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What Mistakes Should Serious Business Buyers Avoid?

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Comments & Replies: 8     Views: 6464     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director

Topics: Buying A Business     Tags: buying a business

Every day I speak to business brokers, business owner/sellers and I hear some pretty amazing stories about potential buyers of small businesses. I tend to ask them what buyer traits do you listen for to see of a potential buyer is serious? What traits or buyer actions are "deal killers"?

I know when I was a business broker (many moons ago) if a potential buyer said these four items (or several of them - not in any particular order) to me I probably passed on working with them very seriously:

1. "Don't worry about the amount of money I have for a down payment - I have plenty."

2. "I don't really care where the business is located, it's not important."

3. "I don't care what type of business I buy, I am interested in all types of businesses."

4. "I've been looking for a business to buy for over 2 years and haven't made an offer yet on any - non of the deals I've looked at made any sense."

In my opinion all of these buyers made statements that showed to me that they either weren't educated about the process of buying a business, didn't understand the protocol of buying, or just weren't serious about buying in the first place.

What interesting things have you heard from business buyers that made you sense they aren't really serious about buying a business and what advise would you give to serious buyers about what to say, and what to do right when seeking a business to purchase? I would love to hear some funny, interesting stories about past or current buyers and some helpful advise you would give to would be serious buyers.

Contributor: Richard Jamgocyan - Business Broker - Los Angeles County

Here are some responses from past potential buyers and my responses:

1) I would like to buy a business but I won't tell you how much money I have, just find a profitable business, money is no object.

Response: as a broker I would not look for a business for this buyer since I will be running in circles with him without knowing how much funds he has available to work with.

2) Find me a profitable business where I don't have to work full time, I would like a semi absentee business with a BIG PROFIT and as little as possible purchase price.

Response: I would not take on this buyer as well, since he is not willing to pull up his sleeves so to speak, trying to make a big profit without wanting to pay for it. And is interested in a general business without any direction, very tough to deal with buyers like that, they are looking for magic, not a realistic solution.

Contributor: Business Broker, SF Bay Area

The biggest mistake I have seen Buyers make is to not have a clear idea of the type of business they are looking for. Many buyers start off by looking at the money they wish to make and look around for many different types of businesses. But after spending a lot of time understanding what is involved in each business they conclude that they don’t want to do it.

So the three key factors a buyer should consider are:

(i) what do they want to do and why they have a qualification or interest in doing it

(ii) the location, a long commute rarely works out

(iii) down payment they have available to purchase the business.

As a broker when a buyer says one of the following, it is a clear red flag to me that they are unlikely to buy a business:

(i) I won’t provide my financials as you don’t have to worry about down payment

(ii) I won’t be working full time in the business and will have people manage it for me

(iii) don’t worry about the distance.

My best recommendation to Buyers is to think about the following:

(i) what you are good at and what you are excited about

(ii) do you like interacting with many new people or a handful of steady customers

(iii) are you good at managing a large number of employees or a handful of them

(iv) what kind of a work environment are you comfortable with

(v) how much money does the business has to make for you

(vi) how far from home do you want the business to be. Then you can focus on the types of businesses that meet your criteria in the geographic area of your preference.

Contributor: Business Appraisals, Valuations Advisor

Why do Business Brokers feel that all buyers should follow their rules or protocols? Not all buyers approach buying a business in the same manner especially those just starting out in the process.

With a little conversation with all of the four types of buyer mentioned you may help them narrow down their approach. Discussing their backgrounds and their goals will make them more comfortable disclosing more specific information on their wants and needs.

Don’t forget, you as a Business Broker have to prove yourself to them to gain their confidence.

I do know that there are perpetual buyers out there who can never make that leap of faith necessary to own a business but they are just part of doing business.

The two year cutoff makes no sense. If I were looking to buy a business I would not buy a business until I found the right one even if it takes more than two years. My life savings would be involved and I would not settle on something because I have looked for over two years.

Replies To This Comment
Granted that a buyer shouldn't buy a business until he/she finds "the right one." But, what is the "right" business for any particular person will depend on their particular circumstances. And, anyone who has never before owned a business can use a lot of professional assistance in determining what will work for them, and even if they have the temperament and personality to own a business--not everyone does. So, before wasting everyone's time and energy--including their own--prospective buyers should consult with their lawyer, accountant, friends who already own businesses, owners of companies in the field(s) they think interest them, and a business broker, to define their interest, capabilities, limitations, and resources. That will make their search far more productive and their eventual business ownership far more successful.

If buyers want to be taken seriously, they have to act professionally. And the person who knows how the buyer should act is the business broker. For most buyers, this will be the first and only business they will ever acquire, and for a smaller number, it may be one of a few acquisitions they will make. But, the broker deals with scores of sales a year, and hundreds, perhaps thousands, in a career. Yet, so many prospective buyers “know it all,” to their detriment.

The listing broker will expect the following from the prospective buyer: a fully-completed and signed NDA, a detailed financial profile, and a summary of educational and experiential background. Why? Because the seller expects that information before expending hours of time and disclosing highly-sensitive confidential information to a total stranger.

In addition, the buyer should be prepared to discuss with the broker their goals and expectations for a business in terms of time, income, and life-style, preferences for the type of industry and the location, whether they prefer business-to-consumer or business-to-business, 9-5 M-F or 24/7, bricks-and-mortar or service or virtual, retail or distribution or manufacturing, franchise or non-franchise, etc., etc. The broker isn’t going to waste his time and energy or the seller's time and energy with a prospect who hasn’t invested their time and energy in considering and answering these questions.

Furthermore, I have encountered too many "serious buyers" who have never been an entrepreneur, but somehow believe they know all about buying and managing a business. And, I have seen many such "serious buyers" waste their own time and that of brokers and sellers—and I’ve seen them miss some great opportunities—because they won’t acknowledge that they have a lot to learn.

Again, if buyers would recognize that the business broker—particularly the business broker who has owned and operated his own businesses—can be a priceless resource for them, they would be far more successful in their business search, business acquisition, and business management.

So, the most successful buyers are the ones who say:

“I don’t know — show me, teach me, advise me.”

“How much of a down payment should I typically need?”

“What financing options are there from sellers, the SBA, financial institutions?"

“What professionals should I have working with me in my search, during due diligence, in the transition of ownership?”

"What parameters should I be setting for the search?”

“What are your suggestions for matching my abilities, finances, lifestyle, and goals with compatible businesses?"

Contributor: Transactional Attorney

Two of the biggest red flags I see from my potential legal clients on the buyer side are when they are overly-focused on price rather than on value and when they start asking about the possibility of seller financing before we've even talked about the business itself.

When a client is looking for the lowest multiple rather than the best possible business in the industry/area, I will do my best to explain why the vast majority of buyers will be better off buying a great business at a fair price than a struggling business at a bargain price.

I have yet to have a client who insists on focusing solely on the bargain route turn out to be a serious buyer, and I will gently suggest to them at that point that my services may not be the best fit for their needs.

While many transactions will include seller financing these days, clients who focus primarily on the availability of seller financing early on have, in my experience, not tended to be serious buyers. I'd be curious whether this has been a red flag for brokers as well or just something unique to my legal practice.

Replies To This Comment
Buying a business is a serious endeavor -- it's not a "hobby" or a sideline to be taken lightly, even if the intention is for absentee- or semi-absentee-ownership, and even if the purchase price is relatively low.
So, the serious buyer does not waste the time or patience of the seller and the professionals involved by "nickel and diming" the transaction and nit-picking over irrelevant, immaterial, and otherwise totally unimportant matters.

Recently, I sold a business for under $100,000. The seller operated as a corporation and had produced tax returns and a a P&L for the previous year; but, they didn't have a balance sheet. The buyers were acquiring the business, NOT the corporation, not the accounts payable or receivable, not the cash. Inventory as to be acquired at actual per-item cost. A balance sheet would show the value of the corporation's liquid assets and the depreciated value of the fixed assets to that corporation; but, it would be totally irrelevant to the purchase of the assets by the new owner, especially with a business this small. But, because of the inexperience of the buyer's financial adviser and the objection of the buyer to incurring any more unnecessary accounting expense, it took more than a week "to talk them off the ledge" and get on with the deal.

Later in the same transaction, I had to independently remind both parties that they were "98% in agreement" and that their "nickel and diming" was threatening a deal that was very beneficial to both of them.

Buyers need to be aware of and pay attention to the IMPORTANT issues, lest their disproportionate attention to EVERY issue keeps them from seeing the forest because they are distracted by the trees.

Contributor: Business Broker, Northern California

A serious business buyer should present themselves as strong as possible. This includes:

1. Build a resume to show their management experience and any experience they have in the industry they are buying.

2. If they want the seller to provide some finance or get a third party loan, before even starting to look for a business for sale, check their credit report to make sure its accurate.

3. Get a copy of their current score so when they make an offer on a business their offer will be taken seriously.

4. Get a copy of their bank statement with their down payment so it too shows they are serious.

5. Assemble a team of professionals they trust to help advise them - this could include a Certified Business Broker, Attorney and CPA.

Bottom line: If the seller has multiple offers, give them a reason to choose you.

Replies To This Comment
6. If the buyer will be relying on third-party financing, the buyer should get a pre-approval letter from a reputable lender or financial consultant/advisor.

Many great points have been mentioned, and so I won't repeat, but there's one thing I encourage buyers to do early on in their hunt, which is don't see too many business at once. There are so many listings on the market at a time, and so it is easy for a buyer to become overwhelmed, especially if they are a novice. When a buyer calls me up, I only show them three businesses at a time, even though they want to see more, I only send them out on three. A novice buyer can be tempted to want to see as many businesses at once, which is understandable, but it's easy to be overwhelmed, and then defeated by the shear amount of information. A buyer should think hard about what type of business they actually want to go into, and then look at about 3 at a time, and then reflect upon what works and doesn't, and then talk with the broker and go see three more.

  Helpful Resources To Assist In Selling And Buying California Businesses
Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

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Peter Siegel, MBA, BizBen Founder, Lead Facilitator - ProBuy, ProSell

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Elizabeth McGovern: Escrow Services - San Francisco Bay Area

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Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California

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Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

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