How To Vet Business Buyers & Tell Real Acquirers From Time Wasters!
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How to vet business buyers who seem interested in buying a particular business? When buyers make an approach, all may not be what it seems; it pays to do some filtering / screening.
The Danger (& why screening buyers is important)
There are several "internet courses" being heavily marketed, courses claiming to teach people how to buy established and profitable businesses for £1 (or 100% "seller financing"). Apparently, one can get business owners to hand their businesses over in exchange for virtually nothing (other than a vague piece of paper promising to pay the agreed price out of future profits).
These courses typically cost £4K - £5K, some a lot more, but people sign up for them. And learn the ropes. And then approach business owners pretending to be well funded business buyers!
There are thousands of such "business buyers" out there who don't have two pennies to rub against each other but who have designs on acquiring solid, profitable businesses by hook or by crook. And the word crook defines some of them very well indeed.
In Texas there's an apt expression to describe these folk. They are all hat, no cattle.
"Yeah, but I wouldn't fall for such a con," business owners sometimes say to me. "Anyone who wants to buy my business will have to pay me all cash."
Cocky!
Then they engage with these "business buyers", people who usually pose as cash buyers, and, viola, the business owner has fallen into the trap. In many cases, the owner will end up losing everything in what is nothing but a very sophisticated sting. See how they operate here.
Are all unfunded buyers con artists? No. Some are just looking for distressed businesses, or business owners who are so fed up that they'll sacrifice value in exchange for a quick exit, but these buyers are the exceptions.
So What Do The Bad Guys Do?
The "bad guy" buyers will negotiate price and agree a part cash, part seller-financing deal. Or even an all cash deal. Whatever the seller wants, no problem. They'll get the seller all excited about selling, let them start making plans for life after business etc.
And in due course, they'll start their games.
They'll drag the discussions out to cause frustration, start picking holes, complain about the most mundane of things. They'll find fault with various facts and figures. It's all designed to get the seller on the defensive and get them to make concessions. They have many, many games to play and many tactics to manipulate business owners selling their businesses!
On each occasion, they'll keep reducing the cash component of their offer. It's a slow and steady process carefully designed to ensure the seller doesn't drop out along the way. The seller's always got to feel the end is near and that they're going to get their money and their freedom soon.
Eventually they buyers will reach a point where they're putting up close to £0 to "buy" the business and the seller is financing the rest i.e. the seller is agreeing to take the balance in instalments out of future profit.
A small handful of these buyers will come right out at the start and explain that they're not looking to invest cash but that, instead, the seller will 'get a much better deal' and will eventually walk away with a lot more money. They'll talk structured payments or explain leveraged buyouts or want to take the business over in exchange for nothing more than shares in a larger, merged entity (an entity over which the seller has no control!)
All Hat, No Cattle (as they say in Texas).
Sellers agreeing a deal like that are likely to lose the entire business with nothing to show for years of hard work. There are several public examples of this happening. One was the Welcome Nurseries group which bought circa 50 day nurseries, on such terms, and then went insolvent. None of those sellers saw the money they were owed.
So How To Vet Business Buyers & Tell If Someone Is A £1 Charlie?
So how to tell if someone is looking to buy the business without investing any money, someone looking to trick their way into a £1 deal? There are some tell-tale signs:
Use of words like "capital" "private equity", "international, "group" etc in company names. Or otherwise choosing a "posh" name to give the impression they've got money;
Claiming to have several offices, sometimes in different countries;
Talking big numbers but talking about them in the context of a "target" or "vision" rather than actual funds under management or actual money already invested;
Putting links in their footer to their "anti slavery" policy and to other such documents that one normally finds only on websites of very large businesses;
Giving the impression of having several people working for the business. The team page could have a dozen employees or partners listed there though not one of them is actually on the payroll;
Giving their cold callers or other minions fancy titles in an attempt to get vendors to take them seriously when they call, titles like the meaningless "corporate investment partner" in a limited company. (Ltd companies don't have partners, they have directors).
Talking about decades of experience (when the entity / company itself was only registered yesterday). They want vendors to focus on the experience of the partners / directors / fake profiles they've got on the "Team" page, not on the history of the company.
Don't forget to check out our £1 Charlie page - our analysis of real life examples of good and bad guys and how you can tell the difference. And this page on how to best deal with £1 Charlies.
The Other Type Of Acquirer To Avoid When Screening Buyers
The above "buyers" are a nuisance. They'll sap time and energy. Getting involved with them loses good opportunities with genuine buyers.
But there's another type of buyer best avoided as well - the tyre kickers. They'll sign the NDA, ask all the right questions, play the part of a buyer. But they are only after information.
Or they've been hired by competitors to damage the seller's business.
Or they want to start his own business and they're looking for ideas, tips, contacts, information.
They have no interest in buying, but sellers won't recognise this till the buyer gets the inside scoop - answers to all the due diligence questions - and then pulls out at the last minute!
In either case, these "fake" buyers will waste time and frustrate a vendor's efforts to sell their business for a fair price. These buyers represent other risks, too!
But How To Tell These No-Hopers From Genuine Acquirers?
I've put together a list of ten questions a seller can ask them... with a guide on how to interpret their answers.
It's important to recognise that there are several different types of buyers. There are financial buyers who're mainly interested in cashflow, financial statements etc. They're buying the business but may have no intention of working in it and have no experience in the industry.
And then they are strategic or trade buyers who, typically, pay a higher price because they're looking to develop the business further and see themselves as able to extract more profit from the business than the seller has done in the past.
In either case, a vendor are fully within their rights to ask a few questions. The higher the value of the business, the more intrusive the questions asked of buyers. For the largest deals, it's not uncommon to demand buyers provide proof of address, proof of finance, copies of their credit reports, even CRB / DBS (criminal record) checks prior to giving them information about the target business!
The below questions aren't that intrusive, but they should give a good idea of whether these are serious acquirers or £1 Charlies.
10 Vital Questions To Ask Buyers
1.What's your business background and experience and what business / businesses do you currently own?
If they already own a business in the sector, they could be looking to expand. On the other hand, they may just be after a competitive advantage from the information shared through the due diligence process. Both are possible. The other questions below should reveal their real intentions.
Whatever their claims about their background and experience, it may be worth running the person's name through the (free) Companies House director search service.
I once found that a prospective buyer who claimed to have no connection with my client's industry was named in Companies House as a director of my client's main competitor! It wasn't necessarily a deal breaker that he worked for the competition. His employer could have been looking to expand via making acquisitions in the industry. But, to my client, the deception signalled bad intent and he decided to not proceed with disclosing company financials and other data to this buyer.
It doesn't hurt to conduct LinkedIn and Facebook searches on the person or people involved in the bid for the business. Why? Because if their profiles elsewhere don't match their answer to the above question there's reason to be suspicious and to seek further "clarification".
2. (For new players to the industry) Why've you chosen this industry & how much research have you done into this industry?
The aim here is to establish whether the buyer has chosen this industry or is randomly picking businesses listed at various online portals. Is he ambivalent between a hair dressing salon, a transport company and a software firm?
Serious buyers tend to know what type of business they want, or at least have narrowed it down to a few related sectors. Their choice is likely influenced by the industries they've worked in before or in which they otherwise have interests. If they're looking to make an acquisition on behalf of a company it's because the board took a decision to expand. The buyer could be asked for a copy of the criteria their board has set for acquisitions (together with evidence of funds the board have approved for intended acquisitions).
3. How long have you been looking for a business to buy and/or what businesses have you bought so far?
If they've been on the hunt for years and years they'll never complete on a deal! Conversely, if they've only just started they'll probably want to fish around a bit first and get a feel for the market and for prices. They'll be in no hurry to complete on a purchase.
The vendor can open up the conversation and ask how many businesses they've already considered, how far they got with those businesses (early stage discussions / letter of intent / heads of terms) and why they did not proceed to completion.
Another tip: It's worth speaking with them on the phone, not just via email! While people think carefully about how they word an email they may not be as careful in a phone conversation and may drop a hint or two as to why previous deals failed. That could be a clue as to what dealing with them is going to be like.
This question is where to catch out the "posers" and the "all hat no cattle" merchants, people who often claim to be experienced buyers who've done lots of deals. They can be asked for details about past deals. Even if they can't share pricing or other sensitive information they can disclose the names of the businesses they've bought and improved (or turned around), the names of the broker / corporate finance firm and lawyer who advised on the deal etc.
If they are evasive, that speaks volumes. A typical ploy with the "all hat no cattle" buyers is to claim to not be experienced themselves but that they have an adviser / board member / fellow director who's the expert. And, yes, they've often paid some well known "player" for the right to use his photo and background on their website with the claim that he is part of the team. This well known expert will often be the guy who ran the course teaching them how to buy a business for £1!
Tip: these are the most dangerous cases and vendors should run a mile, or ask to speak with the organ grinder, not the monkey who's been tasked with doing the legwork.
Questions 4 - 10 below are carefully designed to seem innocuous but the answers tend to give away more than the buyer intended!
Some of these questions will also paint the buyer into a negotiating corner in specific areas... which a vendor can use to their advantage if they ever get to the point of discussing price and terms with him/her.
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