A good business intermediary will get frequent calls from people interested in buying a business. We love these calls; after all, since we get paid when someone buys a business, access to buyers is a good thing. Or maybe I should say, should be a good thing.
It’s easy to over-invest (read: waste) time and energy with someone who expresses interest in buying a business because 98 times out of a 100 (or maybe 99 times out of 100) those conversations go nowhere. Now, this doesn’t mean the person expressing interest isn’t really interested in buying a business. But being interested, and having the capacity and process to do it, are different things. I have seen the behaviors enough that I can identify four signs that you aren’t really interested in buying a business:
- You aren’t honest about how much money you can spend. A business intermediary will always ask a prospective buyer how much money he/she has to invest. Almost every time the prospective buyer will tell the broker the amount of cash they have PLUS the amount they can ostensibly get from friends and family. I often hear it said this way, “I have $500K but I have an investor who can go up to $2 million.” But guess what? That $2 million never materializes, so most people spin their wheels looking at businesses they can never afford to buy.
- 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 are shopping for sport. A smart business broker can smell this.
- You don’t ask about the business model. Three minutes into a meeting a smart business broker knows who is, and is not a real buyer. The serious buyer wants to know how the company makes money, which is a different question than seeing the financial statements. If you don’t understand the difference, don’t think about buying a business.
- You don’t see opportunity. Most prospective business buyers 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 cause the business evaluation process to be overly quantitative. A not-real buyer will decide what metric they think is doable (e.g. 3X EBITDA), then everything rests on finding a deal at or below that metric. However, 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. Smart buyers buy on opportunity, not on price. (caveat: the best deal is the great opportunity that is under-priced!).
Tennessee Valley Group
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