Possibly one of the most complicated sales is that of a business. Not only are there typically a lot of moving parts, but also credibility issues for both the seller and the buyer. There are plenty of reasons that businesses don’t get sold, but let’s start with one of the most common: The parties need to truly be dedicated to the process.
From the seller’s side, there might be an interest to sell, until they get their valuation. Many business owners believe their business to be worth more than the valuation. The basis of these beliefs might include:
- Stock sells for 20 times earnings, why doesn’t my business?
- My friend Joe sold his business like mine for twice as much as your valuation.
- I need more than that to retire on.
By placing a business on the market with an unrealistic price, it indicates the seller isn’t really serious about selling their business.
Another common barrier to a willing seller is the demand that the business be sold for an all cash price. This can work, but typically the buyer will drive down the asking price significantly since all the risk now resides with the buyer. By working with the seller on flexibility for financing, either seller and/or SBA financing, things are more likely to get done. That’s right, even with SBA loans to buy the business, the seller will be required to take some portion of the sales price in the note. What’s more, the amount may not be repaid until the loan is seasoned, or worst case, the SBA loan is completely paid off.
Another common seller issue will be the documentation for the business. Many businesses will be sold with poor, or even no documentation. Better documentation provides for a wider pool of buyers. Most buyers want to see financial records that will confirm what the business is really generating financially. If the seller isn’t able to provide documentation, sellers need to be more flexible in the due diligence process, like an observation period so the buyer can see how much money goes across the counter every day.
Finding willing buyers has its own issues. Many times buyers are so specific that it becomes a hunt for the purple squirrel- something that doesn’t exist. There are a wide range of businesses for sale at any given time, and having an idea of what you want, and what you don’t want is useful. By being too specific you may exclude yourself from buying any business.
Another buyer issue is the nothing down offer. Buying business is not like buying real estate. The fraud potential for nothing down business sales can be very destructive. An unscrupulous buyer might get a business with no down, sell off the equipment, not pay the employees, keep customer monies and withhold taxes owed. The seller is left with nothing, the employees are left with nothing and the customers are left with nothing.
Buyers with a corporate background may also have some expectations about how books ought to be run. There is no razor sharp enough to separate a small business owner from their business. In many cases the owner will have legitimate, but discretionary expenses on the books. The company may not have to pay for the owner’s car, or cell phone or training in Hawaii, but that’s how the current owner chose to run the business. The business broker will recast the financials to account for these entries. As a buyer you want to have a realistic idea of the cash flow generated by the business. Your due diligence is to make sure the business is “as represented”. You want to make sure the books with the recast show how much cash is generated, because that’s how you can value the business. Stay focused on the important stuff- what is the real cash flow, and what could happen to impact that cash flow?
In my experience, the better the relationship between the buyer and seller, the more likely things are to proceed, because trust is developed between the parties. If both parties are sincere about a deal, things can usually be negotiated to a mutually satisfactory conclusion.