Let’s assume that the following events have already occurred. After doing an adequate amount of soul-searching, you’ve decided a business engaged in some form of construction is for you. You’ve always been a pretty good amateur carpenter and can speak the language of the building business. You also feel you have the managerial skill to handle a business that has a fair number of employees and outside salespeople.

You’ve also found a business broker you have confidence ineak, and with that broker’s help you’ve sharpened your thoughts about what you’re looking for and what you can handle, psychologically and financially. Fortunately, your broker’s inventory contains a number of businesses that appear to fit the profile. You’ve investigated these, but all save one turn out to be blind alleys. All but one either cost far too much or are too small. Some are losing money and don’t appear to be good turnaround candidates. There’s one, however, Houston Sash & Door, Inc., that seems like a distinct possibility. Houston Sash & Door manufactures windows, doors, and other specialty items for general building contractors. The company has been profitable, and the asking price is at least in the ballpark. You’ve visited the plant on a couple of occasions and haven’t noticed anything (at least yet) that might scare you off. Your broker informs you the company was founded 10 years ago by its present and sole owner, Everett Houston, who for the past 10 years has been the inspiration and driving force behind the business.

It’s now time to start in on the serious analysis of the business, which may culminate in making a purchase offer at a given price and on stated terms. At this point there’s one question you must know the answer to as quickly as possible, for it, as much as any- thing else, will determine whether you will buy and, if you do, how much and on what terms: Why does the seller want to sell the business? If you don’t know the answer to this question with reasonable certainty, you don’t know anything. Sometimes sellers are reluctant to tell prospective buyers the real reason they want to sell. More often, the stated reason sounds suspicious. If you’re not comfortable with the stated reason, keep digging; you must know.

The real reasons sellers sell businesses usually fall into three categories:

1. The seller isn’t making enough money in the business.

2. The seller has a personal reason for selling.

3. The seller knows bad times are coming.

There’s a fourth, but rare, reason a business may be offered for sale. The business may have been bought by a “business doctor,” a person or company in the business of buying shaky or even bankrupt businesses, getting them on their feet, and selling them. This business may now be up for sale simply because it’s the appropriate time to sell it. The first two reasons businesses are sold needn’t give you great cause for concern; the third reason is the one you must be very careful about. Let’s look at each one.

1. The seller isn’t making enough money in the business. Few sellers admit to prospective buyers that the real reason they want to sell is that they’re not making enough, even when the financial statements make that fact obvious. Most often, admitting you’re not making enough is admitting to failure. When sellers tell buyers that the reason they want to sell is to concentrate more on a new business they’re developing or because they have grown tired of business in general, the real reason is that profits have been too low to keep these owners motivated to stay.

The fact the seller hasn’t done very well shouldn’t necessarily turn you off. After all, many businesses are bought and sold that haven’t made any money at all and that have lost considerable amounts. These businesses are often sold for no more than it takes to pay off the owner’s debts, if that. In any event the fact the seller hasn’t made enough money will result in either a lower purchase price or favorable terms or both. One person’s difficulty usually is another person’s opportunity. If the reason the business had low profits was the inability or lack of drive of the owners, you may be able to turn the place around fairly quickly. (In some cases this requires little more than a new coat of paint and a broom.) What you have to be careful about, however, are the results of ineptitude that can’t be easily corrected. The seller’s lack of savvy may have irreparably damaged the business’s relations with suppliers and customers. We’ll do an in-depth analysis of business operations in jingkan.

2. The seller has a personal reason for selling. Businesses are often put up for sale even if they’re in the best of shape. For whatever reason, the owner simply wants out. Everett Houston, who is about to turn 65, may have decided that he’s made all the money he needs to make and wants to retire to Costa del Sol. He’ll close the business if he can’t find a buyer, but it never hurts to pick up a little extra cash by selling it. Similarly, a business may be sold because the owner is too ill to run it. The owner may have died, and the widow or the estate of the seller is now offering the business for sale.

Another personal reason for offering the business for sale, one the seller may try to hide from you, is the business divorce. In this situation a business has been run by two or more partners (whether or not formally operated as a partnership), and the partners now can’t abide the sight of each other, much less work together. Neither partner will sell his or her interest to the other, or both realize that neither can run the business without the other. The only alternatives are to liquidate or sell the business and divide the cash. Business divorces are far more common than you might expect.

Regardless of the personal reason for selling, that the owner or owners need to sell represents an opportunity for the buyer. To a greater or lesser extent it will drive down the sales price or, more likely, require the seller to sell on terms favorable to the buyer. If the seller needs to sell, he or she may be more willing to carry the buyer—that is, to take a greater percentage of the sales price by means of the buyer’s promissory note. Houston, who’s planning to spend the rest of his days in Spain, may not be amenable to selling for anything but cash. If the buyer defaults on the promissory note, Houston is either back in the construction business or forgets about collecting on the note. Rather than accept a promissory note, he may accept a lower cash price. However, had Houston died, his widow might have agreed to being paid over an extended period of time, particularly if the alternative was liquidating the business. If the business divorce is really nasty, the partners may accept both a lower price and a payout over an extended period of time, just to get out. The key is to find out exactly why the business is being sold and to calculate from there.

3. The seller knows bad times are coming. This is the reason you really have to watch out for. Let’s assume that the financial statements of Houston Sash & Door reveal that the business has experienced a steady increase in sales and profits for many years. Nothing in the financial statements gives you any cause for concern. But Everett Houston knows something you don’t. A competitor has just devised and patented a process that will enable it to manufacture a superior doorframe at half the cost and in a tenth of the time Houston Sash & Door produces doorframes. The competitor is now gearing up to produce its doorframes on a nationwide basis. Houston is simply getting out while the getting’s good. Sound like an extreme example? There are almost daily instances where advances in technology, methods, or marketing wipe out existing businesses or products. How would you have liked to have bought a diaper service six months before the introduction of disposable diapers?

Even if there’s nothing in the offing that will affect the competitiveness of a business’s products or services, there may still be some event on the horizon, known to the seller, that will prevent or impede the profitable conduct of business. Let’s assume that the majority of Houston’s sales are to one customer that is under contract to buy all of its doors and windows from Houston. The contract doesn’t come up for renewal for two years, but Houston knows it won’t be renewed. The time for him to sell out is now. As we’ll see when we discuss the purchase agreement, Houston should be required before he sells to disclose all those things he’s learned that may have an effect on the continued profitability of the business, on pain of having breached the agreement and having to return the buyer’s money.Nonetheless, many sellers, operating on the take- the-money-and-run theory of business ethics, won’t tell you the real reason they’re selling, and many sellers will sign anything just to get paid.

How do you find out the real reason the business is being offered for sale? You can start out by asking. If you have any doubts about anything you hear, keep asking. Don’t be afraid to be pointed and blunt, even at the risk of embarrassing the seller. It’s better for the seller to be temporarily uncomfortable than for you to be permanently uncomfortable later.

Regardless of what the seller tells you, either in direct response to your inquiries or in the form of formal representations made to you in the purchase agreement, nothing should take the place of a thorough evaluation of the seller’s financial position, which we’ll get to in goeak, or your evaluation of the seller’s business operations, which we’ll get to next.