Pet Business Due Diligence
“Bill” and his family were looking for a dog kennel and went on to the internet and started looking at various “Businesses for Sale” web sites. He located a dog kennel for sale with real estate in another state. Bill and his family had experience with boarding animals so it seemed the perfect business.
Without Visiting the Actual Business He Collected His Information by Phone, Fax, e-mail and Regular mail
He collected his information by phone, fax, e-mail and regular mail. He received 87 pictures of the business and property. The seller provided two excel worksheets that he had made up for the buyer. One showed sales by months. The other was a Profit and Loss Statement for the year ending December 31, 2008. No other financial information was provided. The parties had many conversations and important questions were asked by e-mail so there would be a record.
The seller told Bill that the motivation for selling was that they wanted to move back to their hometown, in the South, to be near family members. After escrow closed the seller and his family actually moved to Arizona, and bought a foreclosure property at a very affordable price.
Two questions correctly asked by Bill were:
- What was the sellers reason for selling?
- What is the competition in the area?
A New Dog Kennel was taking some of the Buyers Business
The seller’s e-mail stated that the nearest kennel was 65 miles away. The escrow closed March 2009 and in June 2009, the buyer learned that they were losing business to a new dog kennel in the next town, which is only 15 miles away from them. The new kennel was opened around Summer 2008; just about the time the seller put the business on the market.
The seller was called, when the existence of the new kennel was discovered, and asked about this new kennel. The seller stated “I didn’t know about it,” but then commented, “the kennel only had 20 spaces and would not last long, just like the other competitors that had opened in the past did.”
Get the Paperwork you Need
Bill did pay for a home inspector to act as his eyes and ears to check the place out. The inspector reported that there were not a lot of dogs being boarded that week. This was explained this away, by the seller saying, “it is a bad time of year.” The bank requested and received the tax returns for 2005, 2006 and 2007. The tax returns for 2008 had not been filed yet. Bill never got a copy of the tax returns and cannot get them from the bank, even now. Because escrow closed in April, Bill never asked or received any financials for any part of 2009.
Bill needed a real estate loan to buy the property. The banker who was arranging the financing was required, by the lender, to inspect the property before he could complete the loan. Bill asked the banker to look at the facilities and the volume of activity. The banker reported the place looked busy. The seller told Bill, “the place will be full the week the banker was coming out, and that was a good thing, because the banker would be impressed.”
The terms of the escrow were $135,000 with $100,000 down. The seller carried back a $35,000 loan.
Do You Believe the Seller?
The current situation is that in June 2009 the kennel’s gross income was down significantly from that reported by the seller on his monthly sales report for 2008. Of course we do not know if the sales report or profit and loss statement are in fact true.
Bill sent me the following comments as to what the current situation is; “I have found the new competition to be pretty ruthless, copying almost verbatim, our website in their advertising. It is obvious to me that they are trying to draw away our customers. Now we find ourselves in a fierce battle to hold onto our customer base—something we never anticipated because the seller said the only other kennel is 65 miles away!”
Post Script: Bill was able to settle with the buyers out of court for $20,000 off the Seller financing portion of the sale.
This story ended better than most. The biggest mistake the buyer actually made was taking what a seller said at face value, without independent confirmation. At a meeting of business brokers, I commented that 70% of all sellers lie. The room in unison said, “Your wrong Willard, it is 100%.” Hope you found the story interesting.
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