“I’m looking to buy a good business from a founder who is ready to retire but doesn’t have a succession plan. I can come in, learn the business, then I can buy it over time.” As I read the email from David (not his real name), I could only sigh. If he only knew the number of times I hear this pitch or get an email like this. Life would be so nice if buying a business was this simple.
It’s a matter of common belief that millions of baby boomer-owned businesses will transfer ownership within the next ten years. One book, written thirteen years ago, said there was going to be a “tsunami” of businesses flooding the market in the next 10 years. Well, here we are, 13 years later with no tsunami. I’m barely even wet. Amazingly though, many business transfer experts still talk about the 10-year tsunami like it’s a sure thing. The way the theory goes, many good businesses will be forced into making concessions like carrying seller debt because there will be more supply than demand.
David sure thinks so, and he wants in on the action. A recent MBA graduate of a prominent business school, David is hoping to find a business he can buy and run for the long haul. However, David doesn’t have any money, though he does have promises from a few financial backers that they will “look at” opportunities he brings them. So David’s real hope is that he will buy a great business primarily using bank debt and owner financing, so that only 20-25% of the deal will have to come in the form of equity from his financial backers.
But here’s the real world situation: David wants a business that a lot of other people want. Therefore, once that business comes to market, it’s not likely the owner will want or need to carry any seller financing. Of course, there are plenty of businesses out there that aren’t particularly sellable, and in those situations, David will likely find an owner who is willing to finance some of the deal. The problem with this scenario is that the business David can buy on seller terms is usually not the kind of business he wants. Said this way, based on the many situations I’ve seen, the reason a business owner is willing to sell on terms is because there’s some kind of problem with the business and the owner has to be flexible if there’s going to be any hope of a deal getting done.
I see this played out over and over. For example, I talked to David about a manufacturing company with $9 million in revenue that is returning a 7% operating profit. The seller was willing to carry 25% in the form of a note. David wasn’t interested in it; he thought it was a commodity product that could be easily ripped off. It’s almost like he was looking for something that didn’t require any heavy lifting. At the first sign of an issue, he bailed.
You may remember the Roseanne Roseannadanna character played by the great Gilda Radner during the early seasons of Saturday Night Live. Roseanne had a saying “it’s always something.” Whenever an aspiring buyer begins to find the problems with a business, I reply “it’s always something.” Let’s be real, buying a business is not like buying art. Art is what it is, you buy it in its final form; you can’t improve it or hurt it. But a business is a living, breathing thing that has flaws, warts and issues; there’s always heavy lifting. As Roseanne Roseannadanna would say, “it’s always something” …. a problem here, a deficiency there, this shortcoming, etc. Ninety-five percent of all baby boomer-owned business fall in “it’s always something” category.
But buyers like David don’t want a business that has a flaw, wart or issue. They are looking for that piece of art that will safely provide sufficient cash flow for their bank debt service, and of course, a fat salary. If you are waiting for that deal to float in on the coming tsunami, I have a bridge you might want to look into buying.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.