By Cliff Ennico
“I’ve been looking to buy a business for some time now. My college graduate daughter has been out of work and living at home for two years, despite tons of effort and countless rejections, and I thought it might be a good idea for the two of us to own something where I could help her out for a while until she got the hang of things and could manage on her own.
Through a business broker, I came across a small family owned hardware store in a rural community about one hour’s drive from where we live. There’s nothing like it in the immediate area, virtually all the local contractors use the store, the store has been around for over 50 years, and the numbers in their financial statements and tax returns – prepared by an excellent accounting firm so I’m sure there’s no shenanigans — are extremely positive.
I saw this as the perfect opportunity for our little family business.
When the broker sent the owners our offer letter, they came back and said they would accept our offer but only for an ‘as is’ purchase: they flatly refused to make any sort of promise as to how the business would perform in the future, whether or not there were any hidden liabilities, or even that their equipment and inventory were in good condition. They said it was a ‘take it or leave it’ proposition, and they wanted us to pay the purchase price 100% in cash up front.
This left a sour taste in my mouth, but before I walk away from the deal – is it customary for business owners to act this way when selling their businesses? Are they just playing hardball?”
If I were you, I would walk away from buying this business. As Shakespeare once said, “something is rotten in the state of Denmark,” and you should trust your sense of smell. This seller clearly knows something you (and even perhaps the broker) don’t know, and you need to find out what it is before you move forward.
The big problem here is that the business is located in a distant community. You are not a “local,” and therefore do not have local knowledge about the business, the community, and things that are going on there.
Financial statements – even the best ones, prepared in scrupulous compliance with the accounting rules – only tell part of the story about a business. When you read financial statements, you are looking at the past – how the business has performed historically over time. They say nothing about how the business will perform in the future.
There may well be things happening in this community that will change the way the business will perform after acquiring it, and, unlike buying a house (where the seller is usually required by law to make certain disclosures about potential problems, such as termite damage) the seller is under no legal obligation to volunteer information about them. You are truly in a “buyer beware” situation.
Here are the sorts of questions you need to ask (and I guarantee you won’t find the answers in any financial statement):
- Is a major competitor (such as Lowe’s or Home Depot) moving into town?
- Is a major corporate employer moving out of town and destroying the tax base?
- Are the town’s demographics changing in a way that won’t favor a family owned hardware store (for example, is the town’s population aging to the point where homeowners are cutting back on improvement projects)?
- Is the state Department of Transportation shutting down the road going by the store for major improvements that will take years to accomplish?
- Is the town changing its zoning laws so that the store will become a “nonconforming use” and therefore difficult to sell to someone else?
Obviously, if you are not a local resident and don’t read the local newspapers every day, you have no clue how to answer these questions.
If you do decide to buy this business on the seller’s terms – as a “pig in a poke” – here are two things you need to do.
Hire a Good – Local – Accountant or Lawyer. You shouldn’t buy ANY business without a good lawyer and accountant, but especially in this situation, you need to work with someone who is a local resident and can help you answer some of these questions. Preferably someone who’s been around a long, long time.
Spend Some Time in Town. Take some time off, rent a room at a local motel, and spend a couple of weeks living in the town, chatting up locals (especially the town librarians and elderly men – they are always men – hanging around the coffee machine at the library), reading the local newspapers, and generally finding out if things are happening that will adversely affect the business.
Just make sure you contact the local Police Department first and make sure they know what you are doing . . .
Cliff Ennico (email@example.com) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2016 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Follow him at @cliffennico.