Encouragement for Searchers

April 28, 2019

by a searcher from Harvard University - Harvard Business School

Just wanted to provide some encouragement to searchers....I spent almost a year searching, largely geo-specific, with several swing & misses. But I wound up finding a business a few states away that had the attributes I wanted, and a seller who priced it appropriately for the cash flow, closed on it 11 months ago and it has been everything promised. I happened upon an honest seller who delivered to me exactly the business that was described. My advice would be to prioritize this type of seller above the trending industry or whatever else. There is so much uncertainty in buying a business, your assessment of the seller's integrity could be the most important variable. Do you really understand what the seller (and family (members) do/es day-to-day? Current owner involvment in operations can potentially be the single-most important factor in estimating cash flow--you need to get it right.

Reply by a searcher
from Harvard University

In my case I think just through repeated discussions with seller I wound up with a good understanding of the business and what the seller and his wife actually did day-to-day. [I did not have a complicated situation where there were children and cousins and uncles on the payroll. and it was claimed that they were all no-show jobs. I think in that situation run screaming...] In my case the books were pretty clean, and I was able to be pretty sure that I was only replacing the seller and what his wife did in###-###-#### hours per week. But I think that's also my point--the seller was really open and forthright from the beginning. I'd say if you have an adversarial relationship and have trouble getting answers, that's a sign to run. There is so much to work out post-close, you really need to have a solid relationship with the seller. If you don't have that a month ahead, you're definitely not going to have it post-close and you're probably missing some important information.

Reply by a searcher
from University of Toronto in Toronto, ON, Canada

Dave, congrats on the deal! I completely agree with your comment. My firm does buy-side M&A advisory in the LMM, and the integrity of the seller is absolutely critical. No matter how much diligence you do, the seller will always know more about the business than you and there is inherently a "leap of faith" that is required. Finding someone you trust is essential. This of course can be easier said than done. One criteria we use is the amount of personal expenses ("normalizations") that the owner is running through the business. Just about all small businesses have some of this, but if a seller is extremely aggressive with this it can raise a red flag.

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