Standardizing The Process of Buying A Business

The last few weeks I have tabled some concepts of people paying for certain services, information and assistance when buying a business. I received an interesting comment from Leon Parker (no relation), principal broker and owner of New Hampshire Business Sales (www.nhbizsales.com) who stated that he is always willing to assist buyers but it requires a buyer that knows: "what they want and being willing to pay for my services to get it, and my feeling that we have the resources to carry out the assignment." I categorically agree with Leon.

Leon has been a regular contributor to this blog for years and always gets right to the issue. His latest comments summarize a fundamental flaw in the business buying process and that is the typical buyer's complete misunderstanding of the process, and the legacy of procedure amongst brokers that has not evolved at all in the past 25 years. Leon's strategy is the right approach but it is not the norm across the industry.

In attempting to identify the core problem, and specifically why so few "buyers" ever complete a deal, I think we need to review and understand some of the procedural issues which I believe are the foundation to the problem, and also the solution.  

Buying A Business Is Not Like Buying Real Estate

The only experience the vast majority of buyers have had in a transaction has been when buying a home or other property. As such, many believe that the process to buy a business mirrors real estate. This includes their perception of how they will search, inspect and finance the "property". While there is some standardization in the real estate world, none exists when buying a business.

Sure there is a general flow of steps, but the added ingredients of human emotions, and the number of potential personalities in a deal, change the whole dynamic. Furthermore, a business is a living, breathing entity not a pile of bricks.

Moving Parts and Lots and Lots Of Them

My wife owns a title company in South Florida (and I'm happy to report her business is booming right now), however, I like to use her business as an example when comparing a business purchase to real estate.

In her business, she has a checklist of 100 items that need to be addressed in every transaction. While the work requires meticulous attention to detail and follow up, typically, about 95 of the items on the to-do list are repeated in each transaction.

Take the same 100-point checklist concept for a buyer, seller or broker in a business transaction, and my bet is that 95 of the items change in every deal. Again, it comes back to the point that a business is fluid, personalities are involved, the issues in one business are completely different from one next door, and on and on the list goes. Standardization of the process is the only way possible to ever get this be a more efficient model because at present, it truly is mayhem, and all of the dismal statistics indicate it.

Too Much Information Is Making It Worse

I believe the process to buy a business is actually getting worse and the Internet plays a major role in the demise. While having access to business listings online is a phenomenal evolution, the abundance of information available has also muddied the waters. Furthermore, the typical buyer can search endless listings, send sellers/brokers infinite inquires, request abundant information, chase data from one website to another and yet never, ever make any progress whatsoever. If they never get out and meet sellers the whole exercise is useless. It's like spending your time on a driving range hitting balls and taking lessons, but never getting out to play a full round. You cannot claim to be a golfer. You are just a ball-hitter.

We have become so programmed to accumulate data and information, and it is so readily available at no cost, that buyers typically hoard it. Data and information is useless unless utilized to reach answers, or compile a strategy. It reminds me of the self-storage unit I have - I don't need it, I don't need the bulk of the crap I have in it, I have plenty of room at my house to store whatever I need, yet month after month I pay $100 to keep all this "stuff".

Everyone Needs To Be Re-Trained

Getting back to Leon's point, and the ones of prior column, the only way to improve the process is to change it. Personally, I would like to see a combination of buyers having to pay for services in conjunction with an across-the-board standardization to the process. As someone who deals with hundreds of thousands of prospective business buyers each year, it is obvious to me where most fall off the wagon - instead of having a roadmap through the process they zig zag their way to failure.

Since new buyers constantly enter the market, they cannot be re-trained. Instead, the process has to be set for them. In this regard, business brokers and sellers must play a more important role in setting forth a standard procedure for how and what information is required from the buyer and conversely disseminated to them. There has to be consistency between individual brokers and offices and states. Buyers see a business with one broker who has a completely different set of procedures, requirements and documents than the broker office down the road. Brokers share listings in one state, but not the next one. The list goes on to perpetuity and this lack of due process is in fact a major contributor to the overall market inefficiencies. I am not laying the blame solely on brokers, but they are the only stakeholders that can influence the process because they remain in place while the buyers change.

How welcome it would be if the key associations drew up standard policies that would be implemented nationwide. There is no doubt in my mind that well thought out procedures would immediately result in more qualified buyers staying in the process, the "lookers" would be eliminated, and more closed deals would materialize.

Hey "Buyers" - You're At Fault As Well

While I can easily pontificate about how to repair the market woes, unfortunately, it is not getting fixed anytime soon. Besides, brokerage is a legacy business and loathe to change, so buyers cannot count on it. Instead, buyers have to go into the process understanding what they face, and how to hurdle any obstacles. If you simply want to spend time looking at listings, don't claim to be a buyer - you're a "tire-kicker". If you want to be a buyer, you need to get in front of sellers. If you want to see company financials and you are not prepared to furnish yours, don't expect to always get them. If the broker wants an offer before they give you detailed data (no matter how stupid that strategy is), you may have to play their game. If you want to have people help you then be prepared to pay for their time and services. If you want to get valuable information, you have to pay for it. You are not going to assemble an action plan that will explain what to do at every stage of the buying process strictly by getting tidbits of free general information off the Internet.

If you want to successfully navigate this process you need to understand the process itself. Understand that buying a business is not like buying real estate. If you do not put yourself in a position of being well prepared and knowledgeable, then you are going to come off as an amateur to sellers, brokers, and bankers. Even worse, this exercise will prove to be a complete waste of time. Since the current buying process is broken, instead of spending time complaining about it, just recognize the moving parts and have the know-how to deal with them.

Have  great week.

Comments

[Rob]

Richard,
I read your course and it is very useful. However, you seem to be according more importance to brokers than is warranted. I have just signed a PSA to purchase an internet business after wasting 18 months going through brokers who I would not have purchased a used car from - let alone a business. In my experience they are generally inexperienced sales men and women who add no substantive value and seem to see their main role as bullying buyers. More importantly most have not woken up to the fact that acquisition financing is not readily available for small businesses at the moment and that affects valuations. They therefore turn away buyers who are offering at sensible multiples and damaging their clients' interests. In the end I am buying the business from a neighbour who is retiring and who sacked his business broker (who was charging 11%) because the broker completely misrepresented the business financials to a CASH buyer (the buyer got cold feet as a result and walked away). An example of how sellers can easily be been burned by business brokers. These guys need to have the heck regulated out of them as currently they are nothing more than spanners in the works. Most are rude and didactic - viewing themselves as critical but only creating roadblocks between buyer and seller. My advice to sellers? Forget the business broker: get a lawyer to prepare a standard NDA for you, get your accountant to help you draw up 3 years P&L and B/S information, write your own business spiel and advertise your business on the internet. Then get your lawyer to close the deal for you, and be around to deal with tricky questions during due diligence. You will save 11% and a lot of headaches. If more sellers do this - it will solve the legacy issue of the business broker.

[Ned Engelke]

I appreciate the article (and the blog). For me, as a buyer, the biggest challenge in finding an acquisition is the misrepresentation of the company financials. In many cases there are significant "add backs" that are inappropriate and that inflate the listing price and the sellers expectations.

Of course, it is possible to find those things through the due diligence process but I am unwilling to spend money/time on that process if I feel that the broker is dishonest (which I do when the financials are misrepresented).

I am all in favor of buyers knowing what they want and being ready to pay for it (including the broker's services) but how about some attention on the real things that brokers do in effort to attract attention to their listings?

An accepted and enforced ethics and accounting standard would go a long way towards making me, as a buyer, more efficient and decisive.

[Jim Pawell]

One of the reasons buyers have to request information on so many businesses is because brokers' descriptions are so vague it is hard to tell what the business for sale actually does. This wastes time for both buyer and broker.
I am a periodic buyer, with two seven-figure purchases in the last three years. I agree that the system could use improvement, but have as many gripes about brokers (poor to non-existen offering memos, misleading claims, faulty numbers, junk merchandise) as you have about buyers.

[Robert Mathews]

Richard,

13 years ago, when I came to work with L. P. Grasso & Co. Inc., Larry Grasso told me that the biggest difference between real estate deals and business deals was "owners don't cry at the closing of real estate deals." It is still the biggest difference.

Prequalification of buyers and a broker's willingness to say no to a wanna-be buyer are two necessary baby steps toward improving the process.

All these years later, we require that a buyer show us their financials before we show them our seller's. It's interesting, those that protest the loudest are the least qualified.

When we do buyer representation they are required to demonstrate that they know what they want and that they are qualified to recognize a good opportunity (for them), to afford it and to own/manage it.

The sanity of your wife's hundred point checklist in our industry is more obvious than ever. Check lists are only good if you're willing to use them. They only work if the information is in the sequence required. It is in the benefit of both the seller and buyer prospect to get to "no" as quickly as possible. It saves aggravation, time, energy and money

For example, our first question to a buyer prospect is: "How many businesses have you bought?" If the answer is none,there is a miniscule chance of a successful outcome.

The second question is: "What industry are you interested in? If they don't know what they want or even what they don't want, the're wasting their time since they will never recognize it when they see it.

[David Newport]

I agree wholeheartedly. Getting all the brokers to agree to a buying process would be great but there are a lot of egos that want to be stroked in this game. If you get a chance please read my latest post as well about buyers buying a business not being sold one. The whole process is setup in favour of the buyer but the buyer has to take responsility for their part in the process. Well done as always.

[dennis]

the article is an eye opener,but what is the solution and or structure that a buyer must have/do
to advance forword in buying process.
dennis

[Computer Consultant]

Any buyer was at some point a tire kicker. This is the only way to learn and figure out what the process is, what to look for etc.

[SarahR]

Your post was facinating. But even more facinating were the first two comments.

Rob and Ned, you two didn't just hit the nail on the head - you buried it.

I have bought more than one business, sold more than one business, and am looking to buy one right now.

Dealing with brokers is most often like dealing with bad boyfriends. They don't call you back, they are rude when they do, and more often than not, they "facilitate the promotion of untruths" (if not just outright lie) when representing the facts of the business in question. Then, they try to bully you when you call them on it.

When they aren't bullying you, they're whining that they can't go back to their seller with the truth that the asking price is too high b/c the seller will be mad at them or think they are working against their interests.

Boo-hoo guys - that's why you get the big bucks. Man up and either educate your sellers as to the facts of life (as presented in those first two excellent comments!) or drop the listing.

And by the way, keeping old, irrelevant, ridiculous, dead, stupid listings around in hopes of snagging a buyer is just so lame.

I feel sorry for the business owners who get stuck will an incompetent buffoon of a broker who fills his clients with unrealistic expectations and bullies away buyers.

That being said, there are many good brokers out there. Richard, you seem like one. But the percentage of bad apples are astronomically high compared to other industries. (sorry guys - it had to be said)

So let me ask, what are you good brokers doing to flush away the bad operators?

[Richard Parker]

MESSAGE FROM RICHARD: The comments received so far this week make all the work I do for each blog worth the effort. Thank you everyone who has contributed to the dialogue. Instead of commenting individually, I intend to highlight some of the more poignant comments in next week's article because so many people will benefit. While I have long believed there are some excellent brokers, unfortunately, the vast majority reflect some of the more negative points raised here. If you really want to locate some of the real pros in the industry, follow the ones that regularly contribute to this blog. While they do not always agree with my perspective, they understand the business of buying businesses, its shortfalls, they set realistic expectations for their sellers, and they know the true way to assist qualified buyers while retaining their obligation to their seller clients.

While I do a select amount of mid-market M & A work, my core business is working with business buyers through the guides we publish (see www.diomo.com) and the consulting services we provide. Even after 19 years of buying and selling my own businesses and teaching others how to do the same thing, I cannot get over the absolute ire that many people feel towards brokers, and I remain flabbergasted by the complete lack of initiative on a macro scale by the business brokerage industry to genuinely improve the way they do business. I don't want to paint the entire industry with the a brush of incompetence because there are some top notch, smart, hard working and sincere brokers who want to see good deals get done for both sides. But overall, the industry still is, without question, better referred to as "business brokenage".

See you next week.

[John Chang]

Hi Richard and the rest of the readers,

Looks like my role in this discussion is to play devil's advocate.

Here's the thing - I agree with a lot of the comments regarding the lack of competence and generally poor service in the business brokerage industry.

The irony is that I claim to be a business broker myself.

Why do I use the word "claim"? Because unless you're doing more deals than you know what to do with and have buyer / seller assistants helping you to close them, you're only a consultant or advisor at best.

I do assist quite a few buyers / sellers at any given time but the reality is that it is harder than ever to finance these transactions, as the already difficult SBA loans are even harder to get, and I can only work so much for "free."

Since I discovered this business relatively late in the game, I haven't put in nearly as much time as some of my esteemed colleagues. However, I have put in a lot more time than probably most people would be willing to for unpaid work.

Here's the thing - I started off with all the enthusiasm and determination to provide the best service possible. Over time, what happened?

Lot of tire kickers, bitter landlords and sellers with unrealistic expectations have the argument to continue grinding it out very difficult to justify.

As Richard says, the industry / process is largely broken. While there are attempts to standardize by reputable associations of brokers, such as CABB - the California Association of Business Brokers - by and large everyone has different ways of doing business.

It's no secret that it takes an average of 6-8 months to sell a business. Meanwhile, CABB has show stat's that indicate only about 1 in 5 businesses are able to be sold. (Again, this is probably based on the days of reasonably difficult financing, NOT the current situation.)

So, the "big bucks" perceived to be paid to business brokers are spent largely to keep the doors open until next deal. Especially since buyers largely don't expect to pay upfront for what they perceive to be included in the purhase price for free.

Meanwhile, as mentioned, the blessing / curse of the Internet is that the business listings are more readily available, which translates to even more information overload to manage for all of us.

I'm not saying this to garner sympathy for overworked business brokers. This is to emphasize the reality of having to quickly filter and work with qualified prospects because there are more tire kickers than ever.

There should be a cartoon showing a crusty old guy sitting in the corner with couple of brokers whispering, "Oh that? That's Bill - can you believe that he's only 29 years old and working with unqualified buyers for a whole 6 months now."

Furthermore, I respect the opinion that giving details only after an offer is "stupid," as stated above. However,I can also see the desire to protect an owner's interests in that sometimes, especially with Internet based businesses, where the "secret sauce" that cannot be patented may be what makes them worth anything at all.

Just my 2.5 cents..

NOTE TO JOHN FROM RICHARD: John, your commens are infinitely more valuable that "2.5 cents". I've been in this business for nearly 20 years, and have written hundreds of articles/blogs/newsletters, not to mention the countless media interviews and seminars i've done, and I will say yours is one of the most honest, refreshing and succinct comments I have ever received. THANK YOU!!

[Harry]

John the broker seems sincere but not typical of the brokers I had the displeasure of working with. I have only owned 2 businesses. One I sold to my partner and the other to the landlord's son, both of which were very easy transactions/experiences, and were completed without the use of a broker.

I am once again in the market to buy a business and I cannot believe the lies and deceipt that goes on by the sellers and brokers alike. I have sat down for the due diligence with at least 10 small business owners and in almost every case the #'s, (especially the cash flow), were misrepresented by 35-50%. The majority were also hiding overheard. I mostly blame the brokers for this because it doesn't seem like they do hardly any due diligence themselves, and if they do, then there should be laws to charge them and/or the seller with fraud or at least a misdemeanor. If the broker knows the #'s are not true, then he/she should not take the job. If they do, then they themselves are dishonest just like the seller.

I am hesitant to make an offer even after knowing all their financials well, because they initially withheld information and lied about the "bottom line". I was afraid they might know of a similar business or competition opening up down the road or of some other ungodly disaster that they were keeping from me. The point is the trust was gone, and all I wanted to do is get out of there and continue my search, even though in most cases I really liked the store, and knew what the owner was doing wrong, or was confident I could raise the sales substantially. The lies and stories (of deceipt) just leave a bad taste in your mouth and you want nothing to do with the dishonest seller and broker. Most brokers are bullies, not "customer-friendly", pretend to lecture you and even try to brain wash you about having a great business to sell you, which is bad enough. A dishonest seller on top of the appauling broker, is a definite deal breaker for me, even if he chases me to the parking lot and drops his asking price by 20% which happened in more than 1 occasion.

This is why it takes so long for a buyer to make a decision... and everyone blames the buyers and that most are tire kickers. If the dang sellers and brokers were honest and represented their business & cash flow truly and sincerely, there would be more businesses selling and selling faster. Now please tell me why out of the 11 businesses I visited, none of the sellers provided the true #'s? How can you blame the buyers when probably more than 90% of the sellers are throwing imaginary #'s at you?

[Steve Sharp]

It sounds like some buyers ran across the wrong broker agents. Even great agents may not be able to help because most agents only have up to 20 of their own listings. I don't see the process getting any better either. I recently wrote an article title "Why Business Buyers Have Difficulty Finding Good Representation"

Key Points:

1. The agent represents the seller.

2. It is more difficult to sell other agents listings.

3. For the agent that did not originate the listing each listing is a new discovery process.

4. Many agents will only sell their own listings.

[Sheila Spangler]

Richard:
I have been a business broker for some time (and before that a banker making business loans). And I agree with you that professionals should be paid for their knowledge in making a deal happen.

Buying a business is not for the faint-of-heart and it is not something that one should undertake alone. Having a good advisor makes all the difference.

And you are absolutely correct in pointing out that without "standardization", buyers (and sellers) will be at the mercy of the broker knowledge and skill (or lack of it).

I do believe that business brokers who have taken the time and effort to join the International Business Brokers Association and become Certified Business Intermediaries, have more skills and knowledge than those that don't.

As a member and a CBI, I am required to continually take educational courses about business brokerage. There is so much to know and things change constantly. There is a lot of risk that is taken on by the broker.

Those brokers who have no desire to upgrade their skills and knowledge should really exit the business.

That would go a long way to improving the standard of service to clients and customers.

I do charge a fee to represent buyers. It eliminates the tire-kickers and puts us all on the same page. My clients know that I am serious when I accept them (and there is an interview process). And it makes for a better transaction and happier clients.