When buyers make the wrong move or ask the wrong questions, they end up missing out on great opportunities. What are the biggest mistakes buyers make during acquisitions and how can you keep yourself from committing them? Peter Siegel witnessed firsthand every common trap that business buyers fall into – twenty times over. Peter is the founder of Bizben, a dedicated online portal where small businesses are sold and bought. In this conversation with Brian Loring, Peter explains how you should settle your financial qualifications and study the deal structure when browsing through your potential buy listings. If you want to have a better, more secure experience of business ownership, tune in!
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The Biggest Mistakes Buyers Make In Business Acquisitions With Peter Siegel
Don’t Commit These Errors When Searching For Deals
We talk about getting deals done for folks looking to buy and sell outstanding businesses. A lot of people lump business brokers into the same bin as real estate agents after all, we both provide a service where we get paid with a commission check once a deal gets done. The reality is that these are very different practices. It’s apples and oranges in comparison. It’s so different that in fact, many residential and commercial real estate brokerage firms, including a couple where I used to work, they expressly forbid their agents from doing business transactions, even though the broker’s license used in real estate and business brokerage is the same.
One of the biggest differences I have found over the years is how buyers are treated in the marketplace. Often, we get calls from folks who want to leave their day jobs behind, buy their own business, may be out of work or looking to buy a new future, even strategic buyers who are wanting to strap on another business to their existing company. All these buyers generally have one thing in common. They are pretty much on their own in their search. For the most part, we business brokers only work with buyers when we get a listing and we go hunting for those buyers out there once we get that listing. We don’t represent buyers. A real estate agent works with someone where they show one property after another. Few business brokers are in that relationship. What I’ve found is enormous amounts of frustration out there. Many buyers feel like they flail around month after month without getting anywhere. A lot of them give up after a while.
Our guest has seen this frustration firsthand for many years, very close up, and we’re going to spend some time on how to make progress while you’re on the hunt and not get too frustrated. Peter Siegel is an MBA and Founder of BizBen. If you’re not familiar, BizBen is an online business community that provides a lot of different services in business sales, it’s been a fixture here in California since 1994. First and foremost, it’s a platform where sellers and their brokers can list businesses for sale and buyers can ask to see the businesses that they’d like to buy. For those who have used it for years, BizBen is an amazing resource. The site is packed with all great information articles, blog posts, webinars, podcasts.
Peter heads up BizBen’s ProBuy and ProSell Programs. These are programs for people who are seriously pursuing a deal and want to find something. He also has a financing arm that helps buyers get a deal done through a variety of loan programs. Also, Peter has some very big news to share with us about the future of BizBen, which for years has been focused solely on California businesses. Peter talks about the mistakes he sees buyers making all the time, and he also shares a couple of tips on how to succeed in your search. It’s a great episode and I hope you enjoy it.
Peter, thanks for joining us. I appreciate it. I know that you have a lot going on with BizBen and some amazing stuff that’s going to be coming shortly to BizBen. I appreciate you coming on. Thank you.
Thanks, Brian, for having me. I appreciate you having me on the show.
You and I have talked numerous times about this particular subject and why it’s near and dear to our hearts. It is a very hot topic among the business brokerage community and how buyers go about securing deals, finding deals, figuring out the information, dealing with brokers, and dealing with owners. It’s a very difficult process. I find it annoying from the standpoint of we brokers treat the buyer in the process as chattel, as secondary citizens, and it shouldn’t be that way. Do you get people who are frustrated and come to you and say, “How do I do this better, because I’m not doing it very well?” Do you feel that sense out there?
All the time and I feel your frustration as well, too. At BizBen, I talk to a lot of buyers every day and there was this dynamic shift in our industry. When I say industry, the business brokerage industry, whereas years ago, I remember business brokers, including myself, I was a business broker at one time many years ago, but we would invite buyers into our office for a sit-down. You didn’t get information about a listing unless you came into the office or a phone call and spent about fifteen minutes with us. Ten minutes of it were an educational process and talked about the protocol and everything. In retrospect, that was helpful to buyers, that was one. The second one was the actual representation of buyers as well too. In those days, a lot more brokers cooperated with each other. I’m sure we’ll talk about it in this show, but that’s another problem too and a lot of buyers don’t understand that process.
Do you find that a lot of buyers struggle with the very first process of search? Your BizBen site is a fantastic resource and a fantastic tool. Do you get the sense that people begin the search on the wrong foot or are doing it wrong in how they search for something?
They do. I always tell buyers in our ProBuy Program on BizBen, “You’ve got to look at this as a methodical process, and it’s like finding a job.” For example, when you go to find a job, if you’re an engineer, you don’t look in the line cook section online. You focus and direct your search and you find what types of categories or businesses that are interesting to you. To narrow it down, if you need financing, getting pre-qualified for financing, make sure that you meet the requirements. Buyers have an extremely difficult time, especially at the very beginning of trying to find a business, but tools like BizBen can help you narrow that. When you’re searching, it’s best if you can search by category or by type of business as well as a full-on search.
Lack In Financial Qualifications
I wanted to get a little bit into some advice about how buyers can be fully prepared. What I find is that there are so many people out there who haven’t taken the first 2 or 3 steps to come off as being prepared because they haven’t taken those steps. Getting pre-qualified with either an SBA or a local bank is a big first step. Can you talk a little bit about how we as professionals and brokers determine whether somebody is earnest and prepared to buy rather than somebody who’s talking the talk?
First of all, let me give you statistics because BizBen reaches out and talks to a lot of buyers every day, but also does a lot of surveys. In our estimate, 80% of all buyers who say, “I’m thinking about buying a business,” never ended up doing so. That’s a huge number. My feeling is when they go to buy a business, number one, they should be pre-qualified for financing if they want to leverage their money and buy a bigger business. That not only means SBA financing. It could be a commercial, bridge, and there’s a lot of financial tools the buyers can use to leverage their money.
The other thing that they may want to do is have a personal financial statement ready because they’ll always want to have that going back with a nondisclosure agreement back to the broker or the owner that’s involved. That shows a level of professionalism on the buyer’s aspect. They will want to have what I call a buyer’s resume. It’s a lot like a resume, but it lists what type of business you’re looking for, geographically, where you’re looking for work experience that may relate to the industry, or the categories that you’re looking for, all of those factors. What that does is that tells the business broker, “This person is serious.” Surprisingly, Brian, only 10% of business buyers take those steps.
I noticed that I will talk to some buyers and they call up and they give broad criteria and try to drill down and get more specific about what they’re looking for. Start with what price range you’re looking for in a business and when you hear somebody says, “Whatever. It can be between $200,000 and $5 million.” It’s like, “No, give me some specifics. You need to be targeted.” I feel like a lot of buyers haven’t envisioned what this is going to look like if they did find something that would hit their mark.
When I was a business broker, I usually didn’t work with buyers who said that. That was a delineating point for me. When a buyer said to me, “It doesn’t make any difference. I can buy anything. Don’t you worry about it?” When a buyer told me that, I knew they didn’t know what they were doing. I would be polite, but I wouldn’t work with them. Business brokers now tell me it’s the same way. If buyers are belligerent or if they think they can do something and they demonstrate they can’t, that’s it. It’s the end of the line. They’re not going to get deal flow.
One of the things I must admit that I’m guilty of as a broker who takes listings and represents sellers is that instantly I will want to find out about a buyer’s past, what industries they have been working in, and whether that industry correlates to the listing that I’m holding. I have been guilty of discounting somebody or eliminating somebody who has been in a completely different industry. Yet, there are qualified buyers out there who do buy in something that they haven’t done before. Do you find that’s unusual or uncommon? What are your thoughts on going out of an industry when you’re doing your search?
Two angles on that. I find lots of times buyers who think they know what they want to buy, and they target certain things, usually end up buying something completely different. I can give you numerous examples of that, but all the time they usually end up saying, “I want to buy a liquor store.” They start looking at liquor stores and the financials aren’t that tight and the tax returns aren’t reliable. They spin and buy a feed store or something retail-related but a little bit more on line for, “I have some competence in the tax returns and the financials.” There’s that aspect.
The other aspect is the financing portion because, especially SBA 700 financing, work experience is huge. There are about fifteen different parameters that SBA loans have with buyers, and work experience is important. You got to have some related experience to the business you’re buying. Do I agree with that typically? No, because most of the time, if you’re coming out of Corporate America or working in a job, you have a skillset that could easily run that business, but bankers being bankers, they’re going to look at those things.
Not Looking At The Deal Structure
Do you find that people know how much they can afford?
They don’t. That’s the other thing that we do when we pre-qualify buyers is you need to take them through that process of what they can afford and why they can afford it. There are two factors I feel that you need to look at. You need to not only look at the price of a business but also the deal structure because there are so many ways you can structure a deal. I typically tell people for financing on a good deal with provable income tax returns, etc., you go to the right person, the right lender, you can put down anywhere from 10% to 25%. You can leverage your money. You can work backwards and see how much you’re going to need for a down payment.
[bctt tweet=”Be polite even if you disagree. ” username=””]
Ignoring The Protocols
I wish I had a dollar for every time somebody called our office and saying that, “Here’s the business I want. Here’s the location I want. Here’s how much I can spend. Can you go find it for me?” They expect business brokers to operate like a real estate agent and show them houses. It takes a little while for people to understand it’s never going to work that way. However, there are cases, like my case in particular with ManageVisors because we are a specialty brokerage and we narrowly focus on a couple of different industries. We do approach that level of specificity when it comes to working with a buyer. There’s so much frustration when it comes to the time and amount of energy that’s required in looking at the financials and getting in front of somebody. Talk a little bit about the energy and the amount of time and effort it takes to get a deal done. It isn’t small, is it?
It’s not small and it’s a process because there are protocols in place. I go over that with buyers as well. Protocols are important.
What do you mean by protocols?
The stages of buying a business, everything about identifying, searching, where to look for a business, how to even deal with brokers and agents. For example, most buyers don’t even realize 70% of all business brokers don’t cooperate with each other. That’s not like residential real estate and commercial real estate. What most buyers do is they go reach out to one broker and say, “Will you work with me?” The brokers say, “Sure, I’ll work with you.” They’re not going to have access to over 70% of all deals.
I didn’t know it was that high. I’m a big believer in cooperation because the biggest obstacle we have as brokers is deals that don’t sell. We all have had deals that we thought should sell and don’t sell. The idea of not cooperating, it’s shooting yourself in the foot and you’d rather have 50% of something than 100% of nothing.
Not only is it unprofessional, professional to me is if their seller client knew that they weren’t cooperating and the ramifications of that, it’s horrible. I’m with you. Our association of business brokers should take that up and have some mediation process or something but have the system in place where brokers felt more comfortable about cooperating with each other. That only makes a more efficient marketplace.
Failure To Make Proper Analysis
California is about the worst state there for this particular subject. Florida and Texas and a few other places are much better at it than here in California. That’s a separate subject. In terms of how a buyer goes about finding a deal that is worth their time and effort, I’ve always given one tip and I don’t know what you think about this. I always instruct people to disregard the price at the very beginning. Don’t worry about the price. Look at the deal, location, business. Look at all the factors that go into it other than the price, because the reality is every buyer will tell you that it seems like everything is overpriced and that on its own can lead to a bunch of frustrated candidates.
I tell buyers the same thing. I say, “Here’s a couple of things. Number one, do your analysis. Do what we call level one of due diligence, and then make an offer and have a reason for that offer. No matter what the price is, have a reason for it and let them know the reason why I’m making this offer of XYZ is because of ABC.” I tell buyers, “You wear the pants in the transaction.” Realize what’s fair and then offer it. If they don’t accept it, then walk away. It’s easy.
Make a fair offer based on information that you think you can trust and see where you’re at, at that point. A lot of buyers are not aware of it because so many buyers come to it from a real estate ethos and most people have bought a house or commercial property or whatever. A lot of people do not understand that some businesses come down a huge amount in price because of circumstance. Years ago, I put on the market a business that was listed for $1.2 million and the business wind up having to take $300,000 as sale price. They took it and you don’t find that price drop in real estate. It doesn’t happen. That leads me back to the same point. That is, don’t fixate on price. I see so many buyers looking at the multiples and say, “That’s 4.2 times earnings or something, and I’m not going to go for that.” Eliminate that from your thinking and get to a point where you understand what the deal is about.
Brian, I have an interesting story about that. Before I was a business broker and started BizBen many years ago, I owned several businesses. One of the businesses I owned was fairly large and a business broker was helping me. He said, “The way these works is if somebody makes you an offer, listen to it.” Somebody came in and they made me an offer and it was lower, but they had a great reason why they were offering me what they were. Being the business owner, I was like most business owners. They usually overprice, thinking that they’re going to come down in price. It was helpful. I was stunned. I was like, “This makes sense.” I took him up on his offer because it made sense, but also the deal structure he put in place too made sense for me where I was at in my life. I’ve had numerous buyers call me back after I’ve given this advice and saying, “That worked,” because what I find is most buyers are gun shy. They will not make an offer on a deal. They get this paralysis and I tell them, “Don’t do it. Find out what you feel is a fair price and go for it. You’ll be surprised.”
Do you think that’s because of fear that they don’t trust what’s being told to them, or they don’t trust the numbers?
The psychology on this, it’s two reasons. Number one, they’re not sure because they may not have professional guidance, but number two is they don’t want to insult the seller.
Not Staying On Top Of Communications
I get that all the time. People saying, “I’d like to make an offer, but I don’t want to be insulting because the business that you’re asking $2 million for, I don’t even think is worth $1 million or something.” That is the case. That does happen. There is a certain amount of give and take that you have to work past and make a fair offer, get it out there. Why do you think the failure rate is so high among business sellers? Is it about overpricing or are they not treating buyers properly? You see the same stats I do. People estimate that 70% to 80% of the listings out there don’t ultimately sell for the seller. Do you think part of it has to do with how buyers get treated or how buyers approach it? Why do you think the failure is so high?
There so many factors to contribute to this, but the first is pricing and deal structure. It doesn’t make sense. Also, control over the process. The deal and communications are very important. Unfortunately, if an owner hires a broker or an agent that isn’t on top of it, or they have too many listings or they don’t get back to people, that breaks it down because these buyers are looking at multiple deals. If a broker doesn’t get back to somebody in time, they’re going to move on. There’s a myriad of reasons why deals don’t go through. The longer a deal goes on, the higher chance it’s going to fall out.
That leads me to one of my questions and that is, I do sense that a lot of buyers want to sit and let the listing sit there for 6, 9 or 12 months. Do you think that’s a good strategy to wait around and let something sit there for a while in the hopes that you make an offer and in a year from now or something?
I’ve never thought of that, but I typically think that if a listing sits there for 6, 12 months, it’s not a very good listing because with the exposure that you get on platforms like BizBen, if it doesn’t sell in 6 to 12 months, something is inherently wrong. Sometimes buyers tell me, “It’s been sitting there for 2 months, 3 months. It must not be very good.” That’s not the case because lots of times, when a listing comes on the market, it’ll go into escrow quickly, but the due diligence process and the closing process will be 45 days and 50% of all deals fall out for one reason or another. That typically happens.
There’s a big difference between the three-month mark and the twelve-month mark. I wanted to get back to a couple of common mistakes that you and I wanted to talk about that we see. Another one that I come across a lot, not only about being fixated on overpricing, but also is about the idea of a buyer’s going into the process with a wrong attitude or a chip on their shoulder. They feel like they have to exert power and be dominant in any negotiation or discussion process. They’ll get on a phone call initially with a broker or even with an owner and be argumentative about the price or disputing facts and figures. I always have to tell people, “A business deal is a win-win scenario. You have to go into it in a cooperative mindset.” Have you found the same thing I have that some buyers go in with a negative or antagonistic approach that doesn’t work?
I do. It’s not a good strategy. In lots of those cases, they don’t feel very secure in the process. Lots of times, when people don’t feel secure in a process, they get amped up or go negative because they don’t feel secure. Like what I was alluding to when the buyer would come to me and say, “Don’t worry about this. Don’t worry about that. I can do that. I’ve done this.” That’s the worst thing you want to do. It’s a two-way street. You’ve got to let things work their way out. If it doesn’t, it doesn’t, but don’t be aggressive. It doesn’t pay off.
In your shoes, somebody who is the head of BizBen, one of the most amazing resources out there, you see things that I don’t. Are there other common mistakes that you see that buyers are making that they should be aware of in the whole process?
They’re not prepared. They have very unrealistic expectations about the size of the business that they can buy. They think SBA financing is easy. What they don’t realize is with SBA financing, they want to leverage their money, is all lenders are different. They have different portfolios and underwriting criteria. There are so many factors. They think that the SBA is all the same. It’s not. Between that to contacting 1 or 2 brokers and let them do the search instead of doing the outreach and then spending enough time on the search. This is a lot like finding a job. You got to spend time looking because if things come on the market, if it’s a good deal, you’re competing with a lot of other buyers. It’s going to go and contract in an escrow quickly if it’s an approvable good deal.
You’ve seen 2020. How has COVID impacted BizBen and the marketplace in terms of how buyers approach this? Has there been a dramatic change at all?
I don’t think it’s been dramatic, but there’s been a drop, I would say 30% overall. As far as certain industries have gotten hit harder than others.
[bctt tweet=”The idea of not cooperating is like shooting yourself in the foot.” username=””]
What is 30%?
Reduction in overall deal flow. On BizBen, we keep stats of California sales, small business sales, and were watching the number of sales go down and it’s about a 30% to 40% drop in the California marketplace.
Is that a 30%, 40% drop in the number of listings that you post?
A number of listings had been sold. There has been a drop. Also, it’s correlated to different industries as well. Restaurants have been decimated, retail sector, etc. A lot of service businesses have ramped up a little bit. We’ve seen a lot of cleaning companies in high demand, a lot of real estate staging companies that are high in demand. You see some drops in certain industries, but pick up in others.
Is there a way to know what industries are doing better than others? It’s mostly anecdotal. Everybody knows that restaurants are struggling and other recurring revenue businesses and a lot of them are doing well. Is there any research to be able to identify that for a buyer out there? I don’t know exactly how you would approach that if you wanted to do that.
I think doing a Google search and then also talking to some knowledgeable business brokers like yourself, they usually have a good fix of what’s selling, what’s not selling, what’s hot, and why. You can’t help but pick up a general article about COVID and then they talk about various sectors about what’s getting hit hard and what’s not.
Let’s talk a little bit about BizBen itself. You have some great things coming up and I don’t want to steal your thunder. Why don’t you tell a little bit about what’s going on your end?
We’ve been reflecting a lot during this downtime in COVID and a lot of people over the years. We’ve been online many years and a lot of people have told us, “We love your platform, but it’s California. Can you expand nationwide?” We had a lot of business brokers and agents ask us to do so over the years. While we were down, I was doing some repairs and some maintenance on the site, and I gave it a long look of, “Why not do this.” There’s a lot of features I’ve always wanted to put on BizBen. We incorporated a lot of new features, a lot of online tools, and then also the ability to search nationwide.
The other thing that we have on BizBen too that I’m proud of and excited about for the future is business wanted to buy postings. That’s a huge factor. The internet in the future is going to go more on the demand side versus the supply side. It makes so much sense where buyers can post what they’re looking for and they can get really detailed after they talk to a broker like yourself or broker can even post and say, “I have a buyer who’s looking for liquor stores in this price range and close to this particular geographic area.” It would make our marketplace so much more efficient. That’s what’s missing. That’s going to be a huge component on BizBen. We have something called the TruMatch, which will match buyers and sellers right online.
What’s that about? Talk a little about that.
Sellers who go online, when they post something, they can see buyers who’ve posted wanted postings and vice versa. You can make matches a lot quicker. The whole purpose of BizBen is to make the market efficiency a lot better for buying and selling small businesses. With this process and this tool, we feel that we’re going to be able to do so. It can take anywhere from 3 months to 12 months to sell a business. Our whole goal with the new platform is to get the process down into 3 to 4 months from start to finish.
Let’s keep going on TruMatch. I’m looking for a landscaping company in San Diego County. I put that in as a wanted and then what happens after that?
What happens if there are any postings on the flip side, on the for sale side, it automatically matches. When you go to your listing, you say, “See buyers for my listing,” it will give you the TruMatch link, and it brings up all the potential sellers on that side. It does the complete opposite. We’re doing a beta test on this. I knew it would be successful. We did this beta test and I was telling a broker about this in San Diego and he goes, “I’d like to check this out. I have a buyer who’s doing a roll-up or looking for other businesses in his industry.” It happened to be a garage door business. I love those businesses because they’re usually successful, consistent cashflow, etc.
He said, “He’s looking for up in Northern California. I’m in San Diego. I don’t have the outreach to that marketplace.” I said, “Let’s do an experiment. Let’s put on a wanted posting on BizBen and let’s let it roll.” Two weeks later, an owner got on BizBen from Marin County, which is Northern California, saw this wanted posting. He contacted the broker and a deal was made within three weeks. The broker made a $70,000 commission. I tell buyers and sellers, “It works if you use the tools, it works.”
In the beginning, we brokers tend to pooh-pooh the buyers. We tend to treat them as second-class citizens sometimes, and it should not be that way, should it?
Absolutely not. A trend that I see coming up is a lot of brokers who are representing buyers. It’s like going old school. They’ll charge a fee to the buyer, but they’ll be a buyer’s representative. They’ll act on behalf of a buyer in their best interest and do the searches, but also get a success fee if they find something.
It’s usually a success fee-based. It’s not like a monthly fee-based thing.
People are experimenting with this right now because it’s a newer concept, a lot of them are doing a combination of both. Sometimes it’s a success fee. It depends too if on the sales side if the broker is cooperating or not.
We do it on a success fee basis. I have found after doing this for years, that is very difficult to get buyers to commit to any ongoing or regular monthly type of fee for a buy-side engagement or search because they don’t know that you’re going to be able to get anywhere with it. In terms of putting a bow on this, a couple of things that struck me is that you are doing something actively to make life better for buyers. I have to applaud you for that because you mentioned that you think in ten years, our industry is going to be significantly different when it comes to buyers.
I think the marketplace will become a lot more efficient. Brokers and agents will become more facilitators in our industry, assisting both sides and making sure that transaction gets done instead of a one-off mentality. I have high hopes for the future in our industry.
The reality is that buyers have the potential to be multiple customers a lot better than sellers do. We tend to forget that.
Another thing too is I’ve had buyers for over 15 or 25 years. What I find is it’s a transgression where the buyer will end up buying a smaller business, say for $200,000, an entry-level business, they’ll sell it in 3 or 4 years because they get bored or what have you. They leverage up and buy a bigger business. I have a lot of clients now who have million-dollar businesses who started buying businesses on BizBen 15, 20 years ago. You’re absolutely right. This happens or they buy multiple businesses.
[bctt tweet=”Always make a fair offer. ” username=””]
What’s the timing on the new and improved BizBen?
We’ll make the switch online to the new and improved BizBen version four. We’ll be making tweaks as we go and everything. I like to listen to more users and see what they would like to see. A lot of the new tools online came from users. We’re rolling it out and it’s going to be great.
Peter, you’ve been great, very helpful. I appreciate it. I hope the buyers out there take heed and maybe you get a little bit farther down the road in their search skills and their ability to get a deal done. I appreciate it. Thank you so much for joining us.
Thanks, Brian. I appreciate your time.
About Peter Siegel
Peter Siegel is an MBA and founder of BizBen, an online business community providing many services to buyers and sellers of Main Street businesses. BizBen has been a fixture here in California since 1994.
First and foremost, it’s a platform where sellers and their brokers can list businesses for sale, and buyers can ask to see the businesses they’d like to buy. BizBen is also an amazing resource. The site is packed with great information in the form on articles, blog posts, webinars and podcasts.
Peter heads up BizBen’s ProBuy and ProSell programs for people who are seriously pursuing a deal. He also has a financing arm that helps buyers get a deal done through a variety of loan programs.