Eight Reasons Never to Buy a Business that’s For Sale
Recently, I shared with you how my second deal basically fell into my lap…or literally walked into my office as an employee interview. That was fortunate, but definitely not the norm.
To find deals, you have to position yourself to be looking for deals in the first place. You have to think about where the deals are. While it’s tempting to google “businesses for sale,” all that will do is drag you down a rabbit hole to a bunch of brokers’ websites or business-for-sale websites. And you want to stay away from them.
When you contact brokers, they have their own ideas concerning the deal structure and size. Tackling this mindset and getting them to change their minds can be toxic. Brokers often manipulate the profit figures and then give the seller the idea that they can get huge multiples of the profit. Quite often, that’s because the broker is charging an upfront fee. Their business is less about selling companies and more about signing up sellers to get these upfront fees. This of it this way: Property experts don’t spend their days staring into real estate agents’ windows, and you shouldn’t be looking for bankruptcy attorneys, business-for-sale websites, or business brokers to find your next deal.
Top Eight Reasons
If you’re looking to acquire a business, don’t look for businesses that are for sale. Here are my top eight reasons why:
1. You are probably dealing with a broker:
Not always, but with many businesses that are actively selling, you end up dealing with a broker. The broker isn’t the decisionmaker. Their primary interest is in getting the highest price because, in addition to their upfront fee, they receive a percentage of the deal. You want to deal directly with the principals in order to build rapport. This allows you to understand their motivations and needs. And, it makes it possible for you to present a deal structure that solves their issues and gets you the deal. And that’s a great win-win scenario.
2. You can get into a competitive bid situation:Here, you’re being played against another buyer (real or imaginary). The fact that the owners are actively selling can create huge time traps, whereby you invest weeks or even months of your time only to find out they had a cash buyer all along and just wanted you as a stalking horse.
3. High Expectations: The seller’s better half is down at the Mercedes showroom, picking out the leather colors. Try and talk them down from that one.
4. Mentally Checked-out: Businesses frequently decline the year after they are put up for sale because the owner has mentally checked out. Businesses take nine to eighteen months to sell the conventional way (just the physical process), even when you have a buyer ready. Often, deal fatigue can set in, affecting the business. This then means that at the last minute, the buyer wants a better price for the now smaller business.
5. Who will run it? Don’t buy yourself a job. A business for sale often means the manager who has been running it for years (often massively underpaid) is leaving, and you will need to jump into their shoes—which means you end up with a full-time job. What’s more, if you do a leveraged buy-out (LBO) and borrow money to do the deal, you not only have a full-time job, but all the money from that job goes to the bank for the next five or seven years, assuming the business stays the same or grows. If it shrinks, the bank takes your house. Joy!
6. Manipulated accounts (optimized, if I’m being generous): When businesses are being sold, it’s amazing how good the prior financial year—just before they sell—is compared to the previous eighteen. And, of course, next year will be the best ever! It is also common (especially if there is a broker) to add back expenses to inflate the profits and then multiply the profits up. For instance, they might say they are selling at five- or six-times earnings, but they’ve added back their salary, the interest charges from the bank, the coffee machine, half the phone bill and anything else they can find that they wish they hadn’t bought (but did). The premise being that you won’t incur these costs, so these are the true underlying profit.
Well, you can’t blame them for trying! Any savings you can make are your upside. If they wish they had run the business differently, well then, they should have run the thing differently!
7. Reading too much TechCrunch: A little naivety and reading too much TechCrunch are all that’s needed to massively inflate the ego and price tag of an ordinary business. Find a seasoned entrepreneur who’s had a few more trips around the block in their career.
Bankruptcy Attorneys: Too late—it’s like a doctor looking for patients in a graveyard. If you’re looking for a distressed deal, you want the guy who’s thinking of calling the bankruptcy attorney, because after they do, it’s dead. Most likely, everyone has lost their jobs, creditors won’t get paid, and clients will be left high and dry. If you can get in before all this happens, you can rescue it. Of course, insolvency may form part of a wider strategy, but it’s not a source of deals. It’s a tool, not a market.
In my next blog, I’ll discuss ways that will help you find that next deal—specifically through networking and becoming a business investor. Stay tuned for more insights on doing no-money-down deals.
Until then, have you had any experiences with business brokers? Was what it like? Anything positive come from it?
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