looking. The worst-case scenario would be if the employees find out that the business is for sale, they get scared, and they find another job. The seller loses a good employee during a critical time, and the buyer will inherit a newly hired employee just out of training.
Key employees like managers or family members of the seller who will be staying on after the sale are a possible exception to the confidentiality rule of the buyer not meeting employees prior to the closing of the business sale. In certain cases, where these key employees are vital to the operation of the business, a new employee contract might need to be negotiated between the employee and the buyer prior to closing. Of course, this will be on a case-by-case basis and will depend on the comfort level of the seller with regards to employee confidentiality.
Will I Make as Much Money as the Previous Owner?
How much money you make is entirely up to you, as the new owner and operator of the business. When you are purchasing an existing business, you should be able to do similar numbers to what the business has been historically showing or ideally more if you implement improvements. During Due Diligence is when you will want to get documentation and ask questions of the seller that will prove that the business is making what it claims to be. If a business is showing solid numbers year after year, it is reasonable to expect that if a new owner runs the business in a similar or consistent manner, that they should expect the same results. Most buyers purchase an existing business because it is turn-key and ready to go on day one. There aren’t years of start-up effort, growing pains, and waiting to make a profit. By buying a business, a new owner can run the business as-is and keep the status-quo, while looking for ways to improve, streamline the business, and maximize profits. Afterall, a buyer probably wouldn’t purchase a business that didn’t have potential for growth. It is with an optimistic look towards the future that a buyer takes the plunge and purchases a business, but how successful the business is after the sale depends entirely on the buyer.
What Happens if there are Unpaid Debts?
Buyers absolutely assume risks when purchasing a business. However, there is one thing that buyers can do at the time they make their offer, to act as a sort of safety net for any unexpected debts or liabilities that do come in immediately after the sale. In the purchase contract, the buyer can specify an amount of funds to be held back from the seller’s proceeds of the sale in an escrow account for a short period of time (usually 30-90 days). This would be a buyer’s security blanket in essence, because if any outstanding debts arise from when the previous owner was running the business, and the seller refused to satisfy the liability, then the new owner could seek out funds from the escrow hold-back to pay for any surprises that did come up. Buyers would need to communicate with the closing agent handling their sale to get details regarding the process for claiming on the escrow hold-back. Businesses are normally sold debt-free, so if that is the case in your particular transaction, then the sales contract would reflect that as well.