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Business Buyers want to know why Sellers are Selling

November 3, 2014

Buyers are always suspicious of businesses that are for sale.  They are suspicious about the true net profit.  They are suspicious of the potential, rosey future that is sometimes painted by the Broker or Seller.  And they are always suspicious of the reason the Owner is selling, to begin with.  One of the most common questions in that area is, “If it is such a profitable business, why does the Seller want to sell?!?”

There are endless reasons – legitimate reasons – for a business Owner to want to sell at any particular point in time.  It may simply be for retirement.  It may be for illness.  The Owner may have passed away and the family does not want to continue the business.  The deceased Owner may also not have planned for his/her own demise, and the business needs to be sold in order for the heirs to be able to pay applicable estate taxes.  Reportedly, this is why the Washington Redskins ended up being sold to current Owner, Daniel Snyder.  Similarly, a divorce may demand that the business Owner sell in order to generate enough cash to provide for a settlement that is dictated in the terms of the divorce.

Frequently, an entrepreneur will want to sell his/her business and use the proceeds in order to start or purchase another, even larger business.  There are also circumstances where the business Owner determines that he/she the best years for the business are behind him/her.  That does not mean that the business is necessarily going down the toilet!  But a business that has grown 30% a year for three or four years, will gradually reach a maturation point, where it is still very much a profit maker, but has less in the way of aggressive growth ahead of it.  The Seller may want to go on to other businesses that are more growth oriented.  The Buyer then needs to look at it and determine whether he/she can tweak the business in terms of marketing, promotions or perhaps more efficient operations, in order to achieve greater profitability.  There are some circumstances where a Buyer may simply be happy with the current level of profit, and wish to do nothing more than to continue the kind of earnings that the current Owner now enjoys.

There is nothing wrong with either of these kinds of scenarios.  But the wise Buyer needs to understand the state of the business and where its future may lie.

There are also some circumstances where the Seller may see that the business’s true best years are behind it, and the future may either be stagnated, or even rather bleak.  We had a circumstance many years ago when two guys came to us to list their Public Phone business.  They owned a string of such Phones throughout the area, and appeared to be making it of money.  We were uncertain as to why they wanted to sell, and sell in relative haste, no less.  We did a little research of our own prior to taking the listing and realized that there was this new phenomenon called the “mobile phone”, that was just now becoming popular.  The real threat to their business was the fact that the prices for mobile phone equipment and associated services were beginning to drop substantially.  They knew that their Public Phone business was going to die very quickly and very soon, and they were trying to sell out while they still had something to sell.  We did not take the listing.

So there are some circumstances where Sellers will be less than forthcoming about the prospects for the business’ future, and it is up to the Buyer to do in-depth research about the market, before buying.  This is one of the reasons why we are so strong in our suggestion that Buyers should ideally be looking to purchase or start businesses in industries where they have some experience and knowledge.  Particularly with quick changing technologies, something that looks very promising today can be popping up in surplus stores or antique shops tomorrow.

When you review a business for sale, you are looking at historical data.  At no point does (or should) a Seller or Broker suggest to you that the growth and/or profitability of that historical data is guaranteed to be replicated, once you purchase that particular company.  But outside of that, the ethical obligation to tell you about the future is somewhat hazy.  There may be a highway that has been planned to come through and destroy the location of the business you are contemplating buying.  That highway may have been in the planning stages for 20 years, and it may be yet another 20 years before a final decision is made, and 10 years after that before appropriations before funding is assured – if it is assured, at all!  In that kind of scenario, a Broker or Seller is not obligated to give you warnings about the fact that you could be buying a business that MAY need to be closed in another 30 years, because that highway MAY BE coming right through your store.  In that context, that highway may never actually been built, and may never impact the business under consideration.  The Seller or Broker is not obligated to tell you that a comet MAY some day strike the Earth, thereby destroying your entire market.

On the other hand, if that highway has already been approved, appropriations have been granted, contracts have been signed with construction companies and they are beginning to break ground within the next 12 months, certainly the Seller or Broker has such an obligation to disclose that kind of information.  The disclosure is theoretically required because it is no longer a possibility that the highway MAY affect the business; it is now a matter of fact.

A lot of research and subsequent decision-making in between these two scenarios would be purely up to you.  As a prospective business Buyer, or as an entrepreneur looking to start up a new operation, it is up to you to perform your due diligence on the industry, the business, the market, the economy, the technology and any other variables that may affect your business’ future.  And the way you start doing that is through the development of a detailed and thorough Business Plan.  (See our post about Business Plans:  http://comBrokerbusiness.wordpress.com/2012/01/23/business-plans-who-needs-em/)

In our experience, the vast majority of business Sellers provide information about their selling intentions in honest ways.  There are always the exceptions!  But you, as the Buyer should greet any statements with a certain amount of healthy skepticism.  In working with Financial Statements, review them with your CPA.  In working with Contracts, review them with your Attorney.  Always seek professional assistance when dealing with any technical issues, such as these.

Do not become paranoid about such information, and simply walk away; look at it aggressively and analytically, and always make informed decisions.

(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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