On the face of it, it should be a lot less risky now than it used to be to buy a business from a stranger. Most (but not all) States and Governments in the developed world have brought in stringent disclosure rules which aim to even things up between the supposedly rapacious seller and the innocent purchaser.
Certainly these rules will expose or prevent blatant fraud and misrepresentation, but they can also lull you into a false sense of security. The very worst thing you can think is “Oh well, if the figures don’t turn out right I’ll just take them to court and sue the pants off them”.
If you’re stuck with a dud business as a result of being deliberately deceived you certainly can take them to court. But you don’t need me to tell you of the costs of litigation, the time it takes (years!), and the very real chance you may not succeed anyway.
And in the meantime you have to spend your days desperately running a business that may not generate enough to cover these legals. Remember also that lawyers will only take on work on a contingency basis when they think their chances of success are pretty good. It’s way, way better to get it right in the first place.
Even though most sellers usually turn out in the end to be nice ordinary honest people, I as a valuer always look at them and their businesses with a suspicious mind, and you should too. Because the truth of the matter is that they know far more about the business and what is happening in the industry than you do, and they are quite within their rights to not tell you everything. If you don’t ask, you may not find out until it’s too late.
“Caveat Emptor” is the Latin for “Let the Buyer Beware” and it is still true today despite all the well-meaning but bureaucratic attempts to shield you. Some of the traps I have listed in this and following articles may be legislated against in some jurisdictions and others may have to be disclosed by the vendor. But it pays to know about them anyway.
I’ll give you these tips roughly in the sequence in which I would check them out. Let me tell you now that everything is wrong with the business I select, but of course I don’t know that when I start out. And if it were real I would walk away very early in the piece.
I have chosen a retail business to illustrate these traps, but most of them apply equally to service and manufacturing businesses. I have not specified what type of retail business it is, for very good reasons.
First, the facts and figures have been made up and do not represent any particular type of business. Second, the same type of business can be totally different in the way it operates and in its risk level from one country to another and even from state to state. Third, I would not want to give any type of business the bad name that this (imaginary) one deserves.
So let’s assume it is a general type of retail business and call it the GRB (General Retail Business) Shop. Let’s also assume that it is a reasonably secure type of business, though somewhat sensitive to competition
Location is paramount for retail and most service businesses (though the internet is changing that) but less so for manufacturing enterprises.
The business broker gives me a half dozen businesses to look at. I select one that seems to be in the right price range – the asking price is $230,000 plus S.A.V. (Stock, (or Inventory) at Value) – and not too far from home. So I pay a visit.
It’s in a small suburban shopping mall that looks about 20 years old. The mall is busy for early Monday morning, which is a good sign. The shop is well located within the mall with good traffic flow and prominent signage, but is a little bit tired in appearance. A quick check shows it is the only one of its type in the mall.
The owners seem friendly and cooperative. I ask if they do home deliveries. They do and take me for a ride around the area covered. There is a new housing estate going up close by which they say will increase business in the future, and the next nearest business of its type is some distance away.
Trap 1. Not Being Told of Known Competitor Plans:
I leave and decide to have another look at the housing estate. At the far end of it I discover a large sign announcing the imminent construction of a mega shopping mall with a GRB type of business already signed up. So the business is under threat from new competition nearby.
The message here is, don’t just check the location, check what is happening in the area. Talk to other shopkeepers, talk to locals, visit the council, and look at the demographics to see if they match the market for your products or services. There may be a new highway going through in five years time resulting in a property resumption, or a diversion of traffic away from your site – or it could be good news as well.