Some Business Buyers Are Their Own Worst Enemy

I mentioned two weeks ago that I always avoid talking in generalities and that is why the recent surveys we have done have been so interesting. We get some fairly open-ended comments and opinions on this blog and I am always apprehensive about reaching any ironclad conclusions based upon the views of a few.

One of the most compelling statistics from the broker survey was that 76.8% of brokers feel that buyers are "poorly prepared". I have always held the same perspective and so I was very eager to measure the response form buyers when asked the question why they had not used or purchased any guides, 'how-to' programs or other resources on buying a business. 

The answer choices were: 1. "Already know enough", 2. "Haven't found any adequate resources" or 3. "Too expensive". Now, admittedly, this was a self-serving question because my company publishes how to guides for prospective business buyers. Although I have been in the business of buying businesses for nearly twenty years, I still cannot comprehend how anyone who does not have a wealth of experience buying businesses could be foolish enough to embark upon this project without educating themselves first.

I want to point out again from last week that 69.8% of buyer respondents to the survey indicated they have been looking for a business for over seven months and so we know that we are dealing with a lot of people who have not made little or no progress.

Astonishingly, when asked the question above about why they haven't bought any resources, etc., 49.6% stated they "already know enough". Now, if anyone in this industry wants to finally nail down the reason why less than ten percent of prospective buyers ever close a deal, there is your answer. (by the way 36% answered # 2, and 14% # 3).

Sure there can be other factors including the poor selection of businesses for sale, difficulty in obtaining financing, sub-par seller books and records, but in a nutshell, whenever you have half of the prospects in an industry thinking they "already know enough" to engage in a project where nearly all of them are first-timers, it is a recipe for disaster.

To me, it was one of those BFO moments as a friend of mine Dale Christie calls it - a "Blinding Flash of the Obvious".

When I look at this statistic relative to my business, I have to shake my head in disbelief. I can understand how from a seller or broker perspective, if half the buyers inquiring about a listing believe they "already know enough" about buying a business, how can you even deal with that type of individual?

In my career, I have been fortunate to work with some incredibly successful people. I just look at two of my clients who are self-made, and each of whom are worth in excess of $500 million. The common denominators they share besides their intelligence and focus, are clearly in their philosophy about how they take on new projects and their steadfast belief that they are "smart enough to know that they don't know it all". And so, they have the luxury to engage the best people in the business to assist them whenever they take on a new initiative.

Yet, for some inexplicable reason, half of the people looking to buy a business who have never done so before actually believe they "already know enough"...wow!! That is a staggering and frightening statistic.

I am not really sure how to even respond to that level of delusion. There are so many moving parts to buying a business, and even though I have been involved in this field for nearly two decades, I still learn something new in every deal. How on earth someone with little or no experience could think they have ample knowledge is simply absurd.

I guess one can only conclude that the dismal statistics that plague this industry inasmuch rest with buyers as they do with the seller side despite the general comments to the contrary from the buyer's perspective.

It's funny because many buyers get upset when a broker/seller asks them to provide their financials or other personal information. These are generally the people that are so quick to bash brokers. And yes, many brokers are far from perfect, but perhaps, a better request that brokers could make to buyer prospects is to have them take an aptitude test about how much they know about buying a business and direct them to appropriate resources to assist them in "buffing up" their skills where needed.

On the other hand, anyone who has the attitude that they "already know enough" about anything, and especially about something where they have no experience, well that is a dangerous individual and a reckless approach.

So while I admit that this particular survey question was somewhat selfish to learn more about the mindset of my typical website visitor, the answers provided a far greater overview of the challenges that the industry itself faces.

A lack of knowledge is easy to overcome when a person is truly committed to educating themselves. Between the Internet and industry experts, the ramp up to being a well-informed and properly prepared business buyer in advance of starting the buying process can easily be achieved. I guess the good news for my own business is that for the other 50% it is clear that we must continue to provide helpful information to buyers and at the same time explain how critical it is to be educated about this process.

As for the 50% who "already know enough" about buying a business and don't need any help, to them I can only express my sympathy since there is no known cure for ignorance.

Have a great week.

Comments

[Mark Edwards]

Richard,

I am a first time business buyer. I purchased and thoroughly read your "How to Buy a Good Business at a Great Price", and think it's a valuable resource, and I've read approximaely 50 books on evaluating businesses, management, accounting, etc., and am preparing myself to make a knowledgeable purchase as well as to be in position to be able to run a busness post-purchase.

I'll have to say that I've lost an incredible amount of time investigating businesses that turn out to be totally misrepresented. I've looked at businesses where the broker hasn't reviewed the books, and when a review has been completed it's obvious that there is no connection between the numbers stated on the ad. and reality. Does the broker adjust the add. ? Of course not, and two or three months later the business is still sitting there with the misrepresented financial picture. In most cases, the owners of a business can't even provide you with any current financial information, and I would think that if I were selling a business I'd have year-to-date information on hand at all times.

I'll just that the entire process is a bit of a mess, but I have met a few really capable brokers and I'm not going to give up.

Thanks again for your great book.
Mark Edwards

[cc]

Do you have survey results for all other questions?

[Barbara Taylor]

There's plenty of blame to go around between ill-prepared buyers, seller and brokers. The key is to be able to spot them quickly and either a) proceed with caution, or b) move on. As a business broker, my goal is to not waste anyone's time. That includes mine, the buyer's or the seller's. Thanks for the candid post. We ALL need to continue to educate ourselves on the business transfer process. To echo your sentiment, just when I think I've seen it all...

[Dan Elliott]

You're not kidding, here's my 5 Dos and Don'ts when dealing with a biz broker http://bit.ly/IYWhA