How To Vet Business Buyers & Weed Out The Wrong Ones
I’ve talked to many business owners over the years who feel very secure in their business exits, because “someone offered to buy it already.” Unfortunately, all offers are not what they seem. Clinton Lee’s article below helps us sort them through. Posted with permission (see original article here).
When buyers approach you to buy your business, all may not be what it seems.
There are several “internet courses” being heavily marketed purporting to teach people how to buy established and profitable businesses for £1 (or 100% “seller financing”). These courses claim to teach how one can get business owners to hand their businesses over in exchange for virtually nothing (other than a vague piece of paper promising to pay the agreed price out of future profits).
These courses typically cost £4K – £5K, some a lot more, but people sign up for them. And learn the ropes. And then approach you pretending to be well funded business buyers!
There are thousands of such “business buyers” out there who don’t have two pennies to rub against each other but who have designs on acquiring your business by hook or by crook. And the word crook defines some of them very well indeed.
In Texas there’s an apt expression to describe these folk. They are all hat, no cattle.
“Yeah, but I wouldn’t fall for such a con,” business owners sometimes say to me. “Anyone who wants to buy my business will have to pay me all cash.”
Then they engage with these “business buyers”, people who usually pose as cash buyers, and, viola, the business owner has fallen into the trap. In many cases he will end up losing everything in what is nothing but a very sophisticated sting.
Are all unfunded buyers con artists? No. Some are just looking for distressed businesses, or business owners who are so fed up that they’ll sacrifice value in exchange for a quick exit, but these buyers are the exceptions.
And in due course they’ll start their games.
They’ll drag the discussions out to frustrate you, start picking holes, complain about the most mundane of things. They’ll find fault with various facts and figures. It’s all designed to get you on the defensive and get you to make concessions. They have many, many games to play and many tactics to manipulate you!
On each occasion they’ll keep reducing the cash component of their offer. It’s a slow and steady process carefully designed to ensure you never drop out along the way. You’ve always got to feel the end is near and that you’re going to get your money and your freedom soon.
Eventually they’ll reach a point where they’re putting up close to £0 to “buy” your business and you are financing the rest i.e. you’re agreeing to take the balance in installments out of future profit.
A small handful of them will come right out at the start and explain that they’re not looking to invest cash but that, instead, you’ll get a much better deal and you will eventually walk away with a lot more money. They’ll talk structured payments or explain leveraged buyouts or want to take your business over in exchange for nothing more than shares in a larger, merged entity (an entity over which you have no control!)
All Hat, No Cattle.
Agree a deal like that and there’s a good chance you’ll lose your entire business with nothing to show for your years of hard work.
The Other Type Of Buyer To Avoid
The above “buyers” are a nuisance. They’ll sap your time and energy. Getting involved with them loses you good opportunities with genuine buyers.
But there’s another type of buyer you want to avoid as well – the tyre kicker. He’ll sign your NDA, ask all the right questions, play the part of a buyer. But he’s only after information.
Or he’s been hired by your competitor to damage your business.
Or he wants to start his own business and he’s looking for ideas, tips, contacts, information.
He has no interest in buying your business, but you won’t know that till he pulls out at the last minute!
In either case these “fake” buyers will waste your time and frustrate your efforts to sell your business for a fair price. They represent other risks too!
I’ve put together a list of ten questions you can ask them… with a guide on how to interpret their answers.
It’s important to recognise that there are several different types of buyers. You have financial buyers who’re mainly interested in your cashflow, financial statements etc. They’re buying your business but may have no intention of working in it and have no experience in the industry.
And then they are strategic or trade buyers who, typically, pay a higher price because they’re looking to develop your business further and see themselves as able to extract more profit from the business than you have done in the past.
In either case, you are fully within your rights to ask them a few questions. The larger the value of the business the more intrusive the questions asked of buyers. For the largest deals it’s not uncommon to demand buyers provide proof of address, proof of finance, copies of their credit reports, even CRB / DBS (criminal record) checks prior to getting any information about the business!
The below questions aren’t that intrusive, but they should give you a good idea of whether these are serious players or people looking to exploit you.
1.What’s your business background and experience and what business / businesses do you currently own?
If they already own a business in your sector they could be looking to expand. On the other hand, they may just be after a competitive advantage from the information you share through the due diligence process. Both are possible. The other questions below should reveal their real intentions.
Whatever their claims about their background and experience, it may be worth running the person’s name through the (free) Companies House director search service.
I once found that a prospective buyer who claimed to have no connection with my client’s industry was named in Companies House as a director of my client’s main competitor! It wasn’t necessarily a deal breaker that he worked for the competition. His employer could have been looking to expand via making acquisitions in the industry. But to my client the deception signalled bad intent and he decided to not proceed with disclosing company financials and other data to this buyer.
It doesn’t hurt to conduct LinkedIn and Facebook searches on the person or people involved in the bid for your business. Why? Because if their profiles elsewhere don’t match their answer to the above question you have reason to be suspicious and to seek further “clarification”.
2. (For new players to your industry) Why have you chosen this industry and how much of research have you done into my industry?
Your aim here is to establish whether the buyer has chosen your industry or is randomly picking businesses listed at various online portals. Is he ambivalent between a hair dressing salon, a transport company and a software firm?
Serious buyers tend to know what type of business they want, or at least have narrowed it down to a few related sectors. Their choice is likely influenced by the industries they’ve worked in before or in which they otherwise have interests. If they’re looking to make an acquisition on behalf of a company it’s because the board took a decision to expand. You could ask your buyer for a copy of the criteria their board has set for acquisitions.
3. How long have you been looking for a business to buy and/or what businesses have you bought so far?
If they’ve been on the hunt for years and years they’ll never complete on a deal! Conversely, if they’ve only just started they’ll probably want to fish around a bit first and get a feel for the market and for prices. They’ll be in no hurry to complete on a purchase.
Open up the conversation and ask how many businesses they’ve already considered, how far they got with those businesses (early stage discussions / letter of intent / heads of terms) and why they did not proceed to completion.
Another tip: Speak with them on the phone, not just email! While people think carefully about how they word an email they may not be as careful in a phone conversation and may drop a hint or two as to why previous deals failed. That could be a clue as to what dealing with them is going to be like.
This question is where you often catch out the “posers” and the “all hat no cattle” merchants, people who often claim to be experienced buyers who’ve done lots of deals. Ask for details about past deals. Even if they can’t share pricing or other sensitive information they can tell you the names of the businesses they’ve bought and improved (or turned around).
If they are evasive, they are probably lying about about their experience / background. A typical ploy with the “all hat no cattle” buyers is to claim to not be experienced themselves but that they have an adviser / board member / fellow director who’s the expert. And, yes, they’ve often paid some well known “player” for the right to use his photo and background on their website with the claim that he is part of the team. This well known expert will often be the guy who ran the course teaching them how to buy a business for £1!
My advice: these are the most dangerous cases. Run a mile, or ask to speak with the organ grinder not the monkey who’s been tasked with doing the legwork to find a mug or two.
Questions 4 – 10 below are carefully designed to seem innocuous but the answers you get to these will give away more than the buyer intended!
Some of these questions will also paint the buyer into a negotiating corner in specific areas… which you can use to your advantage if you ever get to the point of discussing price and terms with him/her.