Business brokers always hear from people who say they are interested in buying a business. We love these calls, after all, we get paid when someone buys a business, so access to willing business buyers is a good thing, right? Well, not really, because most of the time these conversations are an utter waste of time.
This doesn’t mean the person expressing interest in buying a business isn’t serious about buying a business. While there are indeed people who shop for sport, for the most part business brokers waste time with those who actually think they are ready to buy a business. Simply said, most buyers think they are ready to buy, but they aren’t. Having experienced scores (maybe hundreds) of conversations like this has led me to identify four warning signs when you aren’t really interested in buying a business:
1. You aren’t honest about how much money you can spend. I will ask a prospective buyer how much money he/she has to invest, and every time (and I mean every time) that prospective buyer will tell me the amount of cash they have PLUS an amount they think they can get from friends and family. I always hear the words “I have X amount but I have an investor who can go up to X million more.” But guess what? That X million more never materializes, so most people spin their wheels looking at businesses they can never afford to buy.
2. You don’t involve your spouse in the process. Anyone who has owned a small business knows they call it a “family business” for a reason. If you show up to look at a business without actively involving your spouse, you’re shopping for sport. A smart business broker can smell this, especially if the business value is $1 million or less.
3. You don’t ask about the business model. Three minutes into a meeting with a prospective buyer, I can tell if the prospect is a serious buyer. The serious buyer wants to know how the company makes money, which is a different question from asking to see the financial statements. If you don’t understand the difference, don’t think about buying a business.
4. You don’t see opportunity. Most business shoppers are like fantasy baseball players, they think they know the game, but analyzing stats is very different from playing the game. The proliferation of business-for-sale web sites has not helped because they make the business evaluation process overly quantitative. A not-real buyer will decide what valuation metric they think is doable (e.g. 3X trailing EBITDA), then everything rests on finding a deal at or below that metric. Conversely, the real buyer doesn’t care so much about initial valuation; sure, nobody wants to overpay for a business, but a smart business buyer knows that a good business buy is way more than just price. A great opportunity over-priced is better than a so-so opportunity fairly priced. Here’s the deal, smart buyers buy on opportunity, not on price. Of course, the best deal is the great opportunity that is under-priced, but if you are only looking for those very rare diamonds in the rough, you’ll never be a business owner.
It might be worth pointing out that I speak with great passion on this topic for two reasons. First, I get these kinds of calls almost daily. Second, I have made every one of these mistakes myself. As the old saying goes “it takes one to know one.”
Tennessee Valley Group
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