Can You Trust A Business Seller’s Information When Buying A Business?
Whether it's a business owner/seller or a business broker representing a business owner who is selling, buyers must be diligent about asking the right questions and getting the right information up front before wasting their time or losing money in a potential futile transaction.
Many times agents, business brokers (intermediaries) don't get financials or tax returns from their seller clients, or business owner/sellers don't understand their financials/tax returns well enough to explain them to potential buyers (answers to potential questions like - what is your seller's discretionary cash flow? how did you arrive at that number? etc.). Many agents and brokers don't even ask for financials or tax returns up front before taking a listing - just listing the asking price of what the owner/seller "wants or insists" for their business when being offered for sale.
These actions (or should I say inactions or misrepresentations) in my opinion waste time for everyone - buyer, seller, intermediary.
Buyers should ask many important questions before proceeding with a meeting with the seller or the intermediary. Hopefully the Owner/Broker/Agent/Intermediary is professional enough to answer these questions before an NDA needs to be signed.
Questions like the ones below should have realistic, honest answers before moving forward:
1. What were the last three years Sellers Discretionary Cash (SDC, Adjusted Net Income, Cash Flow)? What line items does the SDC consist of? (is the Intermediary or Owner taking liberty by adding back line items that shouldn't necessarily be in the total computations?) Do the line items even make sense or are they factual? Has the representing Intermediary even collected the necessary financials or tax returns from the business to do an analysis? (Don't wait until the due diligence phase to find out the representing Intermediary is just getting around to collecting the necessary documents - you'll have already wasted an enormous amount of time and money by then).
2. What are the total revenue trend lines for the last three years and in the current financial or fiscal year? If the numbers are going down at all what are the reasons? (I have heard some really odd & humorous responses over the last 25 years of consulting!) Are these reasons really true or reasonable? (or are they just a bunch of BS to try and sell a business - or get an unreasonable/unrealistic asking price).
3. Is the business being sold cyclical (in sales and revenues)? What time of the year is the business currently in? Is this the best time to buy the business? Should the offer/pricing reflect the timing of your potential purchase?
4. Is the owner/seller not reporting cash (to limit their tax liability) but adding that revenue to overall revenues and representing that income to potential buyers? (if so be be prepared to walk away - if you do buy a business based on cash being represented earned and not reported - you're about to be taken - walk away - look for another business that is transparent and has provable earnings!). Many times Intermediaries will walk out of the room when the talk between buyer and seller turns to unreported cash not reported - you should as well!
Bottomline - all owner/sellers should have their records analyzed carefully and honestly by a professional before they sell. They should find out what their true history of Sellers Discretionary Cash (SDC) is - not only for potential business buyers but also for potential lenders who may be utilized for the transaction. Then a realistic purchase price can be set and buyers who do come to the table to see "real" information will be appeased and a deal can proceed successfully.