During our first talk, the gentleman made quite an impression. Not even knowing much about the business he was looking to buy, my focus was on how polished this gentleman was.
I received his call cold one day. He called to inquire about getting a loan to buy a business. This would be my first business acquisition loan ever. I wasn't completely in the dark about business acquisition loans though. I had read a few 'How to Buy a Business' books before. Also, I was knowledgeable on underwriting a business loan.
Fast forward a year and the deal turned out to be a failure and here's a few reasons why.
- Character is more than the money you have in the bank.
- The gentleman and I met to discuss the deal more. Based on his personal net worth, he was able to afford the business loan to buy the business. I had failed to analyze his ability to operate a business though. He didn't even have a business plan explaining how he would operate the business.
- Lack of due diligence
- In my haste to do this deal, I failed to encourage the gentleman to do a complete review of the business. The gentleman trusted in the previous owner's opinion. He should have asked for:
- 3 Most Recent Years of Business Tax Returns
- 3 Most Recent Years of Balance Sheets and Income Statements
- Current Business Licenses
- Customer Lists
- Accounts Receivable Days Outstanding Report as of Most Recent Month End
- Accounts Payable Days Outstanding Report as of Most Recent Month End
- List of All Business Advisors (Insurance Agent, Banker, Accountant, Attorney, Consultants)
- Deed of Trust (the previous owner owned the building)
- Use of a Business Broker
- I failed to bring in an experienced business broker on the deal. Business brokers work with sellers and represent them in a business sale. Business brokers work with both seller and buyers. They help to structure a deal that lowers downside risk.
- The business seller in this deal owned the business for close to 20 years. In a little over a year, the business failed due to mismanagement.
- I would like to think that a business broker would've set up a deal with conditions of performance for the buyer. These conditions would have lowered the downside risk for both the buyer and the seller.
Although I would go on to do several more business acquisition loans, this first one left me with a few scars. But, I learned a couple valuable lessons:
- If a deal seems too good to be true, then it's a BAD DEAL more than likely.
- Money is a great tool to have, but you better have common sense and self discipline to go with it.
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