Buyers and sellers sometimes overstate, understate or "forget" to state
Like teachers and the proverbial “dog ate my homework” cover story, seasoned business brokers have also heard it all. Only our tall-tale tellers are taller. And they often don’t realize what they’re telling us is untrue.
Some are, in fact, keeping the truth from themselves.
It happens with those who want to buy a business and those who want to want to sell a business. Typically, their errors and omissions fall into one of three buckets: overstating, understating and “forgetting” to state.
We’ll start with sellers:
1. Because some sellers fear tax consequences, they downplay their financials and the realities of their business. Those who don’t tell their broker the entire truth usually end up getting a lower price, a lesser buyer and a tougher negotiation.
2. Some sellers choose to paint a rosier picture than reality, believing that by misleading their broker he or she will sell their business for a higher price. The facts will come out and when they do, the damage may be too deep.
Such was the case with a retail store owner who engaged Sunbelt to sell his business. A difference in numbers surfaced when the new lease was examined in detail at due diligence—not only a slight $ increase in rent paid per square foot, but also a reduction in common area space that had been provided rent-free and used by seller. The result was a significant increase in cost of occupancy. Questioned as to why not these were not disclosed at the outset, the seller's excuse was not believable. The fallout: the buyer lost trust and walked way, even after the seller offered to reduce the price by $100,000, which would have been fair and adequate compensation. In the buyer's words, he “would not take it for free; [he] wouldn’t deal with people who couldn’t be trusted.”
3. Most sellers do not intend to mislead their broker on their representations about staff intentions, the business revenues and profits, the transferability of licenses, the level of goodwill, and so on, but in practice they offer opinions without having done sufficient research to know whether or not they are telling the truth. While items like this may seem minor at the time of engagement, they become huge when working through diligence with a purchaser.
4. Sellers can mislead brokers and themselves about why they are selling and what they intend to do after sale is completed. While at the logical level some have decided to sell, they may not be ready emotionally to let go and leave a way of life that has defined them for so many years. Seller’s remorse can derail the deal.
Sellers are not the only ones who attempt to mislead business brokers
1. Buyers most frequently mislead themselves. Although they start the business buying process believing they are going to buy a business, six out of 10 will never complete it:
Some are looking for the perfect business, which does not exist. Some are enticed by the thrill of seeking, but unable to take the risk when they find the right opportunity. After learning of the hard work involved, some choose to remain employed. Others have no real idea of the amount of cash needed to buy a business capable of supporting their desired lifestyle; once they find out, they realize they can’t afford to buy.
2. Buyers often mislead their broker during the buyer intake interview, claiming to have far less in capital they actually have. They think they are protecting themselves when in fact they are achieving the opposite. A broker who understands the buyer’s skills and financial resources, their risk tolerance and their lifestyle ambitions can achieve the buyers goals. Without this understanding, it will only be by luck that the proper business is procured.
3. Many buyers highly overstate their access to capital, believing Aunt Sadie and Uncle Tom are going to lend them money for the purchase and Sister Sue will send some as well.
Sales of businesses are not price driven; they are down-payment driven. Tweet this!
Buyers who overstate their access to cash for down payment, end up wasting everyone’s time. They also build up significant animosity—by misleading their broker and the seller they may in fact be creating legal liability.
When you are buying a business, a business broker that knows your true situation can develop structuring that allows you to get the most in terms of results with what you have.
4. Some buyers mistakenly believe they are truly independent people who make the decisions entirely on their own. That is not the case in buying a business. Without the support of family, loved ones and friends, it is impossible to put in the efforts and maintain the focus required to be successful at business. When a broker asks who will be involved in the decision to buy, take the question seriously.
Communicate with your broker
As the buying or selling process evolves it is critically important that you communicate your feelings, ideas and any changes in your reality to your broker i.e. a concern about cash to do debt servicing. If you are getting nervous, let them know. If you don’t, they can’t address the issue. You run the risk of walking away from a great opportunity or perhaps buying a bad business. The same is true for sellers. As you’re working through the transaction, you may learn things that are a surprise to you. Communicate with your broker. Let them position these things to the purchaser.
- A good business broker brings education, experience, market knowledge, ethics, and value to the marketplace—for both the seller and the buyer of the business.
- Business brokers are able to guide both parties through the process of buying a business with advice and impartial sober thought.
- Full disclosure to your business broker reduces risk in the buying or selling of a business. He or she will make sure you are protected.
- It’s the business broker’s job to be impartial and fair, to get the right questions asked and answered. At some point in the transaction, the seller and prospective buyer must each make a leap of faith and trust the other. But the trust will disappear along with the deal if the representations are not accurate, the promises are not real, and the commitments aren’t kept.