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Archive for Monday, April 29, 2002

Under new management

New owners should make transition transparent

April 29, 2002

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Buying an existing business can provide instant customers and cash flow or instant headaches and debt.

Business broker Tom Kiernan, who has helped hundreds of people buy and sell companies, says one of the biggest problems with new owners is that they make drastic changes before they know how their business operates.

"Why make changes if you don't know the whole picture?" Kiernan asked.

Sometimes if customers learn a business is being sold, they anticipate disruption, such as higher prices and poorer service, so they go elsewhere. The new and former owners need to work together to head that off, Kiernan said. They can do that by writing letters to clients or making face-to-face introductions and assuring customers there won't be drastic changes.

"You want to make the transition totally transparent to both your customers and employees," Kiernan said." You just don't want it to create waves."

Byron Patton has worked hard to have a seamless switchover for his new business. Patton purchased Rainbow Sings from a family that had run the company for more than two decades.

There are many advantages to buying an existing business, Patton said: You get a ready-made customer base, immediate cash flow and skilled workers.

Patton got one thing he didn't want: Twenty-three years worth of outdated equipment. He's been cleaning it up almost since the first day. He also has shifted part of the business's focus from selling supplies to other paint stores. But he has tried to implement changes slowly.

"My advice is to make changes at a gradual pace so all the changes can come together in a cohesive, gradual manner," Patton said.

What if you don't like the business's location, or the color of the stationery? Moving is not a good idea, Kiernan said, nor is changing a company logo or other branding.

"You're paying for that location, that appearance, that phone number," he said. When you change things "you lose the identity you just spent all that money to buy."

While making too many changes too fast is the No. 1 mistake new owners make, there are other common missteps. Many business buyers underestimate how much money it will take to run the company: They dump everything into buying it and don't leave money for unforeseen expenses, such as machinery that breaks down.

Another error: Taking more money out for a salary than the business can afford.

"They look at cash flow and think of it as profit," Kiernan said, so they see the money coming in as income, even though it should be going back into the business to pay bills."

One of the biggest assets in a small business is employees, so it's best not to make quick decisions about firing someone, Kiernan said.

But if staffers must be fired, it's best to do it immediately to alleviate the rest of the staff's concerns, said Evan Wise, managing director of the business consulting firm Management One.

"When there's change in ownership there's a lot of apprehension and people don't know where they stand," he said. "Make those changes immediately and then assure everyone that's left and it's really hard on the people that are left, not the people you've gotten rid of that you've made all the changes you're going to make."

Wise said one way of avoiding employee dissent is by communicating with them, finding out their concerns and asking them how concerns and problems can be alleviated. It makes people happy to know the company listens to them, even if the owner doesn't use all of their suggestions, he said.

"Get people involved and get issues on the table," he said. "Most of the businesses we see don't operate like that."

A business buyer can avoid problems by doing research into its finances and operation. This means learning about staff, management, vendors, inventory and cash flow, among other things.

And it's also important to find an outside person who has business experience and isn't emotionally involved, Wise said. That can be a broker, a CPA, an attorney, anyone who knows about business and whom the buyer trusts.

"Don't try to buy a business without getting some help," Wise said.

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