Warning! Business Sellers Are Liars

“Business Seller Retiring – Priced to Move”

While searching for an existing small business to buy, the novice entrepreneur will come across a few deals that seem almost too good to be true. There are times when a family situation or a dodgy medical condition may require a quick sale at a below-market price, but these are exceptions that come along rather infrequently. Uncovering the truth as to why a person has decided to sell his or her business is the first step one should take in the due diligence process – an effort that should be extended to all aspects of the pending transaction. But it is only the first step, as there are other red flags to be considered as well. Here are a few avenues worth exploring:

Employee unrest – What is the relationship between management and its workers? One of the best ways to ensure a smooth transition from one ownership group to another involves retaining those who work there. If a labor conflict has caused this relationship to deteriorate, a new owner may be stepping into a bad situation.

Competition – How does the target business stack up against its competition? Make sure that you’re not at risk for being edged out of the market due to pricing considerations or more aggressive marketing tactics. Also, where are those competitors located? A seller may be bailing out because a similar business is opening up across the street or down the block. You don’t need that kind of additional pressure so soon after taking over the company.

Changes in clientele – Has the business experienced a change in the number or type of customers it attracts? Even if sales have remained constant, is the business keeping up with a changing market? If not, revenue could be in for a speedy decline.

Profit & loss – What are the net earnings of the company? Do they compare favorably to the profit margins enjoyed by other firms in the same industry? Some owners may radically cut costs a few months before putting the business up for sale, which can artificially inflate the net earnings figure. Make sure to examine profit-and-loss statements that go back several years or more. If the margins have changed drastically in recent months, no matter in which direction, that should be a cause for concern.

Questionable assets – Exactly what is being sold in addition to the business itself? When companies change hands, oftentimes this involves a sale of assets. This could include equipment, real estate, inventory, and furniture, but it could also involve such intangibles as the client base, intellectual property (patents or trademarks), and goodwill. The intelligent buyer will obtain an independent valuation of each asset, comparing it to the price tag assigned by the seller. In addition, it is wise to ensure that all assets are specifically named on the bill of sale, so that there is no question as to what is included.

To be clear,
one should not enter into the purchase of an existing small business with the expectation that the seller intends to cheat, steal, or lie. The vast majority of business owners are honorable, although they may be tempted to color any situation so that it comes out in their favor. Nonetheless, a skeptical buyer is a smart buyer. Never take anything at face value, and investigate every claim for yourself.

This is the time a professional, well experienced broker can help in providing the desired information to a buyer. In all likelihood, not only has the broker previously helped the seller preparing the business for sale, but a reputable broker also wants to continue working with a buyer and seller (either in form of more acquisitions or later on the sell side) and thus, has a vested interest that both sides are satisfied long after the transfer was executed.