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Why Are Ads to Sell Businesses so Misleading?
We have received requests from a number of Buyers recently, asking us to help them find businesses that met their specific requirements. They came to us because they felt that the advertisements on several bulletin boards for business sales were found to be either horrendously vague or terribly misleading.
We took the time to go through several of the advertisements they had reviewed, and certainly there were several businesses that appeared to be exaggerated in their claims, if not in fact misleading. But not all of their accusations were accurate.
It is unquestionable that a lot of the information on the Internet is false. Ben Franklin, himself said, “do not believe everything you read on the Internet!” (Okay, that was a joke; but remember that you are reading this on the Internet.) Because such information can be delivered anonymously, or in ways that allow the writer to be difficult, if not impossible to trace and validate, the Net provides fertile ground for con artists.
Scamsters find it harder to sell a business – particularly one that has a fixed address, (like a retail store,) or has documentation, (such as tax returns,) that can be verified- than one that does not have any of these traceable characteristics. The biggest scams in this area of the Net seem to be in the area of financing. People that are desperate to get a loan will find huge numbers of offers from supposed lenders, promising ridiculously low interest rates, with little to no qualification required. All they asked this for you to provide your name, address, date of birth and Social Security number. The problem with that is of course, once armed with that information, the con artist has the ability to steal your identity.
We have performed a certain amount of due diligence on some of these financing deals ourselves, and find that many of them do not originate in the states or even countries where they claim to be residing. Most are from countries where there is no legal recourse for anyone that has been cheated by these thieves. We have openly and publicly questioned the validity of several of these organizations, and on at least one instance, have been threatened with violence for not, “…minding your own business”.
But getting back to the Buyers that have complained about the nature of some of the advertising, one of the chief complaints is the vagueness of the ads. Why, they ask am I unable to receive the name and location of the business, from the very beginning?
The answer to that is very simple: The vast majority of businesses of any kind, are sold with extreme confidentiality. No Seller wants his/her employees, customers or suppliers to know the business is for sale. Faced with the uncertainty of a business sale, employees will frequently abandon the owner, thinking that their jobs would be terminated under new ownership, anyway. Customers, even in a retail setting, can lose faith in the business, thinking it will change under the new owner, and that the current owner will simply, quickly lose interest and forfeit thoughts of quality orientation, now that he/she is made the decision to move on. Moreover, they worry that new ownership will not honor warranties and guarantees for any purchases made under the old ownership. Suppliers may change terms of doing business, particularly if their own products or services are billed, for payment at a later date. They would worry that invoices incurred by the current owner would be difficult, if not impossible to collect on, once settlement has occurred.
Most Brokers will not release the name and location of the business until the Buyer has signed a Nondisclosure Agreement, and sometimes provided a Personal Financial Statement, which gives proof that the individual Buyer has the financial capability to make an acquisition of this size. This should not be viewed as insulting or unusual, to the perspective Buyer. As Brokers, we frequently get calls from would-be Buyers who have no more than about $0.10 in their pockets, but tell us they want to make a $1 million purchase. Some of these people have absolutely no idea how business works, especially with respect to the lending aspects of such businesses, while others are simply dreamers. Either way, as a Broker who is charged with the responsibility of protecting the interests of the Seller, we do not want to put such information out on the street, in a cavalier manner.
The other, and more difficult aspect of the complaints we receive from Buyers, is in the nature of them receiving information that would appear to be misleading. Again, unfortunately we need to go back to the fact that some of them are, in fact purposefully misleading. Others are simply exaggerated. But even defining the word “exaggerated” is somewhat difficult. One Buyer may think that, “an extraordinarily profitable store,” is pathetically low to another.
The key to any business is in the Cash Flow and how it relates to the Price. But that ratio or multiple, or however you relate Cash Flow to Price, can be extremely subjective. A number of ethical guidelines among Accountants and Business Brokers suggest how certain things should be evaluated. Bankers and the SBA may have slightly differing methods of qualifying Price. And even among these groups, things are not so infinitely detailed that they are not somewhat subject to further interpretation. Some Buyers, such as experienced Gas Station Dealers or Motel Operators, have completely different industrial rules of thumb for Pricing, that would seem to make no sense to an outsider. Some of the Gas Station Dealers in particular do not even want to say a Tax Return. They ask for the Cash Register Reports showing the number of Gallons that are pumped each month, and the Monthly Gross Revenue produced in the Convenience Store, in a matter of 60 seconds or so, will tell us how much they will pay for a given Gas Station.
The difference in terminology and analyses of financial documentation does not necessarily mean that the Seller or Broker is wontedly attempting to be misleading. In most cases, it is simply a matter of variances in interpretation. Some such analyses are done by the Sellers, themselves. And a portion of those simply may not understand how this kind of information needs to be structured, so that the Buyer can understand the data in a structured manner. As for Brokers, there are simply different interpretations of the same data. Moreover, some are extremely good and well experienced, while others have little or no training and may simply not be practiced. Just like Doctors, Mechanics, Attorneys, Accountants and others, there are good ones and there are bad once. Knowing the people with whom you are dealing, their experience, their standing in the marketplace and other issues are imperative.
But regardless of all other issues, the key to any Buyer in performing any initial screening on a business purchase, or down the road with a more detailed due diligence, is validation. Do not take the Seller’s word for it. Do not take the Broker’s word for it. Do not necessarily even take and Accountant’s word for it in a concrete manner, without questioning his/her conclusions. Everyone can make mistakes! If you, as a Buyer see numbers that appear to be in conflict, get everyone together around a big table and demand explanations. With the possible exception of your own home, the investment you make in a business could be the most crucial financial decision you will ever make.
Do not get frustrated. Do move forward, but only with the utmost in caution.
(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.)