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How to Avoid Bad Business Deals

How to Avoid Bad Business Deals

The biggest myth in business sales is that only bad businesses are on the market. There are lots of reasons why people want to move on from their existing, well run business. Surely, as a business broker it is our job to get the phone ringing! Businesses advertised for sale always boast of all the good things of the business that is on the market to entice your curiosity.

We can’t just make claims that sound good but are not true. All facts in advertising for a business (or house) need to be substantiated. For example you cannot exaggerate the owner’s earnings and you cannot print that it is fully managed if the owner actually works 20 to 40 hours in the business. (Puffery is still accepted so when you read “Best business in the whole wide world” you probably know already they are exaggerating, or it is point of view, so it is accepted).

Certainly for a first time buyer it can be difficult to determine if you are getting a good deal, and finding out can be a costly exercise. Talking to the right kind of business broker will certainly help!

But how to avoid a bad business deal? Here are a few pointers;

  • Remember; ‘if it is too good to be true, it probably is!’. It is tempting to put a (relatively) small amount of cash in return of all the promises. Certainly investigate the opportunity but do a thorough investigation during due diligence and ensure there are plenty of ways out of the contract. (Under law all deposits are refundable when you cancel the contract during this period, unless specifically stated).
  • As part of the due diligence, do a reference check on the business by calling debtors (clients), creditors (suppliers) and review their business online (no cowboys, shark patrol etc.) before committing to a deal. You will soon find out how people talk about the business and if they have complaints against them.
  • Document all your dealings and correspondence in writing. The only way to secure your investment is to have a contract with all the conditions in writing. If you wish to have anything added outside the contract contact the vendor by email, verbal agreements do not mean anything in court!
  • Do not assume; it’s making an ASS out of YOU and ME; Never assume anything! Always ask the question. If you are unsure of the verbal answer ask them to verify this in writing. If you don’t know what a certain business term means, ask!
  • Have an experienced (legal) team of people help you with due diligence. Ask an independent business broker to value the business opportunity. Ensure they are familiar with the reviewing business terms and terms & conditions in a sales agreement. On the other hand, in most cases the worst advisers are friends and family (unless they have experience…).
  • Remember that you get what you have paid for. Some businesses look great because of price but after some homework, that other, more expensive investment could be much more secure. Think about how solid the contracts to suppliers are, or the strengths of the clientele and how well it is protected.
  • Make sure that ALL parties involved in the deal sign off on every term with their signature.
  • Insist on personal contact with buyers and sellers, but also business brokers and agents. A meeting face-to-face is an important part of a good start in a business relationship.
  • Select a Business Broker (and brokerage) carefully. Ensure they have integrity and a good reputation with proven results. Consider a LINK business broker in your local area.

At LINK we have all the tools, and we can offer the following;

  • Get an accurate appraisal value through our in-house appraisal tool.
  • Get exposure to more buyers through the largest database of any brokerage in Australia.
  • We provide better quality buyers through our qualifying process.
  • Increase confidentiality because we can provide actual qualified buyers.
  • We provide ongoing support & guidance at no cost; before, during and after the sales process.

Get better results through the teamwork at LINK Australia and the international network of LINK brokers in New Zealand, Australia, South Africa and the United States.

Article written by Rudy Kokx – Business Broker at LINK Northland

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