Choosing A Business

Outside of the hard assets and financial statements, almost the entire process of buying a business comes down to intangible issues. I do not mean things like goodwill. Rather, a business sale transaction involves personalities, and so all of the main stakeholders -buyers, sellers and brokers, have to understand that there are many more ambiguous issues than cut and dry ones.

This was so evident to me this week because amongst all my emails there was one from a buyer, a business broker and a seller, all asking my opinion about the same particular business and situation that had arisen.

Here’s the situation: There is a business for sale where the current owner has only had it for three years. The business has not done well – it has not made any profit since he has owned it. However, the seller feels that since he has been making substantial investments to the infrastructure, upgrading assets, and repositioning the company, all of these improvements will benefit the next owner and therefore it warrants a “substantial” premium in the valuation.

The business broker refuses to provide the buyer with any past financials, and will only allow prospects to look at future projections. The broker stands by the asking price and said in his email to me that “anybody can hit the numbers because the business is a goldmine” – to me, that is definitely not the right description for a business that has not made any money in three years.

The buyer has the funds to complete the deal and some prior experience in this type of business. They have told the broker that the projections are simply not realistic based upon their experience. However, they did say that he is open-minded to the projections but needs to review the prior year’s figures to see where the business is now, and refuses to meet the seller until he analyzes them.

Now for a dose of reality: While the business may possibly turn around, it is completely ridiculous for any seller to expect to get a top price for an unproven business. Further, the seller cannot expect to get the entire benefit from the next owner’s effort and skill.

My main question to the seller and broker was: If the business is “going” to be so wonderful, why not first make it so, and then sell it when you can rely on actual numbers and get the right deal? Interestingly enough, both parties told me that the seller is not a great manager (no kidding), but it is primed for someone to take it “to the next level” – I just hate that expression by the way.

What is incredibly bizarre about this particular case is that the buyer and seller have never spoken directly. The broker has recommended it, but the parties won’t listen.

The buyer says he wants past figures. The seller says he wants any buyer to agree in advance to pay a price based upon the projections. The broker is tearing his hair out.

I just love this business!

My take – they’re all right; and all wrong. There are several lessons here for the parties

For the broker: While it almost always makes sense to get buyers and sellers talking, it is incumbent upon you to instill realistic expectations into your seller. Further, suggesting a business that hasn’t made any profit in three years is a “goldmine” is completely reckless. Although buyers will purchase based upon their belief in the future, the only way they can guess what the future holds is using the past as their basis.

To the seller: You have to realize that small business buyers are looking to generate cash flow. That is why they buy existing businesses. If you cannot prove that opportunity to them based upon the prior history of the business, then you have to adjust your thinking and deal expectations. If not, the chances of your business selling are very slim. This business clearly brings up a performance-based deal scenario similar to what you can expect if you want to price your business based upon a large future pending contract. Click here to read a great article that discusses how to factor a seller’s future promises into a deal.

Finally, to the buyer: While having access to past financials is critical, it is not always a requisite to have these before you have a meaningful discussion with the seller. You may discover after a call/meeting that you have absolutely no interest in pursuing the business so why get yourself crazy? Or, you may find that the seller has some valid points and a further dialogue may make sense. Instead of winding yourself up about protocol, take the time to learn about the business. The financial details will come, but first get an overview of the company from the seller. Besides, at the very least, you’re going to learn something.

My final word to any business buyer…

There are no rules cast in stone about how the business-buying process must be staged. While it would be great if all the parties followed an exact process, it just isn’t reality. If you want to be in your own business, you must understand that things do not always operate “like they are supposed to” or that everything is black and white. Get used to the gray areas, or you are going to be in for a huge surprise.

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