Buyers often tell us that they are skeptical of the business for sale ads. The information advertised such as revenue and earnings often is inaccurate. Take for example a recent buyer who was looking at a large, franchised pizza restaurant. The advertisement stated $2.5MM revenues and $500k net profit. The buyer was excited because they always dreamed of owning a pizza franchise where their community gathered after sports and school events. They signed the non-disclosure agreement, completed a buyer profile, and waited for the broker’s CBR, or Confidential Business Review.
But when they received the information, they found that the $2.5MM in revenues was in 2019. While they realized that 2020 covid did impact the restaurant, 2021 revenues were only $1.5MM and 2022 was on track to do $1.6MM for the year. Earnings were never $500k, even in 2019. The broker had recast 2019 earnings to adjust their food cost from 30% to 26%, adding another $100k to the bottom line. And they had adjusted their labor costs from 25% to 20%, adding yet another $125k to the bottom line. The Broker’s reasoning for the adjustments was that the business “could or should” have achieved those better food and labor costs. Never mind that maybe the restaurant achieved that revenue because they were known to be a good value, giving large portions or lots of toppings. So that if they did skimp on the toppings to get to a lower food cost, they likely would lose those big revenues because customers wouldn’t perceive it as a good value. And forget that the Seller, who had operated the business for 15 years, never had been able to achieve labor costs as low as what the broker had suggested.
We are not suggesting that adjustments to the income statements shouldn’t be done. But they must be justified and based upon some reasonable assumptions or facts.
That broker it turns out routinely recasts their client’s income statements in this manner. So that buyer on the pizza franchise that thought the business was earning $500k only to find that it only made $275k, and that was 2.5 years ago, will be reluctant to ever believe any advertising done by that broker in the future.
Like any other business, business brokers earn a “reputation.’ It might be for overpriced listings, it might be for inaccurate financials, or it might be for advertising a business that they had sold two years ago but are trying to solicit buyers to switch to one of their other businesses. Or, business brokers such as VRG/Vanguard Resource Group, might have earned a reputation for only advertising businesses at a value consistent with the market, with an accurate representation of revenue and earnings, and only for businesses that are currently available for sale.
Why does this matter to a business seller? Because if you list the business with a business broker who has earned a negative reputation, then buyers will be reluctant to even call or inquire about the business, thinking that your business advertisement, like all the other broker’s listings, is not accurate.
When choosing a broker, ask to see samples of their CBR or Comprehensive Business Review and see if they recast financials based upon realistic assumptions.