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Selling your business in San Diego Beware of the Pretenders

You have spent years, maybe decades, building your business to one day sell the business and retire. Now, the time has come. You (hopefully) have hired a great business broker and are excited that you have a lot of interest from several different buyers. But hopefully, your business broker has the experience to make you aware of the pretenders…..

So, what are pretenders, at least in our small world of selling businesses?  After selling over 800 businesses over 27 years and dealing with literally tens of thousands of “buyers,” we think they fall into two broad categories.

The first category, and thankfully one that we do not see often, are the pure scammers and those who will try to buy the business for much less than the true market value. Here are real examples of both types:

SCAMMERS and LOWBALLERS

John Smith is extremely interested in a large construction company and writes an LOI for $30MM, which is full price. Great news because his personal financial statement shows he has a net worth of over $100M, and he has a compelling reason why this company fits into his portfolio. But the devil is always in the details. John insists on meeting with the seller multiple times prior to writing the LOI. While meeting personally with the seller is common enough, multiple meetings and dinner requests can sometimes be a red flag. Scammers want to build trust and make it more about their relationship than the actual details of the transaction. The second red flag comes in the details of the LOI. The LOI states that the transfer of 100% of the company’s stock will occur on a specific date and will be paid in cash. However, if the buyer funds are not available at closing, the stock will still transfer, including hundreds of thousands in receivables and cash, and a short-term promissory note for the purchase price will be executed, but only for 14 days, until John’s cash frees up.  After dining with John, the Seller would like to do a deal with him and consider that option. However, as an experienced and competent business broker should do, we don’t raise the red flag; we circle it over the seller’s head. Why, Mr. Seller, would you give up control of your company for a promise that John will pay? Just too fishy. Oh, and by the way, why might John have trouble coming up with the money on the date of closing? Well, it seems that he has an offer pending to purchase the Queen Mary and the surrounding shopping center, which needs to be completed before executing this purchase. Yes, red flag number three, and time to show John the door.

Why not a scammer, bottom fishers, those buyers who are trying to buy a business for much lower than the market price, will often use the same tactics. Asking a seller to dinner, wanting to meet in person, making it about everything other than the deal. Then, they make the offer but insist they are in the room when it is presented. This is highly unusual and should raise the red flags and sound the alarms. Why does that buyer want to be in the room so he can break out the charts and graphs and show the seller why his business is worth only 50% of the asking price? Of course, an experienced business broker wouldn’t let that happen, but we did allow a buyer to present his value argument via an email to the seller, along with his LOI.  The charts and graphs presented by the buyer were amazing, so good that the seller told the buyer that maybe he could make one of those graphs showing where he could stick that offer….

Wanna Be Private Equity Groups and Investment Companies

Private equity groups can make great buyers. They usually know the industry well, have the capital and the management in place and don’t usually chase a deal unless they are serious. That said, it seems like everyone and their brother is now a private equity group. Bill and Cyndie just graduated from the “insert Ivy League School Name Here” prestigious MBA program and decided to buy a company. They, of course, are highly educated, and their professors assure them that they have the skill set to run a company. And they certainly might, but what about the money? Well, their well-off professors promised Bill and Cyndie that they would fund the purchase if the deal made sense. Some of Bill and Cyndie’s colleagues at school come from well-off families, and their families are always looking to back strong entrepreneurs.  Could they really get funding from these sources? Sure, it COULD happen, but it VERY rarely does. Instead of negotiating with buyers who want to run the business and have the money, you spend time answering questions, providing financials, and taking Zoom calls from Bill and Cyndie, with a 500-1 chance of buying your business. The problem is that you must sell Bill and Cyndie, then they must sell their investors on the idea, then the investor must work out an equity deal with Bill and Cyndie, etc. There are just too many places for this to fall into the cracks. Of course, some newly formed private equity groups have money in the bank or pledged, which we can verify. Or better yet, they own another company and can show us that they have completed a transaction.

Of course, there are exceptions, and sometimes, a business seller might need to sell quickly and might want to entertain the lowball offers. And sometimes, those new MBA parents really do have money…. which is nice. So don’t throw the baby out with the bath water, but make sure that you ask the buyer the hard questions, just like they are asking you. Maybe that way, you can deal with buyers and not pretenders.

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