“Why do people try to buy a business before they have money to buy a business?” Randy (not his real name) was asking a painfully logical question. After having spent almost 90 days with a “buyer” of his business, Randy came to realize the buyer never really had the money to buy the business. “I lost a lot of time and energy thinking we had a deal, dumb of me for not asking if he actually had the money.”
Randy asked me to help him sell his company after he tried to do it on his own. In late 2015, he received an unsolicited call from a guy who had just graduated from a top business school and told Randy he was interested in buying a company like his. Randy explained to me why this particular call resonated with him, “The guy was very professional and obviously smart, but what really impressed me was he was a graduate of West Point and had spent three years in Afghanistan before going to business school. He didn’t seem to be your typical tire kicker.” Randy told me when the guy’s call first came in, Randy had just begun to think about retiring and selling the business. “So it all seemed so providential, so right. I guess that’s why I didn’t ask the hard questions.”
A week doesn’t go by that I don’t get a call or email from an individual interested in buying a business. They usually say they are looking for a business with EBITDA of $1,000,000 or more and a retiring business owner with no succession plan. When I have a follow-up conversation with these buyers I ask about their funding, and 98% of the time I hear it answered something like this: “I have commitments from several investors who are potentially interested in investing with me.”
When I hear this, I don’t challenge the integrity or sincerity of the potential buyer because I know that buying a business is an exciting process. However, some potential buyers find their enthusiasm moves faster than their preparation. After all, there is enormous – and I mean enormous – interest today in business acquisition. Many people see it as a great way to start a new career path, and from the outside looking in, the idea of owning your own company looks glamorous. So when potential buyers like this start their search, they assume they can find the money once they’ve found the right deal.
But as Randy found out, the number of people sincerely interested in buying a business and the number of people who actually do it is very different. More times than not, when the buyer finds a business they like, their “investors” have different opinions or priorities. I’ve seen it happen so often; syncing what the buyer wants with what their investors will fund is very hard to do.
The guy who wanted to buy Randy’s business was sincere and probably would have been a very effective business owner. But about thirty days before the scheduled closing, the bank asked the buyer’s equity investor to also guarantee the bank loan, and that’s when the deal hit the ditch. The investor didn’t want that much exposure. It was just another example of the buyer not syncing his expectations and objectives with his investor.
The market is flooded with individual buyers who say they are “backed” by investors. Before you spend too much time negotiating with one of these buyers, press for details on the scope and depth of their financial commitments. You’ll likely be surprised how flimsy they are.
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. The names and fact patterns above have been changed to preserve the parties’ identities.
Tennessee Valley Group
Latest posts by Tennessee Valley Group (see all)
- Don’t Treat Your Business Like a Dialysis Machine - December 6, 2024
