business for sale via broker...contact direct or no

I found a business for sale via a broker.

Listing is very vague, but I think I know who it is. Should I contact owner directly or go through broker first?

Go thru the broker. He will get paid regardless, it's in his contract. Most business's for sale usually keep the fact secret until the sale is final to avoid loss of customer base, which is a large part of the business's value.

Do a proper job of casing out the business when no body knows you are looking. Even spend a day counting heads..then on the scheduled day see all the same ducks in a row.

If you think you have time, run a job thru as a customer. That will tell you quite a bit.

Chip

michiganbuck said:

Do a proper job of casing out the business when no body knows you are looking. Even spend a day counting heads..then on the scheduled day see all the same ducks in a row.

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Chip Chester said:

If you think you have time, run a job thru as a customer. That will tell you quite a bit.

Chip

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Depending on how well you know the business, these may be gold suggestions. There is lots of trickery to be done on a scheduled day if the seller is going to play games. If you've done some homework before being acknowledged as a buyer, you'll be in a better place to sniff out BS on the scheduled meeting day.

as much as I hate business brokers (tits on a bull), their efforts did make you aware of it so going direct is definitely offside. If the owner puts any stock in the agent, they will listen to the broker and by circumventing the broker you make an enemy of the owners advisor. In a 100% commissioned world, the psychology is this simple "you just tried to fuck me, and I don't need any more reasons to hate you"

The exception would be if you knew the owner well. Then I would start with him, but afterward call the business broker and work through him. It keeps the broker on side but also puts him on notice, no f'ing around because you know the owner.

One business my son worked at while going to school had a few employees working for cash so they were not on the books but the money was going out just the same.

Thanks all.

To clarify: I do know the owner and the business well enough. Haven't really dealt with them in a few years though.

I think the numbers presented by the broker are pretty high. I would expect that but they're not out of the range of possible either.

Not trying to screw the broker, just position myself properly for first contact.

michiganbuck said:

One business my son worked at while going to school had a few employees working for cash so they were not on the books but the money was going out just the same.

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That is just going to show up as owner profits. .. and the IRS is going to get a larger chunk from him than they would have from some snotty nosed bratts.

You can't - not account - for outgoing funds and think that you are coming out ahead on the other end. Not accounting for incoming is much easier if you run a cash business.

There was likely another reason to have them on cash, like underage, not to bother with dooing all the paperwork for a new (part time) employee, maybe not set-up to have employees at all yet, etc...


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Think Snow Eh!
Ox

Agree OX but the year or couple years to selling, if the business looks like it is making $20K or more than it really is then the selling ask-price can be higher... and then the new owner is left wondering what is wrong.

Gotcha!


Personally - I think the new owner is a putz, but what doo I know?



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Think Snow Eh!
Ox

jamscal said:

Not trying to screw the broker, just position myself properly for first contact.

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I know, didn't mean to imply otherwise....just trying give a sense of their view. I do dislike business brokers, but it'll help you if they're on your side. In that world, going direct is very aggressive and threatening. After talking to the owner, its like "I was talking with Bob who owns the business and he says you are marketing the business, that's why I'm calling.

I'd call the owner, say you heard they might be for sale and see where the conversation goes. If the broker has any control, the owner should tell you to call the broker at which point you do.

michigan, you're right, but I think Ox's point is for there to be cash to pay expenses, there is likely cash revenue as well. Conceivably he could be paying cash out of his pocket to covering expenses to bolster income, but you'd think its a stretch....anyone looking at the business is going to be looking at years of statements. Every time I've seen cash its to cheat on taxes and it reduced reported income.

I've never seen it otherwise -Selling a private business usually involves "normalizing" the income - the exercise of adding back in all the BS expenses to maximize earners (to maximize value).

michigan, you're right, but I think Ox's point is for there to be cash to pay expenses, there is likely cash revenue as well. Conceivably he could be paying cash out of his pocket to covering expenses to bolster income, but you'd think its a stretch....

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Hmmmm ... ????

I wasn't accounting for cash income, but that's possible. But either way - I don't see how that's any more disposable than cash out of his pocket - other than maybe Mamma doesn't question where all the $ went to? Forensically speaking, that would likely show up as extra "draws" of pay, but that will depend on what kind of books you keep too I s'pose. ??? (C corp?)

Cash income would seem to have the same exact value as cash out of pocket to me. It's not like he needs to find a place to dump it. He could shove it into his pocket just the same eh?



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Think Snow Eh!
Ox

Ox said:

Cash income would seem to have the same exact value as cash out of pocket to me. It's not like he needs to find a place to dump it. He could shove it into his pocket just the same eh?

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well I thought I was agreeing you lol.

Perhaps I misunderstood. The point is (in my experience) when there is cash and transactions off the books, it is usually driven by cheating on taxes.....and if you saw expenses being paid in cash off the books, it probably was to use up the cash revenue not recorded....ie there has to be a source for the cash, right?

The problem with off the books and cash (aside from a visit to the crowbar hotel if you get caught) is that you are not building value in the business which comes from a demonstrable stream of earnings over time. While the cheating is saving them taxes, after years and years of understating their earnings they can't get anywhere near what it should be worth as the buyer is only going to pay for earnings they see. Value is usually expressed as some multiple of earnings....so reducing cash flow/earnings by X might reduce your sale price 4X

If you are serious about possibly buying the business, hire an attorney that specializes in business acquisitions and let them talk to the broker. Even around here, small and rural, there are enough business sales that it's not hard to find a firm with at least one or two people that specialize in buying and selling businesses. They can help you with cutting through the blue-sky portion of the asking price and get right down to what a generally accepted valuation should be. In this case it's likely to be 3-5x the businesses last 12 months earnings before interest, taxes, depreciation, and amortization (EBITDA). This is assuming your looking at buying the business as a running operation (i.e. Stock Sale / Entity Sale) as opposed to buying up the equipment and closing the doors (Cash / Asset sale). I point this out because 3-5x 12 months EBITDA is very often much lower than what an owner thinks their business is worth. It can be a very hard pill to swallow, which is why it's nice to have someone on board that deals with these realities every day. It's especially helpful if you can find an acquisitions attorney local to your area. Like a realtor they'll usually have a list of similar businesses sales in the area and know how they were valued. Besides initial valuation, they should also help anticipate pitfalls like hidden liabilities, liens, etc. Attorneys have their uses, and this is definitely one of them, but of course YMMV.

My point was that he was claiming to make a certain profit and paying taxes on the improve amount just to make the business look more profitable than it really was. He was not cheating in any way because what he does with his money is his right, he was just padding the expenses out of his pocket to get a better selling price for the business.
for example a selling price 3 x $100k = $300k but 3 x $70K - $210K.

Paying tax on an extra 30k might cost 9k in taxes.. but getting a business value and sale at $300K is a $90,000 gain.

I've not see that (but admittedly I haven't seen everything)...but it is a good point you are looking for in due diligence - are all the expenses really being shown. Its usually done by things like not crediting inventory when you sell, or creatively treating expenses as capital items. same result, costs are reduced. Careful should be looking for changes in rations etc over time, several years statements always looking for the why, in attempt to smoke this out. You might spot what you describe digging through payroll and withhold tax records....it would only be worthwhile doing a short time (ie they wouldn't do it for years).

This is the sort of thing why one should never ever ever buy a business based on its earnings and financials (vs assets) if there is not a minimum of review engagement statements, better still if audited. Just simply walk away from Notice to Reader and you protect yourself from a lot of the shenanigans.