Buying a Business – Tales and Myths About about it
If you’re buying a business and sit down to review the prospectus or the offering memo about that’s for sale, it’s not uncommon to uncover several untruths… or maybe even some outlandish statements by the business owner.
Claims that go beyond puffery and a positive spin only serve as evidence of the stark numbers concerning the poor statistics of unsuccessful businesses sales in North America. According to one expert, just 20% of the businesses for sale ever close a deal. Now for that other 80%: they’ve probably worked tirelessly to start and grow the business, but if there’s no sale, it may mean cutting their staffs, selling assets for pennies-on-the-dollar, and ultimately closing their doors.
Many business owners in that 80% find out after the fact that a successful sale takes planning, time, patience and resources. Some of these business owners elect to pass “Go” and hope to collect the dollars, just like in the board game. They’re assuming that they can head for the exit with the false belief that numerous buyers will be anxiously lining up to and write them a check and close the deal. Probably not the case.
A business owner who—prior to making any moves except to contemplate selling his or her business—will engage the services of an experienced business advisor like Andrew Rogerson in the Sacramento area. With a business consultant on board, the business owner can start to move ahead. Those who try to sell unprepared will quickly discover that their business doesn’t sell. They’ll need to move back to the beginning to get organized and to plan on the appropriate steps.
One element in avoiding the second scenario is the owner making a critical assessment about the strengths and weaknesses of his or her business. Once that is completed, the planning process for a successful exit may proceed.
Here are some snippets from offering memorandums that should send up a red flag as you review a prospective business to purchase:
“I Only Have to Work a Few Hours a Week.”
Some business gurus have a type of touted a new type of entrepreneurship where the owner can just monitor a successful, profitable business from a villa in the Caribbean or while attending your nephew’s baseball game—with only the use of a smartphone. But running a successful business will take more than a few hours a week! The information you receive in the offering memorandum may claim the founder works only a few hours a month; however, after a closer look, you’ll see that there’s more going into keeping the business running.
It’s not uncommon for the Seller’s Discretionary Earnings (or in some cases the EBITDA) to not account for the compensation attributable to the owners for their work in the business. This will inaccurately inflate the value of the business. Without accounting for the actual cost to replace their efforts, an unsuspecting buyer will overpay for the company.
“Buying A Business? The Founders Can Be Replaced by Some Good Consultants.”
While there are plenty of talented technical and leadership resources available to business owners on an “as needed” or project-by-project basis, it’s a bit disingenuous to think that the founders can be swapped out by people someone outsource from a temp company. This may look appealing: it’s frequently used to launch startups and to bolster more mature businesses, however, this lie maximizes SDE/EBITDA, and only works to inflate the purchase price.
“A Buyer’s Who’s a Good Marketer Will Make This Business Take Off.”
Uh-huh… sure. Unfortunately, there are some buyers who accept this line of reasoning as an excuse for poor year-over-year sales growth or an SAAS company’s high churn rate. Working with a business consult, you’ll invalidate this excuse and appreciate other explanations for the business’ minimal growth. When given this line, the trick for you and your advisor is to find and fix the real issues.
“I Know My Customers, and I’m Sure They’ll Be Eager to Work with You, Too.”
In many instances, a business owner will get his or her business off the ground. He’ll be directly involved in sales and fostering of customer relationships. But continuing this practice is an issue as the business matures. A buyer and his or her business advisor will view this as a dangerous situation. The reason is when customers have an excellent personal relationship with the business’ founders, it’s not 100% automatic that they’ll keep doing business after the sale. In fact, if a seller knows each of his or her customers by first name, and they expect the business owner to be involved personally in every interaction, the business will be less valuable to a buyer. These customers may not like the news of the sale and take their business elsewhere.
Get Local Sacramento Business Advice
As you have learned, there is a lot to examine and to interpret when reviewing the offering memo or prospectus when you are thinking of buying a business. Andrew can help you with this decision and in your analysis of the company’s claims and documentation.
Talk with Andrew about buying a Sacramento business or visit our website Services. Contact Andrew via email or call him at (916) 570-2674.