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Too good to be true? If not, need creative financing advice/lender.

I have been browsing businesses for sale for some time now learning what I can from this website and others. I am starting to seek advice from others that will make up my "acquisition team". I recently brought a business summary to one of my team. It's assets and cash flow were each almost the asking price. He was almost certain that the numbers posted were inflated and just put out there as teasers. He said more than likely any business with numbers that good may have already been sold but the listing is left up there similar to houses on the MLS. Is he right? Do Brokers do this? Also, wouldn't it be in the broker's best interest to inform the seller that any financial due diligence by a buyer will expose the misrepresentation? I don't want to waste my time and resources on pie in the sky offerings. If my guy is wrong, what lender would do this deal with verified seller financials. I need a lender as my assets are not liquid enough to go after a good deal like this one.

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The BAF Group LLC
MD

Sorry to have gotten off track. Let me try again.

First, the issue of POF is normally a catch-22, particularly with larger deals. You want the Seller to send you his Financials or Tax Returns, but he does not want to send out sensitive information without knowing he is dealing with a responsible (meaning capable) Buyer. There are very few ways around that. We traditionally send out P&Ls that are transcribed or with the name blacked out, so the Buyer does not know the identity of the Selling Company until we are satisfied that we have a legitimate Buyer. But there is no other way around it that I know of, and it frequently causes problems. It used to be easier when the Bank would send a letter saying that you were at least minimally qualified for a loan of up to $XX. But no more of that!

If you know what you are doing, the first paragraph of your last communication is relatively easy to deal with, IF YOU CAN GET TAX RETURNS. From that, you can run your own Cash Flow analysis, without benefit of an Accountant. The rough numbers are not sufficient to do an offer, in my view; but they can provide you with enough information to allow you to determine whether the Seller is giving you a generally acceptable price, or whether he is smoking funny cigarettes. And that will tell you whether it is warranted to justify getting the Accountant involved and paying him/her for further investigation.

Remember that ANY Seller is going to jack up the price somewhat, because of the nature of Buyers. It is part of what we call in the trade, "the Game". (Realize I am being somewhat sarcastic, here.) If you have a Business that is legitimately worth $500,000, and you put it up for sale at $10.00, some chucklehead would offer $8.00! The difference between your own, superficial Cash Flow analysis and the Seller's Price can be off, just because he is loading in a negotiation factor.

The key here is that, if you can use his SIGNED Tax Returns, you are safer than any other documentation, as I said in my last tirade. (That part, at least should have answered some of your questioning.) Because his Tax Returns will demonstrate the minimal profit he is willing to show to the IRS. Very little in the way of profit exaggeration should appear there.

I did not roll my eyes at the FSBO line. I did, however jump out of the window, but I was on the first floor when I did that, so all I did was scrape my knee. But I digress... I have always said that you do not ALWAYS need a Broker. And frankly, Sellers are better served by Brokers than Buyers are, anyway. But forget that - that is not the issue.

Yes, you can offer more than his asking price. But depending upon the price, doing so can screw up your Cash Flow Projections and hinder your ability to make your note payments, or pay yourself a decent income. You can also price it so high that no lender will consider a loan, on that basis. Terms concessions would be a better way to go if possible, particularly if there is a tax advantage to the Seller to be had.

It does take more money now to make money, than ever before. There are a lot of Angel Investors out there, (many because of a distrust of Wall Street,) usually selecting businesses by Industry. They want to invest in lines with which they are comfortable and knowledgable. Mezzanine Lenders are getting 12% to 14% on their money. We are doing quite a few of those (relatively speaking) with the Motel transactions we do. No Bank wants to lend to Motels, even with the property as security.

How they are done is nebulous. It depends on the Investor and the type of business. A lot of what we are doing is a combination. I am signing one this coming week where the Land Owner is joint venturing with a Developer. The Land Owner is putting his Property up, the Developer is putting in some Cash, a Mezzanine Investor is putting up another third in Cash, and the Bank is taking about a 60% stake in it. It is all over the freaking place to get these done.

Business Owners, if they know anything, need to agree to take a large portion of their price in Financing the deal. Yes, the SBA is still around. Yes, some deals can be financed conventionally. But more and more, the Buyer and Seller are being left largely to their own devices.

I am not certain this helps any more than before. If you want to talk this through in an effort to give and get a better understanding, I would be happy to do so. And I can assure you that no obligation and no cost would be incurred by you. The number is available through my Web Site. Monday evening or Tuesday at any time during the day next week are best.

Mar 26, 2010
Buy-a- Company

Joe,

It's really hard to answer without knowing the numbers. Many times, you are just "buying a job", in which case, the price is mainly based on assets, and has a very low multiple of cash flow, or sales, or assets.

For example, let's say you were buying a company with a cash flow of $40,000, and it took the owner (who we will assume is intelligent and hard working) 50 hours per week to run it. In that case, the value of the business, based on cash flow alone, is nearly nothing. A person might pay a couple of tens of thousands, if it had good assets, or they really liked the biz. So, when you say, "It's assets and cash flow were each almost the asking price.", that doesn't necessarily mean it's too good to be true.

If you want to share some of the numbers, we can crunch them together.

Mar 26, 2010
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Thanks to all of you for your replies. Somehow it seems that this thread has got off topic. My initial inquiry was to how much does # padding/expired ads of said padded listing continue to run. Almost if it is too good to be true it probably is, hence the thread title. While I thank and welcome all advice, the need for "proper", "sufficient", "legal" DD being absolutely necessary, is the reoccurring theme. Trust me, my to good to be true skepticism has probably talked me out of some legitimate opportunities. Sometimes I have followed a listing and watched the numbers and asking price decline supporting Don's comment that enough investigation and DD exposed the owners misrepresentation. Every BizOp I look at has to meet criteria that makes sense to me. I'm an educated person but never would I buy or offer to buy any Biz w/o having done my own extensive DD in addition to paid financial and legal scrutiny. Here is the rub, suppose I am looking at two Opps that pass my initial checklist, and I proceed to the fin/legal DD stage. I don't know how expensive this process is but as Robert has said, you could go through all that, the #'s turn out false, and you have no recourse. Worst of all, a third possibly legitimate Opp becomes avail and now your resources time/money are tied up in two fraudulent opps. I've even seen and read in this forum brokers not knowing the difference btw Rev and CF. Then there is always the debate of how to calculate CF and last but not least CF vs EBITDA and which is better. I know the difference, so please no explanations. I'm just outlining how many variables that can change a listings viability and how do you overcome these inconsistencies w/o a huge financial outlay?

The second half of my question was the larger of the dilemmas. I was hoping that someone (broker, cpa, lawyer, past buyer/seller or lender would have dealt with this problem. Buying a business for some, and is in my case, buying a job. So in my search I first look at biz type. Then, would I be happy doing this day in day out? Am I qualified to take over this biz? And then a whole list of other parameters I won't go into here. Then/If after all that, the fin/legal DD. My problem is, short of a 100% seller financed deal(never gonna happen) I don't have the liquid capital to even act on an Opp that passes the sniff test. I own a mixed use commercial property outright (500K), but I'm not going to sell it just to have money in the bank to fund multiple DD's and a purchase that may not happen for a year. Especially in these economic times, avenues to pull cash out of this type of property are cost prohibitive ( this is where the angel investors should respond ). Further, when responding to some promising summaries, they will not forward any fin. info w/o a buyer profile showing my avail to buy. They don't want to see that I own property, they want to see cash in the bank. I understand they don't want to deal w/ tirekickers but fair is fair. Should I falsify MY financials and put a disclosure at the bottom saying these numbers are subject to change. In all actuality you can buy POF,SBLC, Aged Corps etc. on craigslist . I do have a third party that will lend on the right deal but he doesn't want to put out his info to anyone or multiple people when the biz is a house of cards.

Ironically, I started this thread to try to find answers before/if I came across the right biz but unfortunately I didn't get the answers ( mostly the financial issue ) I needed before one became available. It was a FSBO ( I see the brokers eyes rolling ) in a field I am very knowledgeable in, numbers are excellent, I responded directly to the owner and he promptly returned my mail. In less than 48hrs he had 25 inquiries and a full price offer in hand but the contract to purchase was not signed, pending DD. He was courteous enough to return my request and said I could put in a backup offer/ bid. Providing I could get financing, Robert, Don, ??, does this mean I could offer more or could I somehow sweeten the purchase w/ royalties off of future sales? Some other way of compensating the seller saving him significantly from taxes? Of course this may be a mute point as his response included a buyer profile form asking for POF. I am not ready to throw in the towel on this but is there no way around this? HM?, bridge fin?, a limited third party investor? How are these deals structured and from who? to get me what I need and protect me from being bent over. I hate the old adage, it takes money to make money but no wonder the rich get richer...

Mar 26, 2010
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Julie--if you have time please check your work e-mail. I need some advice if you don't mind.
Thanks, John

Mar 25, 2010
Julie A. Barnes, CPA
Small Business Exchange, Inc.
Travis County, TX

Hello again, Joe,

Once again, Don has some good advice. I would make one correction: two CPA's are not going to differ if they are a) using the same data and b) using the same assumptions. We are bound by GAAP (Generally Accepted Accounting Principals). For example, I ALWAYS determine cash flow as the net income reported on the tax return + non cash expenses. A client may, in fact, receive more cash that may not be reported. In my opinion, that's just too bad - business owners who under report income should be hoisted on their own petard.

There are also other ways to determine an estimation of cash flow - depending upon the business. For example, if you are thinking about buying a laundramat, utility bills may reflect actual usage. Simply observing traffic to a business may also prove invaluable as due diligence.

I encourage you, once again, to visit my blog: www.AustinBusinessesForSaleBlog.com - where I attempt to render commonsense advice about valuation.

Thanks
Julie A. Barnes, CPA
President, SBX, Inc.

Mar 25, 2010
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The BAF Group LLC
MD

I would agree with both John and Robert. John's point about potential is a major issue with me! Every time a Seller says he wants to be paid on potential, I flash back to discussions a lady I knew had when she was single, about blind dates. Invariably, she would ask, "What does he look like?" And just invariably, she said she would be told, "He has a hot car!" or, "He makes a lot of money!" It is the same kind of thing with "potential". If that is what they are pushing, it means there ain't no profit!

There are times when you would pay for potential. But those times are about as frequent as hitting the lottery jackpot! When a Seller says he wants to be paid on potential, I tell him to go away, prove it with real earnings and them come back to see me.

No potential is free. In order to realize it, someone has to invest in the business, either in dollars or sweat. So, as a Buyer, why do you want to pay for the privilege of paying more, down the road?

There are ALWAYS exceptions. The biggest example I can think of is software. What you are paying for there is frequently the uniqueness of the design, the intellectual property and the patent or copyright that protects and justifies the price. But there are not too many other examples I can think of, off the top of my head.

As for Robert's comments, I tend to (sadly) agree with the fact that some Brokers and Sellers exaggerate the Cash Flow. We tend to take the coward's way out and are very conservative with our projections of historical Cash. But Cash Flow is also somewhat subjective. Two CPAs, looking at the same data can differ on the level of profitability, depending upon their methodology. And the data you want to be looking at are SIGNED Tax Returns, because that is what the Bank will want to see. It is also about the closest you are going to get to something that proves the earnings case, with any sense of certainty. Even if the Seller lies to the IRS, he is not going to inflate his earnings with the Tax Man (or Woman).

Regardless of the Broker's best intentions and utmost in integrity, he/she does not always have the most definitive information. Over time, more and more detail can come to light that can change the picture, so the more people that review it, the better the ultimate understanding. I would NEVER, EVER do a deal without an Accountant and an Attorney on my side, whether I were the Buyer or the Seller.

Yes, some Brokers will continue ads, even after the deal is done. Some just forget to take them down, off of the listing site. (I have done that.) Still others will leave the ads up even though there is a Contract of Sale, because nothing is engraved in stone until a settlement occurs.

Finally, I can't tell you about this particular deal, but it does sound squirrely. Again, I would ask for Tax Returns, before anything else is done.

Mar 25, 2010
Julie A. Barnes, CPA
Small Business Exchange, Inc.
Travis County, TX

Hi Joe,

You're already receiving a lot of great advice from John and Robert. I would add that tax returns are a great way to substantiate income or cash flow. Very few sellers over report their income to the IRS. As John pointed out, there may be situations in which cash - both to vendors and from customers, may be under reported. In these cases, there a creative work arounds.

As John pointed out - used FFE usually fetches pennies on the dollar. HOWEVER, if you like the business and it's assets, you need to consider replacement costs as well.

I encourage you to visit my blog: www.AustinBusinessesForSaleBlog.com (the advice is not confined to Austin) where I discuss valuation methods.

Good Luck!
Julie A. Barnes, CPA
President, SBX, Inc.

Mar 25, 2010
Jon Holmquist
Edgemaster Model 400 sharpener
President
Marion County, OR

Gentlemen, good answers from all of you. Any person who doesn't do the "due diligence" is going to get hurt without a good attorney drawn CYA document. This is why I often recommend a franchise for the new buyer with limited resources and experience. The FDD is always available to back up the talk.
Thanks for your answers. Jon at Edgemaster Mobile Sharpening

Mar 25, 2010
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You really need to go through each listing on a case by case basis. A lot of listings have cash flow listed as pro forma which means that the business COULD do this IF you did this this and this. In other words it means it has "potential." Potential is a deal killer for me. To me it means it's not worth a damn right now.
For example, a listing said it 144k cash flow. I signed th non disclosure and had a meeting with the broker. The asking price was 175k. The broker told me that I could make 144k if I changed the menu, did more promotions and ads, controlled the costs of goods sold and remodeled the place. I asked what the place was making right now for the owner and he told me the owner made 1k per month the way it was run now.
In other cases you will find that a place IS making the cash flow listed BUT it isn't provable because it is being run as a mostly "cash " business. Verifying those businesses can be very tough and ypou won't get financed for it for sure.
In other cases you can get a great deal because of partnership problems, retirement, divorce or illness. It all depends on each listing.
Btw, never ever pay for potential. let the seller realize the potential then pay for it. otherwise pay for it what is worth--FFE (used ffe is worth pennies on the dollar) and what they are making NOW.

Mar 25, 2010
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Robert, thanks for your reply. You basically confirmed what the silence of the community on this issue has indicated. I was hoping for a little more feedback +/- from others such as Mr Barrick, as you guys seem to always give good advice w/o any agenda. Maybe there should be more regulation as to the extent brokers can post unverified numbers and not hide behind any fine print disclosures.

Brian, thanks also. I have seen several businesses with good numbers "if they are to be believed" that I am very interested in but I need a lender that can not only fund a loan based on those figures but can cross collateralize it with a commercial property that I own. I feel that if the business is that good, it will be bought by an all cash buyer before I can even act upon it.

Mar 25, 2010
Robert Cutler
Attorney
New York County, NY

Joe, brokers and sellers do have a tendency to inflate the numbers. That's why you need to independently verify the information through due diligence. I understand your concern about wasting time, but the only way you're going to get to the bottom of this is to examine the business yourself inside out. You certainly cannot rely on what you see on this web site. Some brokers are more focussed on consummating the sale than properly representing the numbers, which is why you occassionally see number padding. Is it legal? It isn't if the information is false or misleading and you have relied on it, but I can tell you that the seller's lawyer will typically draft the purchase agreement in such a way that it says that the buyer has not relied on any representations outside the four corners of the agreement, so that the information you have described would presumably not be covered, although there is some disagreement in legal circles as to whether such language would in fact be enforceable.

Mar 1, 2010
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TheGreenCloud
CEO
FL

What sort of deal are you talking about , I would have some interest if the right deal were presented , please email me at greencloud@gmail.com

Mar 1, 2010

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