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Today's Employee, Tomorrow's Owner

By Karen E. Klein Q: I'm 25 and have worked at a small company since I was 15, starting as a part-timer. I now have the opportunity to purchase the company from the owner. What should I be aware of and what resources can you recommend? -- M.M., Fort Wayne, Ind.

A: First off, congratulations! It sounds as if the current owner of the company thinks very highly of you. This is a significant opportunity for someone your age and could be the start of an extremely exciting and successful entrepreneurial career.

You're in a good position in another way, too. Having been with a small company for so long, you probably know "where all the bodies are buried" and you have a realistic view of the firm's potential, its pitfalls, and the accuracy of its accounting systems. When buyers come in from outside, their first agenda item is to investigate whether the seller's claims about the firm's financial status are backed up with proof. You should be able to assess that fairly well just from your familiarity with the business -- assuming that you've grown into a management role over the years.

TRUST, BUT VERIFY. That said, you still need to perform the due diligence required of any buyer. Are you satisfied that the current owner has legitimate reasons to sell the business -- and isn't trying to bail out because he knows something you don't? No matter how long you have known this person, the selling transaction will change the dynamics of your relationship. And just because you know the current owner personally, don't neglect crucial financial investigation prior to striking a deal. The decision is too important to simply take someone's word for it.

"Look at the books to make sure the numbers add up," advises Gene Pepper, a business broker based in Glendale, Calif. "It helps if there is an outside accountant who has prepared monthly statements you can review."

Rather than try to handle the transaction yourself, Pepper advises, get expert personal representation. Engage an experienced business broker and a transactional accountant who's been through these sales before to give you advice and look through the financials with you.

HITTING THE BOOKS. Above all, "do not use the seller's broker -- if the business is already listed for sale -- to give you advice," Pepper says. "There's always a conflict of interest there."

When scouring the financial records, go back as far as five years and look for trends in profitability -- either up or down. Ask the owner what caused those trends, if they're not obvious to you already.

"Pay the broker and the accountant on a per-hour basis, with a definite cap on the hours to be used in the due diligence process," Pepper advises. These experts can help you negotiate a price that is fair to both you and the seller and accurately reflects the company's value and potential for future growth.

LOAN GUARANTEE. When it comes to financing the deal (assuming you decide to move ahead), seller financing can be key, says Colin Gabriel, a business broker and author based in Carlsbad, Calif. "This means the owner taking back a note for part of the price, and it is very common in the sale of small businesses," he explains.

For the bulk of the purchase, you're likely to get the best deal from bank financing. "Banks have rough-cut rules of thumb for lending secured by the current assets," Gabriel says. "Depending on the kind of business we're talking about, they might be willing to lend 50% of the value of the inventory and perhaps 80% of the receivables, for example."

Visit some local banks, including the institutions that already have relationships with the company, and find out what they are willing to lend toward the purchase price. Inquire about loans guaranteed by the Small Business Administration, which are offered at many financial institutions. You could then look to the current owner to lend you the balance of the sales price, agreeing to pay the money back in installments over a certain period of time -- say, five years. The bank may ask for a loan guarantee from the seller, who is more likely to agree to seller-financing if he has limited sales options and can get a higher price that way.

YOURS, ALL YOURS! Another issue to consider: What role will the current owner take in the firm once it is sold? Are you prepared to step into the CEO role immediately, or can you persuade the owner to stay involved through a transition period? Often, a longtime owner's continued, but diminishing, involvement over a period of time can be crucial to the continued success of the company. If he or she is financing part of the deal, the motivation to stay involved will be stronger, as it will help ensure that you can pay back your debt on time and in full.

Once you've bought the company, make certain that you are in control and allowed to make decisions the way you see fit, even if the owner stays on in a limited capacity. You should not be constrained by the ideas and vision of the old owner after the company is in your hands.

There are many good resources online. Search such key phrases as "buying a business" or "business purchase." The SBA offers online advice on buying a business. While geared toward sellers, Gabriel's book, How to Sell Your Business -- And Get What You Want!, could help you gain some perspective on the transaction. Short (150 pages) and to-the-point, Buying a Business by Ronald J. McGregor and Kay Kepler emphasizes the basics for first-time business buyers. Good luck!

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues

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