Such a Deal
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“WE HAVE MET THE ENEMY AND THEY ARE US.”
In the last article I discussed the Business Broker, and the challenges in working with them.
This time we will discuss in detail the problem of the BUYER BEING “QUALIFIED” BY THE BROKER.
In most real estate practices, brokers probably try to qualify the buyers whenever they can. If they don’t have a method to screen the prospects, they will waste a lot of time. In the Society, we espouse counseling clients, not just qualifying them…and there is a huge difference.
In the buying and selling of businesses, “Qualifying” buyers is often over done. Many times they “qualify” you on the phone and then hang up. Based solely on this phone interview, if the broker deems you to be unqualified, they will rarely pursue a transaction with you, even if you are eminently qualified.
Sounds like the business of buying and selling businesses has too few businesses for sale and too many potential buyers.
LETS EXPLORE THE FACTS——- ONLY 20% OF ALL BUSINESSES SELL.
Does this sound like we have an absence of sellers? Maybe it means that the people attempting to sell the businesses don’t realize the loss of potential buyers because of faulting screening techniques.
REMEMBER, 20% IS AVERAGE FOR ALL SIZES OF BUSINESS. IT CONSISTS MOSTLY OF PROFIT MAKING BUSINESSES. I HAVE NO IDEA OF WHAT THE PERCENTAGE OF TURNAROUND/NON-PROFIT MAKING BUSINESSES SELLS. IS IT 10% OR 5%? MY GUESS AFTER 40+ YEARS IN THE BUSINESS IS THAT IT IS PROBABLY 1-2 % (OR LESS) .
(19% OF SMALLER BUSINESSES SELL; THE NEXT CATEGORY SELLS ABOUT 28%, WITH THE M&A CATEGORY SELLING ABOUT 65%.)
THOUGHT FOR THE DAY– IT DOES NOT MAKE SENSE TO TRY TO BUY OR SELL BUSINESSES THAT DON’T MAKE A PROFIT.
Let your competitors have them.
THE PAST
Before the Internet came into being, it was more difficult to find a good business. Using the techniques I taught in my seminar, most of our contact was directly with the owner of the business. We acted as principals and didn’t have to utilize the services of brokers.
Today we have access to many more businesses for sale. (The same number of businesses as in the past but easier to access.) Today with more businesses on the Internet, we have a problem. The problem is that BROKERS, who often create artificial barriers to closing a transaction, list most of the businesses.
The broker will want to “qualify” you——to make sure that you have 100% cash to buy the business. This is not a major problem when you deal directly with the owner. The owner will want to know if you can put the deal together——– but the owner will not go to the lengths that some brokers will go to stifle your creativity in trying to acquire the business.
SO, STEP 1 IN AVOIDING BEING QUALIFIED BY A BROKER IS TO AVOID WORKING WITH A BROKER. PRINCIPAL-TO-PRINCIPAL TRANSACTIONS ARE THE BEST WAY TO ACQUIRE A BUSINESS.
IN THE NEXT EDITION OF THE SEC OBSERVER, I WILL COVER THE WAYS TO FIND A BUSINESS DIRECTLY FROM THE BUSINESS OWNER. WE HAVE MADE IT WORK FOR 40+ YEARS.
As the broker attempts to “qualify” you, he wants to know how much cash you have to buy the business. He doesn’t care about bank or investor financing. He would probably have a heart attack if you mentioned using real estate in the transaction.
Business brokers are taught that the seller must provide owner carry-back financing. They are also taught that some smaller businesses can get SBA financing at times. Nevertheless, the great majority of them really don’t believe in anything but 100% buyer cash.
SOME BROKERS WILL ADVERTISE THAT THE SELLER WILL FINANCE. Check it out and you will find that the seller will finance a small percentage with real estate as collateral, a personal guarantee, as well as a lien on your first-born.
The deal will usually get so complicated that you end up negotiating an all cash purchase.
The brokers are trained that to succeed they need owner financing. Most of them never ask for the financing nor are they trained to counsel with their client as to the transaction alternatives and benefits that meet the owner’s aspirations. Most owners that say yes at time of listing do so without the benefit of good counseling.
IN THE PAST 20+ YEARS OF BUYING BUSINESSES, I HAVE HAD FEW SELLERS SAY THAT THEY WILL FINANCE. HOW MANY HAVE ENDED UP PROVIDING FINANCING? –NONE.
OVER MY CAREER, IT IS MY OBSERVATION THAT A MAJOR REASON THAT ONLY 20% OF BUSINESSES SELL IS BECAUSE THERE IS NO FINANCING AVAILABLE THROUGH BUSINESS BROKERS.
MY MAIN PURPOSE IN THIS ARTICLE IS TO LET BUSINESS BUYERS KNOW THAT THE DIFFICULTY IN BUYING A BUSINESS IS NOT THEIR FAULT. YOU MAY FIND THAT YOU HAVE TO IDENTIFY THE CHALLENGES TO A SUCCESSFUL TRANSACTION AND OVERCOME THOSE CHALLENGES.
