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Scams in Buying and Selling Businesses

June 12, 2012

So, two priests walk into the Parish House and turn on their computer…  No, this is not the start of a bad joke.  Well, actually it really is.  Except that the joke was on the priests when they fell victim to a money scam from outside the USA.

Such scams are everywhere – not just from outside of the US.  Any time there is $1 at issue, there is someone RWA (that’s business lingo for Ready, Willing and Able,) to make a grab at that Dollar, in the most inventive and intricate ways.

This will be our longest post, to date.  So get comfy…

We have seen/heard about a terrible, apparent epidemic that has seems to have befallen Business Owners and forced them to sell their EXTREMELY PROFITABLE businesses at sacrificed prices.  It would appear that each of these people have had fathers, mothers, sons, daughters, husbands and/or wives that are dying, and require the Business Owner to give up his/her business, in order to care for the terminally ill relative.  Except that it seems that it was all a scam, in many cases.

The Sellers use this sob story to get you to buy into their grief, thinking you would not then be the kind of person who would lie – not while sacrificing so much, in order to take care of a sick loved one.  They believe that you would suspend the deepest research activities you might normally take, because this is such a good deal, and from a person with such a good heart.  They might even take a note, because if they get the down payment, they have made sizeable money!

In this very real example, you see that “Business Owners” can be con artists.  What is really sad is that these scammers make it difficult for the Business Owner that really has a relative in trouble, because now everyone is suspicious of such stories.

Brokers can be con artists as well.  (We are Brokers; therefore, saying this is particularly difficult for us to do!)  They can exaggerate earnings, potential, competition – you name it!  It is difficult to determine who the guilty party may be, if you find erroneous information coming from the Broker, because sometimes they will simply provide the information that has been given to them by the Seller.  It is no less difficult for them to validate such information as it is for a Buyer.  Whether it is a Broker or the Seller does not matter; your challenge, as a Buyer is the same.

We know of a series of false Broker-issues that occurred, exemplified by a call we got from a prospective Seller inVirginia.  The Seller said he had a business to sell that would bring in a price of $2 million.  Obviously, we got in the car and headed there, immediately.

We met to go over his Company Tax Returns and after about two hours of work, we were forced to tell him that, in our preliminary analysis, the business was only worth about $650,000!  The Owner was obviously crushed, and we asked him where he got the idea that the business was worth $2 million?  He replied that it was from another Broker.  So, we asked, if the other Broker gave you such a great price, why did he not list with that person?  The Owner replied that he wanted to, but that the Broker wanted $5,000 to provide a final report and list the business!

We were forced to tell the Business Owner that the Broker he was apparently dealing with previously was not really selling businesses; he was selling BAD price opinions.  The idea is to get the Business Owner all excited about the exaggerated price, which in turn gets many people to forget common sense, or push them into questioning the information the con artist provides them.

This is not the first time we have seen this kind of scam.  There was one company that ended up recruiting representatives nationally, to do nothing but sell these kinds of false reports.  Their pitch was that they could provide the Business Owner with a price analysis, allowing the Owner to use this documentation to sell their own businesses, and save themselves a lot of money by not using a Broker.  They charged $7,500 and more, and there were a LOT of Business Owners that bought into this concept.

In all honesty, we sell a Price Analysis program, ourselves.  But there is an easy way to validate the price that is obtained from us and any other Broker around – and we can show that proof with every transaction.  The way to do this is to take the information, (if the Broker does not already do it for you,) and actually to the math to determine whether the Cash Flow justifies the price quoted.  It is fine to look at Depreciation schedules and the present value of Capital Equipment, but in Small Businesses, that information should not represent the overwhelming majority of the value.  Overpricing practices such as those suggested above do exactly that:  They impress the Business Owner with valuing practices that look great, but do not have anything to do with the ability of the Buyer to afford the purchase or obtain a loan to make the acquisition.  In mid- to large-sized businesses, there are other issues; in SMALL BUSINESS, Cash Flow is overwhelmingly vital determinant in price!

The Business Owner or Buyer, in any analysis of an opportunity to sell or buy, MUST perform this critical test.

There are many other types of scams out there.  There are some with Buyers, (in the absence of a Broker to act as an intermediary or an attorney to advise the Seller,) providing small deposits with a contract that actually allows them to take over the business immediately; the Sellers later find out that the contract have signed leaves them no further ability to obtain the balance of the price.  They have sold their businesses for just the deposit money, without realizing it.

Or, the Buyer that is requested to provide a deposit, only to find that the deposit money is not refundable.  Some of these kinds of scams are run against people – Buyers and Sellers, alike – with whom English is not their original language.  The agreements are confusing and constructed for that very reason.  The terms are verbally explained, but are not always what is actually written in the contract.  The target of the scam signs in good faith, but later finds out that he/she is legally bound to something that was not at all what he/she understood it to represent.

But the biggest scams we are now seeing by far, are those involving lending processes.  The crash of the credit system in 2008 has made acquisition funding more complicated and difficult.  People are desperate for sources of loans, and the con artists have taken note.

But so many of these scams are uncovered by doing the most routine kinds of research.  And the tool is right there at your fingertips, as you read this:  It is called The Internet!  Look at the company that is promoting itself and find out whether it has any history.  Is it licensed to do business in the area in which it resides?  Does it offer references?

Complaints on the Net are not always a barometer of whether a given company is legitimate.  The complaint may be due to the fact that the individual lodging the complaint did not get what he/she wanted, but not necessarily because the loan company did anything illegal or dishonest.  With loan applicants, it may be that either the applicant had faulty credit or insufficient capital to bring to the transaction; or the business they wished to buy is overpriced, or otherwise not a good lending candidate.  Applicants that have been denied can be unreasonable and viscous in their comments.  Unfortunately, the Internet invites that kind of anonymous commentary.

The key is to look at trends.  Staying with the lending theme, have an inordinate number of people had the exact, same complaint?  Or, are the complaints so incredible sounding, as to at least warrant that you do more digging, before committing to that company.  One example was an applicant that said he was told by the “lender” that it was having a cash crunch, and that he (the applicant) needed to put money into the system for that lender to continue the application.  This occurred on several occasions and the applicant said he ended up spending $8,000, until he realized he was being taken for a ride!

The point there is, if you are borrowing money, why would you need to lend the lender money, in the first place?!?  People do irrational things, then money is waved at them.  The key word to us is REASONABLENESS!  You need to use reason, with all transactions of this kind.  If it does not smell right, DON’T PLAY THE GAME!

Case Study

One group with which we were trying to work on an extremely large transaction, promoted itself to be out ofManchester,England.  It said it had the ability to lend up to $500 million.  ALARM #1:  A company like that would go through high level networking to get its leads, communicating at the top of corporate ladders, rather than promoting itself on small business forums on the Net.  They do not need the small business Buyer!

We played along, to see how far this would go.  ALARM #2:  The company had no Web Site and the e-mail address was a gmail account.  The principal told us his Web Site was down for maintenance.  That has happened to us, but it did not affect our e-mail account with a domain name attached.  Why would a company that is worth a half a billion dollars use a free e-mail account?

ALARM #3:  The language used as poor, in terms of both its vocabulary and sentence structure.  This was particularly noteworthy in the contract the company offered.

ALARM #4:  We asked for proof that the company had that kind of money at it disposal, and it provided us with account numbers, telephone numbers and even a contact person, for a bank out ofSingapore, with branches inBritain.  The information we were given was purported to be directly from the bank.  However, that contained questionable information, including the fact that it supposedly listed the company’s complete account number.  NO bank in the World is going to send out account numbers to an anonymous individual (like us) over a fax!

ALARM #5:  We called the bank, inEngland.  The contact person listed in the documents given to us by the supposed lender was a name that was completely unknown to the bank, and the bank’s customer service representative said the account number we were given was not a correct number.  When we questioned the lender, he insisted we had done something wrong, because the account number was complete and accurate.  Double-checking the information with the bank yielded the same result.

FINALE:  Up until that time, when the lender’s principal called on the phone, Caller ID had always showed the caller’s number as “Private”.  The discussions became so heated that the principal called several times, and the last time divulged some interesting information by allowing the true telephone number to come through:  That number showed that it originated with a 234 Country Code.  Since we have done international business in Africa, we immediately knew that the phone call was coming fromNigeria – notManchester,England!!!

It must have been such a successful scam, that an almost identical con artist ran advertising a few weeks later.  When we questioned that one, we were actually the recipient of a mild threat.

Keep in mind that not all scams involve you giving the con artist money.  In the lending application process, you will be asked for Social Security Numbers, Bank Coordinates and so forth.  In this electronic world, that kind of information can lead to Identity Theft, which is far more dangerous to you, than $5,000 out of your pocket!

Remember:  If it sounds too good to be true, it normally is.  When lenders promise funds without security, without regard to your credit score and so forth…run, do not walk to another source of loans.

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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5 Comments
  1. Current economic conditions could drive a big increase in the number of people buying and selling businesses. When buying or selling a business, should you trust just any attorney?

    Like

    • Absolutely not! All Attorneys are not aware of all areas of law. It is very sad that a number of Lawyers do not recognize their own limitations. Moreover, we have had only two (2) Buyers lose their deposits in all the years we have been brokering businesses; both losses were unnecessary and BOTH were the fault of bad Attorneys. Among Lawyers, just like in other professions, there are good and bad practitioners.
      As a Buyer or Seller, question Attorneys carefully for their experience and areas of specialty. And ask for referrals from people who have utilized the services of Attorneys when they were buying and selling their businesses, whenever possible.

      Like

  2. Glad I saw this…we have recently been interested in buying a small business in the tourism industry and the owners want way more than the real estate value of the property yet they admit they have not been running it as a full blown business but a family vacation spot (It is rental cabins on a lake). We have contacted a lawyer in the area and he has been happy to help, but has not produced anything else. Should we have to prompt him for things like a title search and a letter of intent? I have worked in real estate as a closer, and I have never had to ask a lawyer to start these services. Should we run for the hills.

    Like

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