Finding the right business is a long and challenging process for prospective buyers; when a buyer finds a promising business sometimes it is hard to walk away from the deal. They’ve likely invested a lot of time into the deal and are emotionally attached to it. At that point buyers will really want to find a way to make the deal work. Often hard work and perseverance pays off and it all works out, but there are times when you should walk away.
When to Walk Away from a Business Purchase Transaction
- Seller is Difficult:
There are many difficult people in the world. If the seller you are working with is one of them and you can’t work constructively and productively things will not go well. You will need this seller to train you and you will be relying on him to be cooperative and committed during the transaction and more importantly during transition and training. If the seller is difficult to work with it will be nearly impossible to have a smooth transaction and the deal may fall apart later anyway.
- The Numbers Don’t Make Sense:
If the figures on the financial statements don’t make sense and cannot be explained to the satisfaction of you or your CPA it may be time to walk. While there are many good businesses with imperfect books & records/financial statements, the seller and their CPA should be able to explain them to your satisfaction during your meetings and prove it to your satisfaction during Due Diligence. The trick here is to determine where that line is and when it’s time to walk away. - Cash Flow Doesn’t Pencil Out:
If the cash flow after debt service and your required income is not meeting your needs you should seriously consider passing on the business. While you can grow the business and make improvements, it will take time. If the business will meet your needs in the interim that’s fine, but if it is far short of your income needs you should pass on this one.
- Poor Books & Records:
If the books & records and financial statements are poor it is nearly impossible to verify the actual earnings of the business. In situations like this you are flying blind with respect to how the business is performing financially. Some owners have poor computer records, but good paper records (yes, paper records even today). In these situations it is possible to verify the revenue and income, it is just a lot of work. It’s your decision as to if it is worth the work and if you can adequately verify the figures.
- The Seller is Evasive or Untruthful:
If the seller is evasive or untruthful you should walk away, in fact, run away from that deal. If the seller is not forthcoming and open with information it is very difficult to learn the facts about the business and if they are untruthful then you have no way of knowing what is real and what is fiction. It’s difficult to conclude a transactions successfully if the Seller is not open and willing to provide detailed information.
Working with a reputable experienced business broker will definitely be an advantage in finding the right business to buy. An experienced business broker will be able to facilitate the transaction process and coach a buyer on the above problem areas. From the initial meeting through closing a business broker should be able to have or get all of your questions answered and let you know where there might be a potential problem.
Not all problems are deal killers and there are many times when a solution can be reached. However, there are times to walk away because the risk of buying that particular business can be too high.
