Warning! Business Sellers Are Liars?
“Business Seller Retiring – Priced to Move”
While searching for an existing small business to buy, the novice entrepreneur will come across a few deals that seem almost too good to be true. There are times when a family situation or a dodgy medical condition may require a quick sale at a below-market price, but these are exceptions that come along rather infrequently. Uncovering the truth as to why a person has decided to sell his or her business is the first step one should take in the due diligence process – an effort that should be extended to all aspects of the pending transaction. But it is only the first step, as there are other red flags to be considered as well.
Hiding the Truth Behind the Sale
Business owners who are anxious to move on may tell a buyer just about anything to close the deal. A savvy buyer would not purchase a used car without examining its repair history and having a trained mechanic check it over. The same should be true when buying a business, especially since the price tag is significantly higher. Of course, the fact that the owner plans to retire can be perfectly legitimate. However, it should be your goal to uncover the reason behind that decision. Here are a few avenues worth exploring:
- Employee unrest – What is the relationship between management and its workers? One of the best ways to ensure a smooth transition from one ownership group to another involves retaining those who work there. If a labor conflict has caused this relationship to deteriorate, a new owner may be stepping into a bad situation.
- Competition – How does the target business stack up against its competition? Make sure that you’re not at risk for being edged out of the market due to pricing considerations or more aggressive marketing tactics. Also, where are those competitors located? A seller may be bailing out because a similar business is opening up across the street or down the block. You don’t need that kind of additional pressure so soon after taking over the company.
- Changes in clientele – Has the business experienced a change in the number or type of customers it attracts? Even if sales have remained constant, is the business keeping up with a changing market? If not, revenue could be in for a speedy decline.
- Profit & loss – What are the net earnings of the company? Do they compare favorably to the profit margins enjoyed by other firms in the same industry? Some owners may radically cut costs a few months before putting the business up for sale, which can artificially inflate the net earnings figure. Make sure to examine profit-and-loss statements that go back several years or more. If the margins have changed drastically in recent months, no matter in which direction, that should be a cause for concern.
- Questionable assets – Exactly what is being sold in addition to the business itself? When companies change hands, oftentimes this involves a sale of assets. This could include equipment, real estate, inventory, and furniture, but it could also involve such intangibles as the client base, intellectual property (patents or trademarks), and goodwill. The intelligent buyer will obtain an independent valuation of each asset, comparing it to the price tag assigned by the seller. In addition, it is wise to ensure that all assets are specifically named on the bill of sale, so that there is no question as to what is included.
The Skeptical Buyer
One should not enter into the purchase of an existing small business with the expectation that the seller intends to cheat, steal, or lie. Most business owners are honorable, although they may be tempted to color any situation so that it comes out in their favor. Nonetheless, a skeptical buyer is a smart buyer. Never take anything at face value, and investigate every claim for yourself. A slight exaggeration may be one thing, but a pattern of consistently misleading information is a huge red flag for any potential small business buyer.
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07/22/09 at 10:07 AM
I find the title of your blog post “Warning! Business Sellers Are Liars” to be misleading.
I’m a business broker, and while I don’t disagree with you that buyers should look at businesses that are being marketed for sale with a critical and analytic eye, there are many legitimate reasons why a seller may be choosing to exit a business. I’ve found that some sellers are not as forthcoming about the real reason they want to exit, but the reason isn’t because they are trying to mislead or take advantage of a buyer. Rather it may be because of something very personal or even embarrassing (i.e. marital problems, mental health issues, etc.). The majority of sellers I deal with are very forthcoming about the reason for wanting to exit. The title of your post and the accompanying content suggests that there is a bigger problem with seller integrity than there is. Sure, there are some bad apples out there, but most are not. Saying “Business Sellers Are Liars” implies that all or most are. As a broker, I don’t appreciate having a business listing website publish articles that exaggerate issues that scare buyers.
07/23/09 at 02:07 AM
While I agree with a lot of what you say under the headings of, ” Business Seller Retiring etc”,through to “Hiding the truth” and summing up with the “Skeptical Buyer”, I feel it is easy to access whether the owner is getting too old, while illness is harder to pick, but all of it could be very true. The other point of competition should not be a worry, competition keeps prices at a realistic value and at a quality level, why do you see four fuel stations at an intersection? Not just because people are going in that diection, or because they only use that brand, it has a lot to do with the service they receive. While niche markets are good to have, that doesn’t last long as others will open up, good service is the best foundation.
A very rich and successful real estate President gave me some very sound advice, “DON’T PUT YOUR BUSINESS IN THE HANDS OF ACCOUNTANTS”, he did that and almost went bankrupt. He said never let figures cloud intuition. A classic example of how the Treasurer juggles the books, it is extremely hard to judge the business on figures alone, of couse you need a base to work from, but the most important thing, if you feel the business has potential, is how you would run and improve it. Like selling a house, its real value is what people are prepared to pay. Do not confuse that with its book value, like a house, position is important as well as replacement value. Very little value can be put on goodwill, that depends on the buyer, goodwill can be here today and gone tomorrow. An independent valuer, may also have difficulty in placing a value on specialized equipment where its real value lies with the imput to the business. In closing I would like to add, IF YOU HAVE DOUBTS, DON’T DO IT!
07/27/09 at 06:07 PM
Most business sellers are honest and forthcoming about the reason for wanting to sell, but there are some “bad apples” out there so we want buyers to be aware. The issues discussed in the article are not exaggerated – the purpose here is to encourage buyers to do their due diligence when buying a business. Perhaps a better title could have been “Warning! Business Sellers Are Liars?”
01/27/10 at 01:01 PM
As a business broker and Certified Business Intermediary, I have found that most sellers are uneducated as to the process, therefore may appear to be covering something up in the name of confidentiality. The same lack of education befalls buyers as well. A creditable and involved professional broker will be able to assist their sellers and buyers in achieving an understanding of the process, as well as the marketing transparency which allows the business to be seen in a clear, objective light.
If a seller’s business appears to be hiding something, mention this right up front to the broker and you’ll usually find that the broker can correct the communication gap; after all, the broker doesn’t get paid unless and until a buyer makes the purchasing committment. Recommendation: make sure that you are using a professional broker with current International Business Brokers Association cerfification and real estate license. Particularly, be careful about real estate agents who may have good listings, but who don’t understand the vast gulf between selling real estate and selling living, breathing, profit-producing businesses.
Good luck, and don’t relinquish your responsibility to be careful!
01/27/10 at 08:01 PM
A professionally researched & prepared business report which is signed by the seller (and legally binding) can avoid such problems, as will appropriate due diligence by the buyer.
01/29/10 at 12:01 PM
An apt title might be Business Sellers motives. Often, the numbers speaks louder than words. The importance of potential liability disclosure.
Perhaps, most sellers are compelled to aggressively market their business to prospective buyers. Does that make them liars? The reality is the burden is on the buyer. Inherently the broker should create the balance between the buyer & the seller. Often, the broker maybe the one crafting out the sellers business to potential buyers.
A sound business usually will sell on its own … as details are more often forthcoming and verifiable. Rare occurrence, usually more chance of bad apples. Also note: proper accountants document or so witness the actual business operations and the relative decisions.