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Are You Ready, Willing and Able to Buy a Business? Real Life Examples of How Buyers Misunderstand the Process

For anyone that's ever been on either side of a business buy/sell transaction, you know that the process is not easy. Buyers must be ready to change their life circumstances, have a reasonable risk tolerance, adequate finances, a good credit score, and of course, find the business that fits their criteria.

On the flip side, sellers must willingly let go of their legacy to someone else…someone who promises to continue the business into the future, taking care of the employees, customers, and community.

According to 40-year veteran business broker, Glen Cooper, only about 2% of individuals that respond to a business opportunity advertisement ever buy. After a few years as a business broker myself, I agree with him. It seems that serious, qualified buyers are the few and the brave!

Brokers and sellers often navigate challenging and sometimes frustrating interactions with potential buyers before they find someone promising.

The following real-life examples may be helpful if you are considering buying a business.

Example 1: The Know-It-All Buyer Who Has All the (Wrong) Answers

A business owner (Prospective Buyer) indicated interest in purchasing local companies. After receiving a signed non-disclosure agreement, I provided them with the Confidential Information Memorandum (CIM) for the business.

Prospective Buyer then requested a meeting with the seller and sent over a list of questions, which I forwarded to the seller. A conference call was held between the three of us, in which Prospective Buyer asked questions and the seller answered them.

About a week later, the following conversation happened:

Prospective Buyer says to me, "Thank you for answering my questions. I'm going to be out of town for a few days but I will definitely make an offer".

The following week I received an email from Prospective Buyer saying, "I just wanted to let you know that I am going to pass on this deal. It's just not worth the price you are asking for it."

Given that the buyer's conversation with the seller went well, I was surprised at this turn-around especially since the buyer prospect was also a business owner.

I replied , "I'm curious, what changed between our conversation last week and now? I think the seller will be very disappointed at your change of heart. I hope you'll reconsider. You can make an offer for what you do think it is worth."

Prospective Buyer responds back, "I have a friend that buys and sells businesses for a living and he looked at the information and said that since I own an established business, this acquisition is not a good financial decision for me. Also, the seller works in the business which means it's a job and not a business.

And I know that typically 10-20% of the clients will leave once the owner sells. And further, I gave ample notice about the questions that I needed answered, and the seller couldn't or wouldn't give me any specific answers."

Oh boy. There's a lot to cover here. I'll start with the last comment and work backwards. From my perspective, as a listener to the conversation between this buyer prospect and seller, the questions asked were answered.

Regarding the "10-20% of clients" that will leave when an owner sells.
This is typically because the new owner made drastic changes regarding service level, pricing, availability, or other processes. When buying a business, a new owner is best advised to keep the status quo and not make drastic changes. Your "better idea" will still be there in a few weeks or months. Perhaps there is a reason the seller did it that way. Wait and see.

If the seller works in the business, is it really a job and not a business?
Yes, that's right, he does work managing the business just like this prospective buyer who also happens to be a business owner! This lack of self-awareness confounded me. Every owner of every business I've sold has "worked" in the business to some degree on another. However, the myth of owning a small business with passive income persists… those with six figure incomes, part-time hours, recurring revenue, and no employee problems. Perhaps they do exist, and, like Bigfoot, some people have seen them. Sadly, I have not. Yet, I continue to be hopeful.

Sharing confidential information with a friend is a big No, No.
Last and not least the comment: "I have a friend… (or brother-in-law, father, cousin, etc.) who says, your business is overpriced". Gosh. Thanks SO much for telling me that because I'll bet your friend has all the facts about the situation and the specific knowledge and experience to price and sell businesses! However, the most disturbing part of this comment, is that this buyer prospect "shared" the information with his friend who had NOT signed a non-disclosure agreement. This is a big deal and a violation of the seller's trust not to mention leaving a bad impression about the buyer's integrity and intelligence.

Most serious buyers after having a meaningful conversation with the seller, reviewing the financials and operational details in the Confidential Information Memorandum will make an offer. The offer may be low or the deal terms may not be ideal for the seller, but after spending the energy to talk with a seller, making an offer makes sense, doesn't it? It does unless the buyer isn't serious.

Most buyer prospects have the opinion that a business advertised for sale is over-priced. To be fair, some are and some are not. To begin the buy/sell process, someone has to make a move and generally that is the buyer. Deal structure is as important if not more important than price. A low offer with difficult deal structure may be a place to start but a buyer shouldn't expect the seller to accept it as offered.

Example 2: The Buyer Who Expects the Seller Is Desperate to Take His Offer

Recently, an experienced business buyer made an offer for a 30-year-old, profitable, well-operated business. This particular buyer was identified by the seller as a possible acquirer. The seller optimistically looked forward to receiving the offer.

Unfortunately, the buyer was only serious about buying at a discounted bargain basement price structured with a seller note, and $200,000 of the seller's working capital.

An earn out is a provision where the buyer asks the seller to postpone receiving a portion of the business sale proceeds until some future time based on financial performance metrics such as revenues, gross profit, etc. They are sometimes used in large merger and acquisition transactions where the seller continues to work in the business for a period of time after the sale and may retain some control over the company's financial performance.

Earn outs are problematic for "main street-sized" businesses.
First of all, SBA financing requires that the price be known at the time of purchase. I realize there may be workarounds but in the case of a 100% sale of a small business, most sellers aren't willing to accept the risk of an earn out. A more realistic deal structure may include seller financing for part of the transaction.

Furthermore, the seller wants to retire or move on to another adventure. She has no control over the business after she sells it as it is under the new owner's management. A seller typically isn't interested in sticking around and working for the buyer. Also, it is difficult for the seller to believe that that the buyer will heed his guidance to achieve the revenue and profit goals especially when the seller's buy out price is tied to it.

Most small businesses are sold without working capital included in the asking price.
The seller typically keeps the working capital (i.e. cash in the bank, the receivables, and pays the payables) and pays off any long-term debt from the buyer's proceeds. The buyer receives the tangible assets, which include the equipment, vehicles, furniture, plus a normal amount of inventory and any goodwill.

A buyer must provide their own working capital or borrow it.
Financing for working capital needs to be considered in addition to any debt to acquire the business. This prospective buyer's offer was so low, with such an onerous deal structure, that the seller would have received less than half of the offered price in cash at closing. The seller did not accept this offer. I explained to the prospective buyer that the seller may have accepted a lower price, but the structure was a deal killer, especially since the buyer wanted the working capital without paying for it. This buyer declined the seller's counter-offer and refused to make another offer.

The buyer's response told me is that he wasn't really serious about buying this business. He would only buy if it was a "good deal" for him. The deal structure and price have to work for both parties. If you want deal terms such as a seller note or other creative ideas, the offer should be close to full price. If you are offering all cash, then perhaps you can get a discount.

What Really Makes a Deal Happen

To the few, the brave, the 2% - those individuals who will buy a business - remember that the seller wants to sell to the right person who will successfully continue and grow the business. Price and terms are negotiable. Building trust between buyer and seller is critical to making a transaction happen. Trust is created by asking questions, listening, understanding, and treating each other with respect just as you would do when building a new friendship.

To reach a productive outcome for both sides, the buy/sell process should be viewed as a journey that is to be navigated together after understanding the needs and desires of both parties, not a war where one side obliterates the other. If you can't reach a final agreement together, that's fine too.

And just like with some friends, you may decide to agree to disagree on certain points of view. Neither the buyer nor the seller gets everything they want in the deal structure. My experience is that when both sides are a little bit unhappy, then a good deal has been negotiated. There are great businesses available. Are you ready, willing, and able to buy?

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