Biggest Business Broker Myths

Here are some of the myths in business brokerage that I have seen over the years.  While they are not absolutes, most profess they are fact.

1. “Foreign Visa buyers will overpay with buckets of cash.” There seems to be some notion that rich foreign buyers that need a visa have tons of cash and will overpay for a business. Let’s look at the facts: It is very hard to become rich in most foreign countries.  It’s even harder to get the money out of the countries they try to leave.  In order to become rich, even in the USA , you need to have some degree of higher intelligence. Therefore, most rich foreign buyers are SMARTER than rich USA buyers, and henceforward do not get stupid just to buy a visa and your overpriced business. I will admit I have seen visa buyers pay for small businesses to get a visa, and then basically walk away after they get a green card in a few years. But they never spend the big bucks and they usually do not overpay for the small ones. There are way too many reasonable price/value choices for all buyers.

2. “Businesses that do not cash flow are still worth a multiple/percentage of gross.” Before I get nasty-grams from my fellow valuation professionals let me explain. The point here is simple. If the investment doesn’t cash flow (i.e. pass the reality test), then you cannot use a multiple/percentage of gross income solely to value the company.   I have seen some very respected valuation experts weight this approach most heavily because their subject business is worth next to nothing through an income approach and a multiple of earnings in the market approach. Who is going to buy a business and not get a decent return? Don’t say strategic buyers!

3. “Strategic buyers pay more because they will have synergies.” I don’t think so! Here’s the thought process. If that were true then if there were only one strategic buyer in the market place, and everyone else was financial, the strategic buyer would still overpay. NOPE! They only pay more when they fear losing the deal to another buyer (there is competition). Otherwise most competitors and strategic buyers will smell the blood in the water and eat your lunch. Plus if they were smart enough to be successful enough to be acquiring companies, they probably are not dumb enough to over pay. Don’t write me letters if your strategic buyers overpaid with stock or wacky earn-outs! If I could print my own money or guarantee success, I would overpay too.

4. “There is conventional financing for businesses beyond SBA guaranteed loans.” Don’t email me and say I’m wrong, my aggressive banker friends. You are lying and your pants are on fire! It will always boil down to someone collateralizing the loan with assets. No one does non-SBA “air balls.” If I am wrong and you do write non-SBA cash flow only loans with no outside collateral, call me; we both are about to be rich.

5. “This business is 100% absentee.” Please, must I defend this statement? There are some businesses you can leave for longer periods of time. Perhaps even years, but a ship with no captain eventually runs aground.

6. “I am a part-time business broker and make lots of money.” There may be an occasional fluke year where you can make a couple of big deals here and there. But very few people can make a lot of money at business brokerage part time. If you can, call me, we are hiring.

7. “My backers will give me the money when I find the right business.” Or we have unlimited funds to buy a business or we can find the money for the right business. I call them “pretenders.” Probably why the saying “buyers are liars” has come to be. Real buyers and serious companies in the acquisition mode have no problem providing proof of financial ability to buy.

8. Assets alone can make a business more valuable. The opposite is true. For the most, part excess assets are a handicap in business sales. Examples are under performing jewelry businesses. Who wants to pay $2M for a business that earns $100K? The answer is NO ONE. We often advise businesses with under performing earnings compared to assets or businesses with excess assets to liquidate or get their balance sheets in shape in order to sell.

9. I’ve been in business brokerage for years and I have seen everything! I think I have seen a lot and know a quite deal about this business.  However, I learn everyday and continue to thirst for knowledge. What is also really interesting is the people who have the most experience (and the most success) are the ones who attend conferences and are still around for Saturday afternoon workshops. If you want to be the best, you need to get educated and continue to hone your craft.

10. There was a #10 but the editors won’t let me print it! Want to know what it was?  It had to do with undisclosed cash earnings.   Email me and I’ll tell you more!

Andy Cagnetta
CEO
Transworld Business Brokers
ac@tworld.com

This entry was posted on Sunday, September 13th, 2009 at 2:47 pm and is filed under Buying, Selling. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.