A Few Things Not To Do When Buying A Business

Years ago, I remember seeing the late comedian Buddy Hackett on The Tonight Show. Johnny Carson asked him how, after all these years in showbiz, was he was able to keep coming up with new material for his hour-long shows in Las Vegas. Hackett said he just observes everyday life, and somehow finds comedy in most of it.

Each week, I think about what I am going to write in this blog, and I take this exercise seriously. Identifying a specific topic for me is similar to how Buddy Hackett developed his materials - it comes from everyday life, and specifically from the interactions I have with business buyers, sellers and brokers.

I sometimes receive inquiries through our contact page from people who have not purchased our materials, yet send in a question or two, which I am always happy to address. Some of them however make my shake my head, and this week I two such inquiries that are worth discussing.

The first was from an individual who obviously did not take any time whatsoever to read anything on our website. He simply said: "send me the last three years financials on all your businesses." First, we don't list businesses for sale. Second, it was an inquiry that screamed: "I have no clue what I am doing". Let's assume we did list business and I was the receiving seller or broker of this inquiry. It would be easy to justify sending it to the delete file immediately.

When you submit an inquiry for a particular business for sale listing, first of all make sure you are on the right website. Second, you cannot expect any seller or broker to take you seriously with this type of message. There is a very specific process to be followed. Identify the business, tell the selling party you are interested, and above all, make it very clear that all you want is the appropriate non disclosure document to execute so you can learn more about the business. That is the ONLY way to start the process.

You may not have any experience buying businesses, but you do not have to advertise the fact.

The second interesting email inquiry I had this week that got me thinking was from a gentleman in the Midwest who had found a particular business and was about to make an offer. He explained that the seller just had a deal fall apart with another buyer and the seller was "exhausted" from the process. This buyer felt he could "really take advantage of the seller now."

Although the buyer had some very specific concerns about the business, and namely about three key accounts that represented over forty percent of the volume, he felt he could leverage this for a better deal, but not now.

While it was a text book case for an earnout, and he could have likely negotiated very favorable terms, he had a different tactic. Instead, he was going to put in a full price and terms offer, "get the seller excited", and wait until the end of the due diligence period to go back and renegotiate the deal terms incorporating an earnout on these top clients along with a reduced purchase price. He believed that the seller would "cave in" rather than having to go look for yet another buyer.

When I first read the email I figured I was being secretly taped by Candid Camera, or as my kids would say, I was "getting punked".

Realizing no TV cameras were in sight, it dawned on me he was serious. So let me make sure any buyers reading this know loud and clear that this is not the way to go about solidifying a deal with any seller. This strategy will only result in a lot of dead deals. I have long believed that when a buyer and seller trust each other, and the buyer wants to buy, and the seller truly wants to sell; you cannot stop them from getting a deal done.

Conversely, when either party does things to erode that trust, credibility is gone, and deals head south quickly. If/when you discover issues when analyzing the business, you should either discuss and resolve them, or incorporate a remedy in an offer. Going into due diligence with the sole agenda to renegotiate is not the right approach.

The idea of reaching an agreement with a seller is just that - to reach a deal. Then, you go into the formalized due diligence phase with the strategy to validate whatever has been represented. If not, you either walk or renegotiate.

But don't waste the time, money, and effort consummating a purchase agreement with known "red flags" unresolved with the hopes that the longer you play out the deal, the more likely the seller will be to give in. You may discover the exact opposite response, and then everybody loses.

Comments

[John Gledhill]

Great stuff as always Richard.
You are right on that trust is an essential element in any deal - and especially a deal with an earn-out component. The buyer and seller will still be working together for years to come, or at least they'll still have a relationship, that won't be mutually beneficial without a level of trust.

I am working on a deal now where the seller isn't getting much upfront but could earn a substantial amount of money over a five year period with an earnout. She is also working with the buyer during that period, so it is a true partnership. They've gone back and forth several times, and things at times have gotten a bit heated. However they have come together with a mutually beneficial deal - largely because they have both been up front and honest from the beginning.

Thanks again for your terrific blog.
John Gledhill
www.businessbrokers-newengland.com

FROM RICHARD - GREAT COMMENTS AND A PERFECT EXAMPLE. NOT ONLY DO THE BUYER AND SELLER NEED TO CULTIVATE TRUST TO GET THE DEAL DONE, BUT ALSO TO GO INTO A PARTNERSHIP - YOU CLEARLY HAVE DONE A TREMENDOUS JOB OF GETTING THE TWO SIDES IN THIS DEAL IN SYNC - WELL DONE!!

[Jackie Ossin]

Richard, I'm a business broker in Orlando, FL and have been selling companies for 11 years. I always enjoy your articles. You are an asset to www.Bizquest.com and certainly the Business Brokerage Community. I have had both of these types of buyers, many times, and enjoyed your experience with these two. Looking forward to the next article.
Jackie Ossin, www.crowneatlantic.com.

FROM RICHARD - THANK YOU JACKIE - I TRULY APPRECIATE YOUR KIND WORDS.

[Kara Hetrick]

From someone working in an earnout situation right now, it really does behoove both parties to cooperate and have each other's best interest in mnd. Otherwise, might as well just let the lawyers settle it.

FROM RICHARD: Kara, you are correct that it is always best resolved between the two parties..unfortunately, in my experience, if you leave it to lawyers to "resolve" , it is likely to never get done. They are generally too focused on the technicalities to be able to settle the deal parameters in a fair and equitable manner that mirrors the original intent of having an earnout altogether. In other words, they'll take a simple deal and complicate it to the point of creating animosity between the parties. Or, the language will be come so convuluted, it will be impossible to measure.

[Clinton]

Hi Richard,

Great stuff as usual. This isn't about oneupmanship. It's a game in which both players need to win.

It's not just buyers, sometimes it's the seller who plays silly. With website purchases, for example, I've had cases where the seller tried at the last minute to retain a critical component of the sale - say the email subscriber database - in the hope of extracting a few more dollars. With experienced buyers that rarely works, they'll simply walk away ...even if they've already made a large time investment!

Parties to the transaction sometimes take misplaced comfort from the fact that there's a broker or escrow intermediary. The prevailing logic with some sellers seems to be that if the goods are easily inspected prior to payment then trust doesn't come into it. They forget that the sales contract often has clauses like the no-compete which rely on the buyer trusting the seller way past transaction completion.

FROM RICHARD: Clinton, you are 100% correct. So much of these deals comes down to the parties dealing fairly and above board with one another. Nearly every deal that falls apart is a result of a a seller trying to hide the issues, or the buyer taking a deceitful approach. These are such delicate transactions altogether and the smallest indication of mistrust conveyed by either side makes it so difficult to get the parties to the finish line.

[Metal Buildings]

Very balanced and calculative steps introduced in this write up!The buyer and seller will still be working together for years to come, or at least they'll still have a relationship, that won't be mutually beneficial without a level of trust.