Horror Stories - Traps to Avoid

Never, ever buy a business without the accountant's figures, and even then ....

We had a vendor approach us to sell his business with an asking price that he said was what he paid for it a year before. We looked at the figures and they simply didn't stack up, so we asked him what he'd based his purchase decision on. He told us he'd bought it on the basis of the previous owner's figures. 'Accountant's figures?' we asked. 'No, no', he said. He'd just accepted what he was told, hadn't asked any professional advice and had paid a price that was in fact nearly $90,000 more than the business was worth. Needless to say the next purchaser didn't make the same mistake. But are accountants always right? Nope. See 'Even the Accountants Make Mistakes'.

Check and re-check the lease, especially if the landlord wants to re-write or 're-issue' it for a new owner.

Great business, great building, great lease - 3 years remaining plus a 5 year option - until the landlord refused to assign the lease in its current form to the would-be purchaser. We checked the re-written, new lease and it was identical, except for the insertion of one little clause buried in 6 pages. But the clause was a killer. It was a demolition clause allowing him to give the tenant a mere 3 months notice, effectively making it a 3 month lease. Needless to say the purchase didn't proceed. Turned out the owner also owned the property next door and wanted to re-develop the whole site but didn't want to pay out a lease in order to do so. We understand a legal fracas may develop between the would-be vendor and the landlord on several grounds.

Even the Accountants Make Mistakes.

When a vendor gives us the accountant's figures on a business, we never take those figures at face value but scrutinise them ourselves in great detail. In this case when we looked at the figures something was out of whack. It was a food business, but the ratio of goods purchased to sales just didn't seem right - the gross profit was too good to be true - and we've seen enough food businesses of all types and sizes to know!

It turned out that the vendor had been paying for goods not from the business account but on a personal credit card to reduce the expenses as shown on his profit and loss statement and so show an inflated profit. We approached his accountants who threw their hands up in the air and said, 'It's not our fault, we can only work with what we're given - read our disclaimer!'

Lesson: We know what to look for in just about every kind of business and we can smell a rat a long way away! Incidentally, the would-be vendor eventually sold the business to an employee, (not through us!) at what we estimate was a $100,000 loss on what he'd paid for it.

Listening to the wrong person.

We recently had a buyer who was looking for an accommodation business and we had just the thing for him. After some negotiation on price he put a contract on it which the vendor accepted. However, the purchaser's solicitor intervened and advised him against proceeding as, in the solicitor's opinion, it wasn't a good business. He pulled out of the contract. Two weeks later we had another buyer who unhesitatingly paid the full price and completed the contract.

The original, would-be purchaser then approached us again and said he thought his solicitor's advice was wrong and that he definitely wanted the business. He asked us to approach the new owners with an offer that was $80,000 more than the original sale price. The owners declined. They were completely happy with their purchase and had actually improved the business quite significantly already. ‘Tell him to come back in a couple of years', they said, laughing. We are now looking for another business for him, and this time we know that while he'll take legal advice from his solicitor, he'll take the business advice from us!

Lesson: You can have a great solicitor, (and/or a great accountant), but they're often not who you should go to for business advice. We don't give legal opinions, except that in our opinion, most solicitors shouldn't give business opinions either!

Taking care of the family, or 'can they really run a business'?

We often see the situation where well-meaning parents will buy a business for a son or daughter without being sure they can actually run it, and with no 'hurt' money involved on the son or daughter's part either!

In this case, the parents bought the son a restaurant, and it was a good restaurant too, with an excellent trading record. Problem was, while the son was a good chef, he wasn't a good restauranteur, which the previous owner was, and he simply couldn't manage the 'front of house', and nor could he pick staff that had the right touch either.

Result; business for sale in very short time and at a substantial discount on the purchase price because the figures had dramatically fallen away. The son went back being the good chef that he was. The parents consoled themselves that at least they'd tried. In this case, 'hurt money' really wouldn't have helped either - the son simply didn't have the very specialised skill-sets it takes to be a good restauranteur.

Does your Golden Parachute have strings attached?

We had a buyer from interstate walk in our door after seeing a business he liked on this website. He worked in a senior position on a contract with a major blue-chip company but he wanted out. He knew financials, liked the business he saw and put an unconditional cash contract on it that day with a very substantial deposit - enough to buy a luxury car!

Imagine his horror when he tried to resign and his employer said they would hold him to his contract and sue him for substantial damages if he walked out.

It was only because we quickly found another buyer who was prepared to pay the same price for the business that he got his deposit back, less a relatively small amount for legals. Lesson: It sounds simple, but please be sure you are completely free to fulfill a contract before you enter into it.