Business buyers come in all shapes and sizes, and often it can be difficult to apply rules of thumb in evaluating them. For example, we have individual buyers that at first glance seem to be underfunded and unorganized that later turn out to be backed by wealthy investors who will purchase with cash. Although I have to admit, usually when someone seems underfunded, they are.
On the other hand, we have “private equity groups” with names such as Golden Capital Fund II that turn out to be one guy with no money. Typically, that guy is hoping to find an acquisition opportunity and then turn around and raise the money to make it happen. Turns out that is a very difficult task and I’ve watched a few of these guys look for years without getting a deal done. In fact, I almost sold a company to one of these types, a nice guy that almost made it happen. He actually raised the money and had submitted a letter of intent to purchase, but in the end he couldn’t get himself to offer up enough money to get the deal done. He decided after that that maybe he wasn’t cut out for the private equity game and he went and got a job.
So it is important for an intermediary to screen buyers, and usually it isn’t very difficult to do. A PEG will share what they are looking for, the size of their fund, and their portfolio companies. If they are missing some of these items (for example, they have not done any deals yet), then it warrants a closer look. An individual buyer should be willing to supply a statement of net worth, or provide letters from the investors they have lined up to back them.
My favorite buyer story is a call we got from a buyer on one of our companies. An associate and I were discussing this buyer on the phone, and the fact he said he owned a similar company in the past. I Googled around trying to find what company he had owned, and came upon the fact he had recently been released from federal prison on fraud charges. He had indeed owned a similar company, but had double counted inventory by doing inventory at one warehouse, then having inventory trucked to another warehouse before year-end inventory was done there. We had a laugh about that, because some of our clients hide inventory in order to increase cost of goods sold, lower earnings and thus lower taxes. But in this case it was a public company, so high earnings and high stock price was the name of the game, and he was purposely manipulating the stock price. Since the company we had for sale was privately held, we thought, “well heck, in this case he can just drive the trucks the other way”. He did not continue to look at the business we had for sale, so we never got to the point of asking the business owner (it is his choice after all) of whether he wanted to deal with this buyer.