Why Deals Don’t Close
Sellers
- Don’t have a valid reason for selling.
- Are testing the waters to check the market and the price. (They are similar to the buyer who is “just shopping.”)
- Are completely unrealistic about the price and the market for their business.
- Are not honest about their business or their situation. The reason they want to sell is that the business is not viable, it has environmental problems or some other serious issues that the seller has not revealed, or new competition is entering the market.
- Don’t disclose that there is more than one owner and they are not all in agreement.
- Have not checked with their outside advisors about possible financial, tax or legal implications of selling their business.
- Are unprepared to accept seller financing or now unwilling to accept it.
Buyers
- Don’t have a valid reason to buy a business, or the reason is not strong enough to overcome the fear.
- Have unrealistic expectations regarding price, the business buying process, and/or small business in general.
- Aren’t willing (many of them) to do the work necessary to own and operate a small business.
- Are influenced by a spouse (or someone else) who is opposed to the purchase of a business.
What Do Buyers Really Want to Know?
Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same.
- Want to do their own thing; to control their own destiny, so to speak.
- Do not want to work for anyone else.
- Want to make better use of their skills and abilities.
- Want to make money.
These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently.
The important item to note is that money is reason number four. Although making money is certainly important and necessary, it is not the primary issue. Once a person decides to go into business for himself or herself, he or she has to explore the options. Starting a business is certainly one option, but it is an option fraught with risk. Buying an existing business is the method most people prefer. Purchasing a known entity reduces the risks substantially.
There are some key questions buyers want, or should want, answers to, once the decision to purchase an existing business has been made. Below are the primary ones; although a prospective buyer may not want answers to all of them, the seller should be prepared to respond to each one.
- How much is the down payment? Most buyers are limited in the amount of cash they have for a down payment on a business. After all, if cash were not an issue, they probably wouldn\’t be looking to purchase a business in the first place.
- Will the seller finance the sale of the business? It can be difficult to finance the sale of a business; therefore, if the seller isn\’t willing, he or she must find a buyer who is prepared to pay all cash. This is very difficult to do.
- Why is the seller selling? This is a very important question. Buyers want assurance that the reason is legitimate and not because of the business itself.
- Will the owner stay and train or work with a new owner? Many people buy a franchise because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
- How much income can a new owner expect? This may not be the main criterion, but it is obviously an important issue. A new owner has to be able to pay the bills – both business-wise and personally. And just as important as the income is the seller\’s ability to substantiate it with financial statements or tax returns.
- What makes the business different, unique or special? Most buyers want to take pride in the business they purchase.
- How can the business grow? New owners are full of enthusiasm and want to increase the business. Some buyers are willing to buy a business that is currently only marginal if they feel there is a real opportunity for growth.
- What doesn\’t the buyer know? Buyers, and sellers too, don\’t like surprises. They want to know the good – and the bad – out front. Buyers understand, or should understand, that there is no such thing as a perfect business.
Years ago, it could be said that prospective buyers of businesses had only four questions:
- Where is the business?
- How much is it?
- How much can I make?
- Why is it for sale?
In addition to asking basic questions, today\’s buyer wants to know much more before investing in his or her own business. Sellers have to able to answer not only the four basic questions, but also be able to address the wider range of questions outlined above.
Despite all of the questions and answers, what most buyers really want is an opportunity to achieve the Great American Dream – owning one\’s own business!
Today’s Business Buyer
For a business to sell, there has to be a seller – and a buyer. The buyer of today is a bit different than the one of yesterday. Today’s buyer is not a risk-taker, is concerned about the financials, and seems to be overly concerned about price. Unfortunately, buyers have to understand that they cannot buy someone else’s financial statements. The statements might be a good indication of what a new buyer can do with the business, but everyone does things differently. It is these differences that ultimately determine how the business will do. The price may not be the right question for the buyer to ask. What is usually the most important question is how much cash is required to buy it.
Today’s buyer is finicky, due certainly in part to the fact that, he or she is not a risk taker. Quite a few buyers enter the business buying process and, at the last minute, cannot make the leap of faith that is necessary to conclude the sale. The primary reason that buyers actually buy is not for the reason one might think. Money or income is about third, maybe even fourth on the list.
Buyers buy because they are tired of working for someone else. They want to control their own lives. In some cases, they have lost their job, or are being transferred to a place that they don’t want to move to, or are very unhappy in their job. Surveys indicate that about half of the people in the county are unhappy in their jobs. People buy a business to change their lifestyle. A recent newspaper article quoted a very successful business woman, who left her job and bought a book store because she was “looking for a change, a way to be more rooted and be at home more.”
The make-up of a typical buyer
The typical small business buyer usually has many of the following traits:
- 90 percent are first-time buyers. In other words, they have never been in business before.
- Almost all of them are looking to replace a job. Business brokers primarily sell income substitution.
- Most buyers will have about $50,000 to $100,000 in liquid funds to use as a down payment.
- Most buyers are looking at businesses priced at about $100,000 to $250,000.
- Most buyers will not have sufficient funds to pay cash for a business.
Obviously, many other types of people go through the process of looking for a business. However, those buyers who will eventually purchase a business have most of the characteristics outlined above. Going a step further, the serious prospective buyer usually possesses the attributes described below:
Who is a serious buyer?
- Has the necessary funds and they are readily available
- Can make their own decisions
- Is flexible in the type and location of a business he or she will consider
- Has a realistic and sincere need to buy
- Has a reasonably urgent (within three to four months) need to buy a business
- Is cooperative and willing to listen
Sellers should take a second look at those who express interest in their business. If the prospect has very few of the above traits, perhaps the seller should move on to the next potential buyer. On the other hand, if you are a buyer, or think you are, take a second look at the traits of the serious buyer. If you don’t have many of them, you may not be as serious as you think. You might want to rethink the reasons for owning a business and be sure that this is the right decision for you.
Dispelling a Buyer Myth
Most prospective business buyers really don’t know from the outset the exact type of business they want to buy. Experienced business brokers and intermediaries know that many business buyers end up with what is sometimes a far cry from what first captured their imagination.
Take, for example, the old story of the buyer who saw (and probably smelled) a doughnut shop in his business dreams. This was the business he was sure he wanted to own and operate – until he discovered that someone, most likely him, had to get up at 3 a.m. to make the day’s baked goods. It is important that, before making the dream a reality, those prospective buyers understand just what the business is and how it fits their personalities – what they want to do and what they don’t want to do! Obviously, if getting a good night’s sleep is important, owning a doughnut shop is not a good idea.
In searching for the right business, here are some of the crucial questions a prospective business buyer might ask himself or herself:
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Does the business look exciting and interesting to me?
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Do I feel that I can improve the business?
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Would the business offer me pride of ownership?
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Would I feel comfortable operating the business?
Professional business brokers can offer many different businesses for a prospective buyer to consider. Prospective business buyers can discuss their needs and wishes with a professional business broker who can then show them opportunities that they might never discover on their own.
A Buyer’s Quandary
Statistics reveal that out of about 15 would-be business buyers, only one will actually buy a business. It is important that potential sellers be knowledgeable on what buyers go through to actually become business owners. This is especially true for those who have started their own business or have forgotten what they went thorough prior to buying their business.
If a prospective business buyer is employed, he or she has to make the decision to leave that job and go into business for and by himself. There is also the financial commitment necessary to actually invest in a business and any subsequent loans that are a result of the purchase. The new owner will likely need to execute a lease or assume an existing one, which is another financial commitment. These financial obligations are almost always guaranteed personally by the new owner.
The prospective business owner must also be willing to make that “leap of faith” that is so necessary to becoming a business owner. There is also the matter of family and personal responsibilities. Business ownership, aside from being a large financial consideration, is very time consuming, especially for the new business owner.
All of these factors have to be weighed very carefully by anyone that is considering business ownership. Buyers should think carefully about the risks – and the rewards. Sellers should also put themselves in a buyer’s position. The services of a professional business broker or intermediary can help determine the relative pros and cons of the transaction.
Today’s Business Buyer: A Profile
Today’s independent business marketplace attracts a wide variety of buyers eager for a piece of ownership action. Buyers of small businesses are most likely replacing lost jobs or searching for a happier alternative to corporate life. Buyers of mid-sized and large operations are, typically, private investment companies seeking businesses to build and eventually sell for a profit. This is the broadest possible look at the types of buyers out there. Business owners considering putting their business on the market should be aware of the finer “distinctions” among buyers, as well as what they are looking to buy, and why.
1. Individual Buyer
This is typically an individual with substantial financial resources and with the type of background or experience necessary for leading a particular operation. The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both time and money. If these buyers do not have the amount of personal equity required for acquisition, they most likely will turn to family members or venture capital sources for financing. (Buyers and sellers should be aware that, in many cases, seller financing will be an essential element, benefitting both parties in the long run.)
Even when such sources are available, the individual buyer will hit a strong bottom line when it comes to price. Therefore, these buyers will usually limit themselves to transactions involving less than $1 million, cash.
2. Strategic Buyer
This buyer is almost always a company, having as its goal to enter new markets, to increase market share, to gain new technology, or to eliminate some element of competition. In essence, it is part of this buyer’s “strategy” (hence the name) to acquire other businesses as part of a long-term plan. Strategic buyers can be either in the same business as the company under consideration, or a competitor. Example: a bank in one part of a state purchases or merges with one in another part of the same state. The acquiring bank enters a new market and “eliminates” competition at the same time.
Strategic buyers will be looking chiefly at businesses with sales over $20 million, with a proprietary product and/or unique market share, and effective management both in place and willing to remain.
3. Synergistic Buyer
The synergistic category of buyer, like the strategic type, is usually a company. The difference is that, with this buyer, the acquisition or merger flows from the complementary nature of the purchasing company and the company for sale.
Synergy means that the joining of the two companies will produce more, or be worth more than just the sum of their parts. Example: a large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.
4. Industry Buyer
Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well and, therefore, does not want to pay for the expertise and knowledge of the seller. The industry buyer is interested mainly in combining manufacturing facilities, consolidating overhead, and utilizing the combined sales forces. These buyers will pay for assets (but probably not what the seller thinks they are worth); they will not pay for goodwill, covenants not to compete, or consulting agreements with the seller. There can be some cases in which the industry buyer is also a strategic buyer, with the price determined by motivation.
5. Financial Buyer
Of all the buyer types, financial buyers are most influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible. Working on the theory that debt is the lowest cost of capital, these buyers purchase businesses with the sole purpose of making the maximum amount of money with the least amount of their capital invested.
Each type of buyer has distinctive characteristics that correlate to the motivation behind the purchase of a particular company. In addition, the price each is willing to pay for a company is directly proportional to the motive. The relative sizes of acquisitions by different buyer types (compressed into their broader categories), is shown in the accompanying chart (keep in mind that all figures are approximate):
Type of Buyer (Less than $3 million) ($3 to 10 million) ($10 million):
Sole Proprietors (45%) (25%) (5%)
Public Companies (30%) (20%) (20%)
Private Companies (10%) (15%) (15%)
Investment Groups (20%) (30%) (20%)