“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 David only knew the number of times I have heard this pitch or received an email like this. Life would be so nice if buying a business was as simple as he described.
It’s a matter of common belief that millions of baby boomer-owned businesses will transfer ownership within the next few years. One book, written almost 20 years ago, predicted there would be a “tsunami” of businesses flooding the market in the next 10 years. Well, here we are, 20 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 special terms because there will be more supply than demand.
Uh, maybe not.
But, David sure thinks so, and he wants in on the action. A recent MBA graduate from 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. Therefore, David hopes to 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 problem David hasn’t fully come to grips with: he wants a diamond-in-rough 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 (i.e., not diamonds in the rough); in those situations, David will likely find an owner who is willing to finance some of the deal. Ironically, David can buy on seller-financing terms, but it’s 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 that 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 the company manufactured 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. He didn’t consider it a “great” business, so 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 always think of Gilda Radnor’s character. 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. Good luck with that.
Tennessee Valley Group
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