Buying a business isn’t like buying a house. With a house,
you can examine the foundation, walls and roof, and of course hire a house
inspector to help you do it. Although
there are some surprises, for the most part you have a pretty good idea of the
condition of the house. Plus, the
previous owner moves out, and the next owner moves in – in that order.
You can examine many parts of a business, but often there
are some intangibles that are very hard to assess – like the ability to
continue to land long term contracts in the future. In addition, often you can’t just hand over
the keys. Many of the businesses we sell
require the ongoing involvement of the previous owner, at least for a few
months if not for years.
It’s like buying a house, then having the previous owners
live in the house with you for a few months so you’ll know how to operate the
A/C, stove and garage door. Plus, often
the buyer will still owe the seller money for years to come, even if a bank
loan is involved. In the end, there has
to be some degree of trust between buyer and seller.
We just had a deal fall apart because the “trust gap” was
just too large. In this environment
many buyers are cautious, which is fine to a degree. I sure would be. But this buyer offered a very low cash
payment for the business (in case it went downhill), and offered to pay
everything else as a performance bonus (earnout) over 15 years. In addition, he had some specific ideas of
how he would run the company, but considered these ideas proprietary and
refused to share them with the current owner.
The current owner had his own trust issues, some well
grounded. Even after meeting the
prospective buyer, he wasn’t completely comfortable that the buyer could adequately
run the business. A significant amount
of the value would be based on future payments and the ability for the new
buyer to run the company. I believe the
owner’s words were, “I know I can run the company and make a good living, so I
would rather bet on me than bet on an unknown”.
He was OK with some earnout, but not nearly the amount the buyer wanted.
Since the buyer refused to share how he would run the
company, we were not able to ease the owner’s fears. On the other hand, the owner was not able to
convince the buyer that the business would not be significantly impacted by the
recession in the future (it has not to date).
For us as the M&A brokers the writing was on the wall. There are always hurdles to overcome on these
deals, but this was too much and I didn’t waste much time or energy trying to
convince either side. The owner has a
great business and I’m sure someone will come along and buy it. If the owner gets comfortable with the buyer,
I hope he’ll be more flexible with the terms.
This buyer now wants to look at other companies. If he looks at one of ours, I hope he’ll
understand that at some point, it always takes a little bit of trust.