The last thing anyone wants to do is invest in a bad business, and yet bad investment decisions are made every day by well-meaning people who base their decisions on insufficient due diligence or an altogether lack of research. In this edition, we visit with Walter Zweifler of Zweifler Financial Research to discuss why it is important to remain objective when looking to acquire a business. Mr. Zweifler will also address how and why it is so important to thoroughly research your target business ahead of time. In addition, you will learn the importance of working to bridge the gap between the business seller’s price and the actual value of their company when negotiating the transaction.
It's important for the buyer to have a very clear notion of what he wants to buy, why he wants to get involved in that, and how much he can afford to pay, and how much of the purchase price he's going to have to finance, and where he's going to go through to loan, if it's necessary, to finance a transaction. Yes, there is a correct time for it. There's an optimum moment and if the person who’s buying thinks that through carefully before even beginning to search, he's going to end up with a much happier result.
- Walter L. Zweifler
Jeff: Welcome to the Morgan & Westfield podcast. I'm Jeff Allen. Thanks again for making us part of your plans today. Now if you're selling or buying a business or just interested in the subject, this is the place to be because it's our mission to educate and inform you, with the help of some of the most credible people in the industry of transacting businesses so you'll be better equipped to make some very important decisions when the time comes to sell your business or buy one. Or maybe, you'll talk to somebody else about selling or buying one, and you'll have some information that they don't have.
Now, today's topic [is] Buying a Business 101 or Buying a Business for Starters. We could probably talk about this subject all day, but we're going to take the next 29 minutes or so to discuss this with Walter Zweifler. Walter's been on with us before. He's the senior financial appraiser and Chief Executive Officer of Zweifler Financial Research. He has been active in the appraisal profession since 1976, initially with Marshall and Stevens Incorporated. In 1980, he earned the designation of Accredited Senior Appraiser in the American Society. In 1982, he organized Zweifler Financial Research, a division of Zweifler Appraisal Service Incorporated. Previously, Mr. Zweifler was a financial analyst with W. E. Hutton & Co., Bache & Co., Muller & Co., Piper Jaffrey & Hopwood, Applied Portfolio Strategy, and the Amivest Corporation. Mr. Zweifler's testimony has been accepted in Tax and Federal Courts as an expert witness for the Internal Revenue Service and for a broad array of tax payers. So, this is one gentleman who you need to know, and you'll become more familiar with as we go through.
Walter, it's good to have you back again, my friend.
Walter: Thank you for having me. That's [a] pretty glorious description. I'm going to do my best to live up to that. [Laughter]
Jeff: Well, I appreciate it, Walter, and I'm sure you're going to be able to live up to all of that because it's all true. Walter, let me ask you a question. We're going to start from the beginning. I am someone, for example, who is interested in buying a business. I'm thinking about it, giving it some serious thought. Can you tell me, is there an optimum time to buy a business? Is it just like buying a house, for example? You wait until the market falls out and then you go in and you try to buy at the bottom, or is it a little bit different in the business world?
Walter: It definitely has an optimum moment, but it varies from business to business and buyer to buyer. It's important for the buyer to have a very clear notion of what he wants to buy, why he wants to get involved in that, and how much he can afford to pay, and how much of the purchase price he's going to have to finance, and where he's going to go through to loan, if it's necessary, to finance a transaction. Yes, there is a correct time for it. There's an optimum moment and if the person who’s buying thinks that through carefully before even beginning to search, he's going to end up with a much happier result.
Jeff: Walter, let me ask you a question with respect to buying a business that maybe is not necessarily a business that I have a passion for per se, but I mean it because I'm interested in the investment. I'm just interested in buying a successful business. Can you tell me from your experience, where are some of the best places to look for businesses for sale? In your view, are there certain resources that are published today where you can go to find some real reliable information about businesses that are ripe for sale?
Walter: There's a lot of information available, but like any good question, the enormous research that you put into it personally will define the result. There are business brokers that will constantly come to you with offerings, but if you're a buyer, the best thing for you to do is to sit down and say to yourself, "what do I have in the way of personal experience and resources and knowledge that will lead me to conclude that something is of growth industry? Am I person who, for example, know a lot about healthcare and know that the population is aging, and that this is an area where there's a lot of service to be provided by a varied array of vendors? Or can I get involved in some other industry?"
So yes, there's a time to buy, and there's a place to look. But the best place to start is from your own resources and your own experience. If you go to a broker or someone else like that, you've got to always question whether they have the objectivity that you're looking for. They want to get a transaction [and] earn a commission. You have to approach this thing with objectivity and know what you have to bring to the transaction in the way of experience and that you can be relying on as not having any other ax to grind except the transaction itself.
... there's a time to buy, and there's a place to look. But the best place to start is from your own resources and your own experience.
Jeff: Walter, you bring up a good point about objectivity. I think that's so important in this day and age. We're told that it's a more transparent world. There's a new normal in terms of the way that business is done, in the terms or the way that things are valued and the processes that have been put in place, and that's all as a result of, of course, the financial collapse we saw right before the housing market or as the housing market was kind of coming down. All of these kind of came down together in 2008, 2009. So, when it comes to objectivity, in finding that objective party to deal with, it sounds like it's a difficult prospect of being able to deal with that. How do you know, when you're dealing with someone who is objective? How can you really distinguish the objective between the subjective?
Walter: You never know. It's like picking a wife. When you go out on a date you say to yourself, "She's a beautiful woman. She looks nice. She has a nice conversational tone to her. I've met her mother and father, and I think she comes from a nice family. We seem to get along and have similar values and similar conversational ability to have a smooth conversation."And in many cases, our judgment proves to be correct. In some respects, finding a candidate to buy a business is a very similar process. You have to put a lot of care and a lot of analysis and do it to come up with the right answer. That's the best thing that I can suggest here.
Jeff: What do you say, too, Walter, that if you can expand your network of associates or friends or people, colleagues that have had some experience with buying a business in the past or knows someone who has bought a business and has been able to successfully transact, that they tried to form those kinds of association so they can get as much up-close information as they can.
Walter: Well, let's analyze that.
Walter: Because we're covering a lot of ground here. Most people do their own income taxes and then send it to their accountant. Most people lay out what they would like to have in the way of a will, or if they get into any kind of difficulty, they send their draft to their attorney. These two people can, from their experience, advise you in a lot of cases, and you can sit down and discuss this with them. One I… "I have a certain amount of capital here. I'm interested in making a bid for a business. What do you think, in your experience, among your clients or from your referral network, that has a business that may be a candidate for sale? Do you know of anybody and why do you think they might be the right one for me?"
Now, he'll talk to you and respond to you in a subjective way because after all, you're a client of his. He wants to make you happy. He wants to make sure that the decisions that you make are the right ones for you in your life's situation. But nonetheless, it's a good starting point. I would say your lawyer and your accountant are two good places to go for more information.
Jeff: Excellent. Very, very good. Walter Zweifler is the Senior Financial Appraiser and the Chief Executive Officer of Zweifler Financial Research and you’re listening to his conversation with me, Jeff Allen, here in the Morgan & Westfield podcast series.
Walter, let's jump ahead now. We have, let's say, we've gone out, we've looked at several opportunities, and there's a maybe company that I'm interested in looking at and seriously pursuing now. I’m interested in finding out more about financing, about being able to afford this business. What are some of the more traditional forms of financing business buyers are turning to today?
Walter: Well, of course, there's always the commercial bank. The place where you have your checking account is a good starting point. They're in the business of making loans. There are loan brokers, and there are private equity investors. There are a myriad of other people that do traditional lending. And then, of course, one area that you'd really have to consider that not many people do is the owner of the business, him- or herself. If you buy the business, and let's assumed that it's a service enterprise, there is no collateral for them to post and the traditional lender will probably not be too anxious to lend to that kind of entity, then you might say the seller himself becomes a source of financing, very as much as it is when you've tried to buy a home or residence. You can get a mortgage from a bank in many cases, and then in others, because of conditions in the area or variety of other factors, you find it very difficult to get a loan. Then you can tell the person making the sale, "If you would like to sell this property, we would like to buy it at an X price, and we would like you to finance us at least for the initial period with what is called seller financing or an owner's mortgage." The same thing is possible with a business itself. It's a very valuable insight if you are buying a practice that is a service practice and there's no hard assets to post—that sometimes is a solution. And we find that it would be very helpful and have assisted people in trying to figure out how to structure such a loan.
I would say your lawyer and your accountant are two good places to go for more information.
Jeff: Walter, how common is seller financing? Have you seen a lot of that?
Walter: Well, if you are an attorney selling your legal practice, and by the way, the canons of ethics do provide for that in many cases, if you're an architect, if you're an accountant, if you're somebody that [who's] selling a business that is a service practice and after all, the United States is becoming more and more of a service-focused economy, that is a very, very widely and growing area of financing it. Because, as I said before, the personal goodwill of the seller and the corporate goodwill or the entity goodwill are what you are acquiring, and it makes sense in a lot of cases for the seller himself to provide the financing.
Jeff: What does a lender look for, Walter? Is it the same kind of a situation that they look for if you're buying a home as far as you've got the collateral, you have the credit, you've got the income. Tell me about the details here.
Walter: If a lender is interested in timely payment of the interest and principal, and that relies on the earning power of the enterprise—the cash flow is another term for that. Earnings are central to the decision to make a loan. And then, there sometimes can be what are called person guarantees where the buyer says, "Well, you know, if you don't earn that at a specific time, I will personally guarantee or partially guarantee for my own net worth that we will continue to pay you on a timely basis." And if he doesn't have those resources or doesn't want to post that guarantee, of course, that downgrades and waters the quality of the loan. But these are the possibilities that you can negotiate.
Jeff: Before we get to that point, should the appraisal of the business have already been done, or is it at this point that the buyer comes back, and they get back with the seller of the business, and they request that appraisal be done in order to determine the earning capabilities of the business?
Walter: They are right. We are getting a cart before the horse. Typically, a seller and a buyer make a decision that this is a target of interest for them.
Walter: And so the question is, what is it worth? In many cases they can say, "Well, I think I can do that." And in some respects they can, but it's better to have somebody that has no other ax to grind to come out, frankly someone like us, who could tell them what is the fair market value of this entity. Once that's decided, that doesn't necessarily mean that that number will become a part of the negotiations. But it will give both sides of the transaction an idea, if they've arrived at their own opinions independently of each other, and they can begin negotiating what they think is the appropriate amount. Sometimes, sellers think their businesses are worth much more than the buyer is convinced that it is worth, and so there are decisions that have to be made in the negotiating process on how to bridge that difference There are lots of ways in doing that. There is what are called workout formulas where the difference between what the seller wants and the buyer's willing to pay gets paid if there is a performance that is delivered after the closing day. There are a lot of other things that can come in at the picture. Is it answering your question.
There is what are called workout formulas where the difference between what the seller wants and the buyer's willing to pay gets paid if there is a performance that is delivered after the closing day.
Jeff: It answers my question. What happens if the bank, they want collateral, but I don't have it, or if I suspect that I'm going to need collateral in order to help finance this business, and I don't have it, what then?
Walter: The first thing is you've got to know that the business is well-financed. It's got to have enough working capital, and it's got to have enough growth capital. It's got to have the ability to earn, and those three things will define the value, the amount of capital that's in the business or can stay in the business. If you are selling services, you don't have much need for working capital because after all, the only thing you have to cover are your facilities, your heat, light and power, and your support staff. But you have to have access to enough funds so that you're not living from hand-to-mouth on the collections that you have from your clients coming in. If it's a business that has inventory and selling a hard good, then you can go to a lot of other things: how much must you extend to your customers to get a sale in a way of accounts receivable; how much accounts payable can you get from your supplier, which is a very worthwhile source of working capital; and how much inventory do you have to carry in order to get the transactions when you want to get them? This is called an analysis of the cash flow turnover, which if anybody wants to know about it, it's a little bit detailed, and beyond the thirty minutes of what you provide us here, and we'll be happy to talk to you about it.
Jeff: There you go. He is Walter Zweifler. I'm Jeff Allen. And through the magic of Skype, we are crossing some 3,000 miles of the United States to chat with you today on the Morgan & Westfield podcast series. It's Buying a Business 101 or Buying a Business for Starters today, and there's going to be some stuff that we're simply not going to be able to cover because as Walter just mentioned, we've got only thirty minutes to do this, and that's why we invite him back again and again. So, you'll get to know Walter I think quite well.
Walter, you just mentioned that if anyone is interested in getting with you on this important topic, at any portions of this show that we're talking about today, they need more detailed information, what don't you just go ahead right now and give out some contact information that might be helpful if people want to reach you to get some detailed answers to some of these questions or to ask you some follow-ups that maybe I don't touch on. Where can they reach you? What's the best way?
Walter: The best way is to go to our website which is zweifler.com. Z as in zebra, W as in Walter, E as in Easy, I as in Item, F as in Fox, L as in Love y, E as in Easy, R as in Roger dot com, and that would give you an access to our website as well as our email address. You can get us at firstname.lastname@example.org, or if you want to, you can get a hold of us by Skype at zweifler1. Those are the three ways I would suggest, and I would look forward to anybody—send me your most challenging question and if we can't answer it, we'll find somebody that can give you the answer if an answer exists. Sometimes…
Jeff: There you go. Sometimes they're not so easy to come by, but the chances are Walter's been doing this a while, as you know, and the chances are Walter's going to be able to get you the answer. He can't get it right away. It'll probably take him a few days but stick with him. He's going to make sure that he takes care of you.
Walter, the traditional lenders, what if they say no? What if you can't get financing through them? You can't necessarily ask the seller for full financing I would imagine, maybe they’d put up part of it. But what do you do next?
Walter: If you're selling goods and services, goods, hard goods, you can go to your suppliers and ask them for longer payment terms or on your accounts payable. That's a very good source of funds. If you are a seller and know this whole thing has been oriented to a buyer's perspective, when you become an owner you take the position of the seller, the three places that you can go to, the owner can go to, to find synergy will be the largest customers of the business, the competitors, and the suppliers. These three groups know the business well, know you, know where you are in it, and all of them have an incentive to discuss helping you find capital, possibly even becoming a partner in a joint venture with you. The first thing you want to do is make that analysis as a part of the buying process, so you'll know where to go once you become the owner.
Jeff: What if I'm interested in buying only part of a business for sale? How's the process any different from buying the entire business?
Walter: It's a very good step, the first step in many instances, especially for those who don't have a lot of experience in the business because one of the most important assets that are available from a sale is the experience and seniority of the managing partner or owner or president or CEO. That is a good reason for you to want to keep them in focus and engaged at least for the outset. That is an indulgence you don't often get, because sometimes this person has died or is incapacitated. If there is a junior person or next-in-charge that's available; nonetheless, however it falls, wherever the chips fall, you've got to understand that one of the most valuable assets you've got is the personal goodwill of the seller, and you want to get as much use out of that as you can, either by continuing his ownership or part of the business or by making sure that there's a bridge put in between the sale of the business and the time that you take full management control.
... one of the most important assets that are available from a sale is the experience and seniority of the managing partner or owner or president or CEO.
Jeff: So, in some cases, what you're saying is this could be an advantage to buying just a portion of the business at first with the eventual goal of full outright ownership and 100 percent share or 100 percent control. It seems to me though it could also be something that requires a certain amount of caution that needs to be used by someone whose going into this thinking that they may have a certain amount of control with regard to policy changes, controlling interest, and so forth that all the management benefits come with that. Are there any other questions or particular areas of note, Walter, that you think people need to use caution if they're buying a portion of a business that has in fact been put up for sale?
Walter: Well, it's important when you're getting involved in a family business or a closely-owned business to, and when I say “involved” I mean making or formulating a bid for it, to understand that the status quo in terms of the relationship with the various owners isn't always something that will continue indefinitely. We have an engagement right now of a company that has just full control, has just been acquired by a senior man who’s been in the business as a half partner for a while, and he wants to give 30 percent of the business to his children. And I said, "Fine, that's great." Well, we had to discount it significantly because those children don't have a lot of control, and the fact is, however, that they can get married. And if they get married, there are times when marriages don't work out.
Walter: And there's [there are] divorces, and this changes the whole perspective of how solid the management team will be in the future. And these are the kind of things you have to really look at.
Jeff: And that can really get sticky, it sounds like, some care and caution [are needed]. You need to anticipate those types of things coming up down the line.
Jeff: As a buyer, what can I do? This is one of those "what if" types of things, Walter. What can I do to protect myself from buying a business that will be nothing but problems, just issues? And maybe those weren't the types of things that presented themselves from the very beginning, but I'm starting to see signs that maybe I need to think this back through. Can a business appraiser help me at all to get me set up in case this is something that just isn't going to work out?
Walter: Oh yes, absolutely. An appraisal is more than just looking at the condition of performance and the financials. An appraisal, if it's done right, involves talking to the management team and looking at the real operating guts of the business and raising a lot of contingencies that go along. For example, will the supplier continue to be available to the company? Will they insist on not giving as much terms of accounts payable? Are there people out there that, customers that will insist on to taking longer terms to pay you? How much inventory do we need on hand? These are issues that that could change. Is there some technology that's about to emerge in the business. Is there a competitive structure in the business, in the industry, that will put us at a disadvantage? What do we think is motivation of the seller? Is he a young person? Why does he want to get out? Is there something he's not telling us? Or better still, this man's been around for “X” number of years, is he really as good as he thinks he is? Is his standing in the industry what he describe fits in? Are there others that have supplanted him over the years? These are the kind of questions that you have to talk about when you're looking to make a bid and buy or acquire a business.
An appraisal is more than just looking at the condition of performance and the financials.
Jeff: We have just a short amount of time left to go in this program, Walter Zweifler. What are some of the key takeaways from our discussion today with respect to Buying a Business 101. We're just giving it some thought, and we're in the early stages and we're just learning about what we need to know in order to research and buy our first business for the very first time. Key points from today's discussion you'd like people to walk away from this podcast remembering today.
Walter: One, you want to make a selection about the industry that you think has some particular promise and look into it, who are the competitors and what's the structure and how has it been changing. Two, you have to analyze what the businesses that you are acquiring to the extent that you have information, or if you're the seller, how much you are going to offer it for. And three, you have to look into the question of how the transaction will be financed: how much money am I prepared, as the buyer, to put up, and how much, as the seller, will I insist on having? What kind of financing will be needed to bridge the difference? Will it come from a traditional lender, or can it come from me, the seller? These are the issues that have to be addressed sequentially in the order that I just gave.
Jeff: There you go. And one last time on this particular edition of the program. Walter, if people want to get in touch with you to talk to you about anything that we've discussed on this edition of the show or if they have any questions that are specific to their particular situation, who do they call? How can they reach you? Where do they go? Email, phone… all that stuff. If you could, give it to us one more time.
Walter: The best answer is zweifler.com. If they want to telephone us, we're on area code 212-809-6435, or they can get us on Skype at zweifler1. They can get us at email@example.com for email.
Jeff: There you go. Thank you again, Walter Zweifler. It's good to talk to you again as always, and we'll look forward to chatting with you again soon.
Walter: Thank you and thank you for the opportunity.
Jeff: Thanks again to Walter Zweifler for joining us today on the Morgan & Westfield podcast presented by Morgan & Westfield, a nationwide leader in business sales and appraisals.
Now, if you'd like more information about buying or selling a business, you can call Walter. You can also call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. Until next time! My name is Jeff Allen, and I'll see you again.