Whether they are called big lies, little white lies, fibs, misunderstandings or exaggerations, the Californian ready to buy a small business may hear some non-true statements from the seller, or even from the professionals business intermediary (the broker) while examining an offering.
Untrue statements usually are meant to convince a buyer to move ahead on a deal in a situation in which he or she is unlikely to proceed toward a purchase if told the truth. The would-be entrepreneur who is fairly new to the challenge of examining businesses for sale may not recognize a statement that is not entirely, or even partially factual.
So it's a good idea to be informed about those statements encountered when examining a business that may be made by seller or agent, but unlikely to be true.
1. "I don't have the most current figures but I know business is improving." This is a common statement made by sellers who say they haven't got profit and loss figures for the past few months but have provided tax returns or year-end figures for last year. And in some cases, sellers claim they haven't had a chance to file last year's returns with the IRS and want a buyer to rely on performance statistics that are more than a year old.
While I'm aware of a few cases in which the owner of a business simply didn't keep accurate and up-to-date records and had no intention of hiding the company's performance results, that is certainly not the norm. And when someone is trying to sell his or her business it is highly suspicious if the owner can't furnish financials showing recent revenue and earnings performance. To me, it means that the seller is purposely withholding material and relevant information about the business that needs to be disclosed. It's usually correct to assume the owner has something to hide. And it's a good idea for a buyer to dismiss the offering and move on to other business for sale opportunities.
2. "There's more money made here than what shows on the books." This statement is meant to suggest that the seller who has just uttered those or similar words, is letting the buyer in on a little secret""that not all sales are recorded, that some of the revenue generated by the business goes directly into the owner's pocket. Some buyers are pleased to hear this news but most are quite skeptical about it. If the seller is, in effect, admitting to lying to the taxing authorities, is it possible he or she should just not be trusted? If there is some money being collected "under the table," does it amount to a large sum over several weeks and months, or is it a matter of a few bucks, an inconsequential amount when determining the company's income and deciding whether to make an offer? The best advice usually is to avoid a business offering owned by someone who claims to be "stealing" from the taxing authorities.
3. "We'll have no trouble getting the landlord to switch the lease to a new owner." Some sellers making this statement might believe this to be the case, but often are wrong. That's because they haven't taken the time to talk to the property owner to whom rent is paid for use of the business premises. Perhaps the business owner doesn't want to have that conversation until a viable buyer can be introduced to the landlord. It also is often the case that the seller has spoken to the landlord about a change in ownership of the business and has learned not to expect cooperation providing the lease to another party. In some cases, the property owner may require a large "lease transfer fee" (a form of extortion) as a requirement for agreeing to take on a new tenant. It almost always is a good idea for a seller to get a commitment from a landlord regarding transfer of the lease before the business goes on the market. But sellers who don't have that commitment have been known to say the transfer will be "no problem" when, in fact, any deal arrived at between buyer and seller may be destroyed by the unwillingness of the business property owner to cooperate with a transfer.
4. "All the personal property you see here is owned free and clear." Perhaps the seller has forgotten that the refrigeration in her restaurant is being leased. Or the printing company owner has forgotten he still is making payments on one of the company's presses. This statement also may be a little lie that is told to impress the buyer prospect about the financial strength of the company. In any event, any buyer interested in a business should work to ascertain how much of the equipment is owned in due-diligence and will be transferred with the business, and how much of what you see when touring the company is not going to be yours if you make the purchase.
5. "The employees are very loyal to the business. I am sure they're going to stay with a new owner." Unless the owner has discussed the plan with the employees-few sellers actually do this" there is no way of knowing whether or not employees will want to stay with the company when it is under new ownership. And even if employees say: "Yeah, I'll stay," they may have no intention of doing so. Or may change their minds once the buyer takes over the business. Since the statement about employee loyalty cannot be readily verified, the prospective buyer should be aware that he'll need a plan to get competent people working in the business in the event the employees don't stay with the business under its new ownership.
6. "I don't have any special relationships with customers or with suppliers. They will be just as loyal to you as they are to me." Sellers usually are not able or willing to guarantee a buyer that all existing customers and suppliers will continue to do business with the company when under new ownership. Even the seller's firm belief in this statement does not necessarily make it true. And like the statement about loyal employees, there is no practical way to investigate the question. The best plan to guard against the problems of losing key suppliers or customers is to have the seller available, as part of the post-sale training agreement, to introduce the new owner to repeat customers and venders. And the business buyer should plan to institute marketing and customer retention programs immediately upon taking over the business. Sometimes, incidentally, the new owner learns that the seller had alienated people, and is able to get back some of those customers and suppliers by letting them know the company will be under new, more accommodating ownership.
Every owner with a small business for sale does not necessarily mean to purposely mislead a buyer prospect when making some of these statements. But in many cases, when communicating one of these six ideas, the seller is wrong. A smart buyer is aware of this and is skeptical and perhaps seeks verification, when hearing one of these six possible untruths.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Joanne Weber, Broker: Preschool Specialist, Southern California
The Ryan Craig Company is in its 35th year as the recognized expert in Southern California, dealing exclusively in the sale of preschools, Montessori schools, day care centers, and private schools. Our extensive list of references speaks for itself. Phone Joanne at 818-760-3684 for more info.
|Mike Nova, Business Broker: North Bay Restaurant, Retail Specialist
I have over 30 years of direct restaurant industry experience, including my personal experience as a restaurant owner. For the last 7 years I have worked as a Broker specializing in this challenging and ever changing field of restaurant and bar sales. Contact me at 510-708-6682 Cell.
|Timothy Cunha JD, Business Broker: SF Bay Area
SF Bay Area experienced attorney, & business broker. I & my EvergreenGold team offer owners sound advice & expertise to build business value & achieve profitable sales. Call today for a FREE business evaluation & SWOT analysis for your business. Call me direct at 650-600-3751, 650-866-5393 Text.
|Steve Erlinger: Laundry Broker, Consultant - Southern California
I specialize in the laundry industry broker and consultant in Southern California. I assist buyers navigate the many facets of finding, evaluating, and operating a laundry business. I also help current laundry owners find additional stores, sell, evaluate an existing laundromat. Call 949-500-5893.
|Jack Oh, Business Broker: LA, Orange Counties
Business broker and real estate services in the Los Angeles and Orange County areas. 10 years experience with great negotiating skills. To sell a business or buy a business in the LA or Orange County Areas phone Jack and his team at 562-787-4989.
|Peter Siegel, MBA, BizBen Founder, ProBuy, ProSell Programs
Founder & President Of BizBen.com (since 1994). I am the Lead Facilitator for both the ProSell & ProBuy Programs. I consult daily with business buyers, business owner/sellers, and brokers and agents daily about buying and selling California small to mid-sized businesses. Call 925-785-3118.
|Prabhjot Randhawa, Broker: SF Bay Area, Central Valley
I'm a Business Advisor at Liberty Business Advisors of San Francisco. I have over 20 years of experience in all phases of entrepreneurship. During the past 15 years my concentration has been in business of mergers and consulting. I have owned and operated over 10 businesses. 209-815-3842 Cell.
|AJ Rana - Business Broker, San Francisco Bay Area
Professionals who understand the importance of world class business brokerage service and the value it can create. Specializing in assisting sellers and buyers with retail stores, restaurants, hospitality & lodging, manufacturing operations, distribution companies, e-commerce and service businesses.
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