6 Ways Sellers Can Fool Buyers

Fool by Nick Youngson CC BY-SA 3.0 Pix4free

Here at Apex we pride ourselves on giving ethical presentations of the businesses we represent. Unfortunately, there are some individuals who try to sell a business without holding themselves to our standards. Here are some common ways they can hide crucial information from buyers.

Misleading Inventory

There are a few ways inventory can be misleading, starting with basic human error. Bad systems and careless employees can create inaccurate data. But more frequently, we run into inventory that includes obsolete or worthless materials marked at their purchase price. Just as bad as obsolete inventory is inventory that may be expiring or earmarked for a client prior to a sale closing (and is not otherwise marked as “work in progress”).

Inventory is one of the basic measures of value in a business, so if it’s misrepresented, there are implications for valuation and the chance for a deal to get sidelined or derailed.

Personnel/Legal Issues

Not everyone’s labor problems are as public as say, Boeing’s. Most Main Street businesses that are prepared to sell are run by competent staff. But just because staff are competent doesn’t mean that they will stay with a new owner. Oftentimes even the nicest new owners can’t change the feeling that “it’s time to move on” for employees (and customers) so it’s important to make sure that, as much as can be estimated within the bounds of confidentiality, any personnel issues are fully disclosed. The same goes for any legal issues. On more than one occasion a seller has pledged to deal with an ongoing legal issue on his/her own dime as part of the negotiations pending a sale. That sort of honesty and willingness to compromise helps to get deals over the line.

New Technology/Competition

Often buyers will be entering an industry/market for the first time by buying a business. That means sellers need to be their eyes and ears for the state of the industry: what technology is coming up (or could come up) and what competition is present or could come soon? If you have grown complacent in past years, just staying in your business lane, it’s important to do some research into these subjects so that even if you miss something, it won’t be for lack of diligence on your part.

Unclear Financials

While clean books are a gospel we preach, when we say “unclear financials” we are less referring to the types that are incomplete or poorly categorized and more the ones that have dramatic changes with no context. Examples include:

• Large, unexpected expenditures
• Major changes to employee compensation
• Uneven expenses (or revenues)
• A significant amount of “miscellaneous” expenditures
• As mentioned above, inventory swings

The goal with financials shouldn’t ever be: “Hey, you’re the buyer; you figure it out.” Sellers should give as much context and explanation for financials as possible. No buyer yet has ever complained about receiving “too much information” about financial statements from a business.

Are you worried about getting fooled by some of these techniques? Let us help you in the process. Give us a call today.