Buying a business from friends or family: 5 tips and traps

Published on May 16, 2010 Buying a business from friends or family: 5 tips and traps

When buying a business, your trust in the seller is a big part in a successful transaction. Friends and family members might be a great trusted source but on the downside, things can get very messy very quickly if there are any points of contention in the transaction.

To make things go as smoothly as possible without causing a huge rift in friendships or with your family members, here are some top tips for buying a business from friends or family.

1. Get it in writing

There’s a tendancy to skip the details when you’re dealing with your family. Never do that! No matter who you’re dealing with, if you’re selling or buying a business, a written and signed document is essential. Make sure it sets out:

• What is included, and what is not included? Do you get the customer details? Is the domain name included? Is the website a hosted solution or an outright one? What does it cost to renew the domain? Has the seller committed you to any supplier contracts?
• When will the sale take place?
• How will payment take place? Who will pay for the transfer costs for things?

2. Head as well as heart

Your head is on top of your heart for a reason! Your friends and family will likely be passionate about their business and it’s easy for their enthusiasm to make you lose sight of the rational nature of the transaction. Passion and the brand are essential elements but so are the numbers.  Look at the amount of revenue that has been earned, the number of customers that they have, their cost to revenue ratio etc. Research the business you are buying well. Plus:

• Research the customers – survey some of them and get a testimonial
• Research the market – can you do a customer survey?
• Get advice from a third party – your accountant, your lawyer etc
• How will the transition work? Will they train you? Will they help you out and answer your questions? Will they compete with you with their next business venture?

3. Consider your experience and the industry?

Whatever you are going to be running, you need to have the requisite skills to run it. You don’t have to be the foremost expert in the industry you are entering but you do have to be passionate about it and have done your research – who are the competitors? How do you stack up against them? What ideas do you have for the business? Do you see yourself doing this in 6 months? 1 year? 5 years?

4. Buy for the right reasons

Don’t buy a business to help your family member out.  If your uncle has been running the business and is tired and wants to retire, that’s not a reason to spend your money. Would you buy the business if it wasn’t your uncle selling it? Also, don’t buy a business if you’re not passionate about the industry. If you hate the industry, you won’t put in the effort and your business will ultimately fail.  It is hard work running a business – you can’t just work 9 to 5 if you want to succeed.

5. Protect your relationships by planning

What happens after you buy? One way that buying from family can lead to problems is when there is post-purchase dissatisfaction. Another is if you don’t plan and run into difficulties. It is essential when running ANY business to plan:

• Work out a business plan. It doesn’t have to be a huge 100 page document, but does need to cover what the business’ objectives are going forward for operations, marketing, and growth targets. Will the business need staff? What are the ongoing expenses? Who are the business advisors? What are the key elements that make this business a success? What is the strategic direction? How is it doing in search engines? How much traffic does the site get? What keywords does it rank on?
• Know how the business will grow. Have some plans for what you want to keep the same and what you will change. 
• Decide what you will and won’t discuss with your friend after the sale goes through. Stick to your plan as it’s easy to whinge to your friend. If you wouldn’t say it publicly don’t bring your relationship under pressure by discussing the business in too much depth after the sale. Talk about this before the sale goes through so you both know what the boundaries are after the sale goes through. Business is business after all.