6 Possible Untruths Told To Business Buyers When Buying A Small Business
Whether they are called big lies, little white lies, fibs, misunderstandings or exaggerations, the buyer ready to buy a small business may hear some non-true statements from the seller, or even from the professionals business intermediary (the broker or agent) while examining an offering for sale.
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 a 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.
About the Author: Peter Siegel, MBA is the Founder & Lead Advisor at BizBen.com (established 1994 - 8,000+ California small businesses for sale & wanted to buy postings - with 500 new & refreshed posts daily). BizBen.com offers business buyers, owner sellers, business brokers and advisors free access to online postings, articles, blog posts, discussions, podcast, resource and broker directories, etc. Peter heads up the BizBen.com ProBuy, ProSell, & ProIntermediary Programs. Peter Siegel, MBA can be reached direct at 925-785-3118.
Peter Siegel, MBA - Founder Of BizBen.com (over 25 years), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.
All Good points Peter. One important point mentioned is getting the lease read by a real estate attorney. Typically when there's a lease assignment, not much can be done to change that lease you'll be inheriting but you should know what your getting into. Some people feel like its a waste of money, it is not. Landlords are litigious and they will hold you to what is written.
Posted By: Transactional Attorney
Great post, Peter! Buyers have to go into an acquisition with their eyes open and you have nailed the key points that can cause disputes down the line.
Once a buyer verifies the above (and all other material aspects of the transaction) they can then start thinking about how to draft the right contract language to protect them if they uncover anything after the transaction that the Seller wasn't honest about.
They will still be faced with the prospect of bringing legal action, but Buyers can at least put themselves in a much stronger legal position by requiring detailed seller representations and covenants ahead of time. Having that additional leverage can sometimes make the difference between lengthy litigation and forcing an early settlement.
There is so much truth in Peter's article about lies.
The savvy seller should anticipate the legitimate suspicions that a buyer may have about the seller's honesty, by doing the following:
1. Even if it's near the end of the fiscal year and all the financials are not yet completed, be prepared to show a buyer current (monthly) sales figures, the recent bank statements showing expenses and deposits, and any preliminary, draft, or "subject to verification" P&L figures for as much as possible of the current or recently-ended previous year. And, if you are serious about selling your business, make one of your top priorities completing all financial documents as soon as possible, even if it mean added expense.
2. If you have "cash" income that you haven't reported in the past, then, as soon as you decide you're going to sell your business, start reporting it! At least you can show that you have seen the light and have stopped cheating; but, Peter is right: if you lie to the government, why won't you lie to a buyer?
3. In many businesses, location is critical to value. The prudent seller has the lease reviewed by a business attorney familiar with commercial leases to determine the terms for assignment and/or sub-let and the seller's possible ongoing liability. If you can, you want to extend the lease for as long as necessary to preserve the value of the location. Every situation is different, but your lease is a very important conversation to have with your business broker and attorney, before you start marketing the business for sale.
4. Be upfront about any finance or leasing liens on any of your furniture, fixtures, or equipment. It's going to come out eventually when the escrow agent conducts a UCC-1 financing statement search. Since any lien will need to be satisfied prior to closing or through the closing by the escrow agent taking funds from your proceeds, what's the big secret? And, in some cases, it might be an advantage: the lienholder might agree to have the new owner continue the payments, thus reducing the amount of cash they will need to close. (Essentially this is easy purchase-money financing.) You end up with the same amount of money in either case; but, if you hide the lien from your broker or buyer, you lose any chance of making the sale easier by transferring payments to the new owner.
5. Employees are a very delicate matter. They can often be your most valuable and most volatile asset. You generally do not want to tell them about an impending sale until it is imminent; but, there are proactive things you can do in advance:
a. Enter into an agreement with your key employees about your "mutual commitment to the long haul." In return for a renewed confidentiality agreement, offer them a bonus if they are "with the company" in six months or a year. Then, make it a provision of your sale that the new owner honors your commitment. As soon as the turnover occurs, you and the new owner reassure the employees that the commitment will be honored.
b. Keep morale high during the selling process. Bring in lunch. Sponsor company social events. Ask "What would make you happier working here?" --and respond positively.
c. Compensate them appropriately and make sure your buyer knows it, by showing how your pay scale compares favorably to your industry's norms. Employees are less likely to jump ship if they are being paid fairly.
6. Anticipate the buyer's legitimate question about the importance and value of the owner's personal involvement with business relationships. Establish regular interaction between your key employees and your essential suppliers and customers. Delegate phone calls, emails, personal visits to these employees. And be able to demonstrate to a potential buyer, by concrete evidence, that you are not the "center of the universe" in your business. One enjoyable and dramatic way to demonstrate that the business relationships will continue without you, is to schedule yourself a 3- or 4-week vacation. If you feel that you can't, you have serious "value-building" to do. If you can take such a break, document the results with copies of your tickets and itinerary and the specifics of your business performance during that time (sales, revenues, expenses, units produced ... whatever). Who knows? The business just might do better without you! Just recently, a seller of a business I have listed left for a two-week cruise. On his return he discovered that they had done just about the best two weeks of business ever! Buyers looking at the business are very impressed!
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