Why Don’t More People Buy Businesses?

Why More People Do not buy a business?

Introduction

You may not believe what they say yourself, but if you have been in the business of buying businesses for a long time you’ve heard someone repeat this time worn statement.

“One in 14 buyers actually buys a business.”

The business brokerage industry throws around this number all the time.

This “1 in 14” number (or only 7% ) is based on statistics gathered from some old-time brokers. They must have actually kept track of how many buyers called their firms versus how many deals they closed. We can’t know how well they tracked this info, or where this data originated from. But, thankfully, the actual number is not the important part. For the sake of solving the problem, we just need to see that it’s low, and really could be better.

Here’s why that number stays so low…

When I have gone to seminars and association meetings, we all schmooze. And these crowds contain the cream of the industry, all the most experienced individuals. And when I ask why only “1 in 14”, I receive the same explanation, from all of them, as to why this happens.  (I’ll get to it in a moment, but I think the lie has been going around so long that everyone believes it without question or without taking a closer look at this explanation.)

The explanation given?

The buyers were not really serious in the first place.

Or its’ cousin:

They were not motivated enough to move forward now. They were just shoppers.”

This places the responsibility squarely on the buyer.

Well, any explanation, to work, ought to open the door to its own solution. And, this particular explanation does not open the door to a solution.

We need an explanation that we can do something about.

Which brings me to my survey…

Survey results

I have been doing surveys of business buyers continually for 20 years.

Throughout the entire twenty years, there are some constants. I have asked the same question many different ways and still come up with the same answers to these constants.

When I survey you, the business buyer, I find the opposite of what I was told by brokers!

The buyers, for the most part are very serious; only a small percentage were just putting their toes into the water.

So why are so many giving up? Well, let me tell you what I have found from years of interviews.

Hard Won Knowledge…

  • Most potential buyers have never bought a business and have no idea of what to do or where to start. (Around 70% is the industry percentage.) They want to become educated so as to make an intelligent decision.
  • Many prospective buyers are terrified of making a major mistake in buying a business. They see the asking prices and have no idea if they are reasonable or not.
  • Many potential business buyers don’t know what to look for in the financial information presented. They look at the financials they are presented with and, while they are concerned, their eyes glaze over or they don’t know how to discern if the information is valid or not. They know they do not know what they are doing.
  • They feel that the listing agents are not helping them; they feel the agents act like they only represent sellers. Most make it clear they are not in the buyer’s corner to help make a deal. The agents tell the buyer to do their own due diligence and do not depend on what the agent gave them. This does not create trust with the listing agent.
  • Prospective buyers usually want a buyer’s agent to act as an advocate to help them, for free, just like in real estate.  They are crying for help, but not enough to pay a CPA or other buyer’s advocate to help them. Unfortunately, free advocacy rarely exists in this process, and the apparency of it is usually specious.
  • When the listing agent tells the buyer that he can’t see any financials, a large percentage of buyers become lost at this point. Right at this critical time, the buyer knows that he needs a buyer’s agent or fee appraiser just to make an offer. The buyers also knows, in his blood, that he really can’t ask the listing agent, who works only for the seller, to give him a rule of thumb valuation.  A experienced buyer resents being asked to make offers before they have seen any financial information, because the savvy buyer is fully aware that the information that will be given later will not match up to whatever he gets at this point. The less experiences buyers are just panicked they will lose their deposits, and may blindly act.

Even after these problems are overcome, with the help of having a buyer’s agent, CPA, attorney or business buying advisor/due diligence consultant, well, then the determined buyer hits the next set of roadblocks.

Roadblocks:

  • They cannot find a good business to buy: The buyers and buyer’s agents look and look at businesses and can’t find any that fit the requirements. Some look for two years before finding what they want or before giving up. Sometimes the funds to buy the business are eaten up because the buyer is living on those funds during the search. There are just not enough actually profitable businesses to go around.
  • How should they even define what is a good profitable business? OK, a definition of the holy grail, a Good Business To Buy: A business where the buyer can comfortably know what the cash flow will be after the close of escrow. The actual cash flow amount is not the issue, because there are buyers for most businesses, regardless of what the cash flow is. Different people are happy with different levels of profit. All buyers just want to be assured that the business they buy will generate enough cash flow to support their family.
  • Who to trust? The problem of trust is so bad that a small percentage of buyers, after paying for due diligence a few times, in total frustration become apathetic and do no due diligence of any kind.  They just accept the hype given by the seller and broker, close their eyes and close escrow, knowing full well they are going to get screwed.

Solutions

I believe that if we had this industry organized differently we would sell 25% of all buyers a business. That means we’d minimally match up a quarter of you with the right business for you. Profitable, enjoyable, a good fit for you… along with all the other nuances that you need experts to help you navigate toward.

How to reorganize the industry?

Let’s postulate here what we’d need to make a 25% close rate. Well, at least this:

  • If we operated more like real estate transactions with two agents on each deal we would have more buyer trust. Case in point, Florida closes a much higher percentage of listings because there are two agents on most deals. This raises the buyer’s comfort level even if the buyer’s agent does not have enough experience.
  • Better yet, the buyer pays for the cost of due diligence, but if the buyer backs out of the deal because the financials are not as represented, the seller agrees to pay the fee. Buyers would be very willing to do this. Sellers would have to be educated that if they are not forthright it will cost them money. All told, it would result in a lot more closes and a lot better ability to predict an outcome.
  • A third possibility is the listing agent acting as a dual agent tells the buyer to find a business broker, CPA, attorney or other experienced due diligence person to act as a buyer advocate. The person is not a co-broker getting 50% of the commission but receives a flat fee for assisting the buyer paid for out of the listing agents commission. This fee would have to be on contingency if the deal closes or the listing broker would be liable for the costs. Finding professionals to work under these circumstances will be difficult, unless the buyer agrees to pay the fee and get some credit at the close of escrow.

Conclusion

So far, after years of surveying, I’ve reached the following conclusions:

If we continue to run our industry the way we always have, we are going to have a hard time keeping the respect of our clients and getting deals closed. If we become more of a buyers advocate when dealing with both the buyer and seller, the buyers trust level will go up. Trust is what makes the world go round. Let’s put trust back into our industry.

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Image credit: alphaspirit iStock

 

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