The “For Sale by owner” approach to selling valuable property is less commonly used for sale of commercial real estate and businesses than residential real estate. However, from a buyers point of view, this usually would be more risky than buying a business when the seller is represented by a business broker.
Why could it be more risky to deal directly with the seller? There are a number of possible reasons:
- Seller does not want to spend the money to receive advice that is needed
- A seller may think he or she may be more persuasive than a broker
- Seller may want not to disclose certain aspects of the business. These may be
matters of regulatory compliance, tax compliance or other issues…
- A broker if retained may insist on preparation of proper financial statements or
other customary transaction steps and the seller may not want to be bothered
So in the situation where the business owner conducts a sale, the buyer should exercise a much higher degree of caution. In such cases a seller, by definition cannot be neutral and may not want to be subjected to the normal processes of buyer due diligence. In addition, this type of seller is less likely to have prepared the business for sale in a manner that would reveal the true worth of the business. The drawback to buying a business being sold in this manner is not just that the business may be poorly managed; it’s that there usually is no easy way of knowing the true business potential. Under these circumstances buying a “For Sale” by owner business can be very risky.
It’s a Tough Challenge, Buying a “For Sale by Owner Business”
It’s not just that a business owner may deliberately attempt to overstate his or her business profits, but with poor bookkeeping or a cash based business it can be difficult to determine and understand the true earnings. As a buyer, you certainly do not want to pay money for an unprofitable business or buy one that you thought was profitable, only to later find that poor accounting was creating the “profits”. When buying a business that is for sale by owner, the owner may have the best of intentions, but might be truly unaware of the real circumstances and value of his business. Consequently, in such cases you would likely end up paying too much, which is not a good way to start off. Further, and a very big caution: your own good negotiating skills could help lead you to buy a business that you would never knowingly want to buy. So obviously there are better ways to proceed…
Intermediary and Businesses for Sale By Owner
You should use an intermediary such as a business broker to assist you. An intermediary can provide strategic information regarding market timing, market conditions, market price, financing options, transaction structures and other relevant information that is critical for both buyers and sellers. You need an experienced business broker to help you see what you are not seeing, or that which is hidden from your point of view. And the business broker would guide you on what to do about it the situation. Simply put, most of us need a guide dog or a guard dog when we are travelling unfamiliar territory. Buying a business is a very time consuming task for all parties and it can take countless hours of dedicated time. For a modest price that business brokers charge, there are many advantages from providing to you protection to saving you time and unnecessary frustration.
Why You Should Not Be Without the Services of a Business Broker
Using effective representation can make the difference between closing and losing the right deal, or alternatively walking safely away from a deal that you would never knowingly want to do. A business broker has established relationships with the many professional organizations, which are required to appropriately complete the transfer of business ownership. These relationships prove to be invaluable to sellers and buyers alike.
There are a number of skill sets that a professional business broker uses to ensure that the transaction is managed smoothly, thus benefiting both buyer and seller. Evaluation experience, market awareness, achieving proper representation of financial condition, and use of creative deal structures are a few of these skills. A business broker operates in the marketplace daily and is current with overall business supply and demand, the types and availability of financing, etc. No other professional is in this position.
A business broker can help find attractive businesses in which you might want to invest. In addition, business brokers usually have experience with determining the fair market value for sale by owner businesses and can help estimate the fairness of the initial offer. When issues need the attention of other experts like a forensic accountant, valuation expert, or deal savvy attorney, the business broker knows how and with whom to strengthen your team.
Lastly, a business broker often has considerable experience in dealing with the type of the businesses you are seeking. You should never allow yourself to be persuaded that you do not need a business broker because the seller does not have one. Ideally, you should look for business broker firm who has already dealt with a particular industry or industries you are targeting. Not always, but in certain situations, it is advisable to seek a local business broker.
Obtain Assistance Responsibly – Ask for Certifications & Qualifications
The industry certification of a business broker is very important when making an important decision to purchase a business that is for sale by owner, as a considerable amount of experience is necessary to achieve success in this situation.
Certification serves as one of the possible ways to measure the reliability and trustworthiness of a particular business broker. The International Association of Business Brokers certifies business brokers and awards the Certified Business Intermediary (CBI) to brokers who have successfully undergone rigorous training and examination. The designation demonstrates their knowledge, expertise and years of valuable experience.
Your choice of a business broker can make or break your attempt to buy a business that is for sale by owner. You are encouraged to pay attention to the experience and qualifications of the particular business broker whose services you are about to use. With this in mind, purchasing a “For Sale” by owner business with competent due diligence and under the right terms and conditions can be a rewarding and lucrative decision.