Beware of “Investors”

Know who your investors are – Will they stand behind you?

The majority of the buyers we see (whether individual or corporate) want to acquire a business as the sole owner. Successful partnerships are rare, let alone successful investor backed buyers. We often see a buyer who claims to have investors that will back them on any given deal. This raises a red flag immediately for us based on our past experience. The investors are never at the meetings. The investors don’t fill out the forms or financial statements. They can back out at any moment, without giving any notice.

For investor backed buyers, we require all parties to sign the contracts as a group of prospective buyers.

Here are three stories of investors that have backed out of deals in the last 2 years:
1) An investor backed out at the last minute because a girlfriend he met in Las Vegas wanted to open a bar in Vegas.

2) An investor backed out at the last minute because he decided he wanted to buy classic sports cars and race them instead of buying a business.

3) The buyer and investor couldn’t agree on their shares of ownership. Investors usually want a big piece if they are the major funding source.

In all of these situations, the buyer was not in control of the deal and was left with no funding and no clear way to move forward to get the deal done. You have to be sure to protect yourself if you are going to rely on other parties to get your deal done. Do your homework and make sure that there is some kind of contract in place that outlines the partnership agreement for all parties before trying to buy a business.

If your broker has a funny look on their face if you mention that you have an investor, now you know why. Roughly 1 in 100 deals are successful when outside investors are involved. Contact an Apex Broker if you would like more information.