Historically, small business buyers are typically owner-operators or other businesses in the same industry who are growing via acquisition. It’s much more difficult for an investor to purchase a small business and either run it remotely or put a local manager in place to run it. Over the past year or so, we’ve seen a torrent of new buyers flood the business sales marketplace, and a growing percentage of them claim to be investors, equity firm buyers, or even list themselves as “entrepreneurs.” While this type of buyer isn’t new to the scene, today’s “investor” seems to be a different breed than in years past. Because we thoroughly screen all of our buyer inquiries before sending over any confidential details about the businesses we have listed, we have found some emerging trends with these buyers that have us tightening up our processes and procedures to protect confidentiality more than ever before.
These new equity firm or investor buyers all seem to share some similar characteristics, and they are easy to spot because of this. Of course, not every equity buyer is exactly the same, but usually they are younger in age, and don’t have a lot of experience running a business, let alone as a business investor. There are also usually multiple partners or investors involved as well. While an equity firm or investment partnership website might have been set up for their company, when we google their address, it is often a virtual office, someone’s house, or in one case, an empty field. So, the legitimacy of their company should definitely be questioned in some cases. Naturally, just being a new company or a first-time investor doesn’t mean that they aren’t a real buyer, but it does mean that we need to look deeper into their process for buying, their viability as a buyer, and their financial ability to purchase the business.
Mode of Operation
Some of these investors have a “local” on their team who will oversee the day-to-day operations of running their collection of businesses (which is the best-case scenario), but many of these buyers are out of state, with no plans to relocate. They intend on running the business as an absentee owner, which as we have seen through the years, usually results in a lower performance of the business than if the owner was present and involved. These equity firms are buying multiple businesses, in order to fill up their portfolio. Some seem to be staying within a certain industry, but a lot of them are all over the place, with the same buyer inquiring on a hair salon, an HVAC contractor, and a retail boutique. Many of these buyers just seem to be hunting for a “deal” or a “steal,” because it seems like they are testing the waters to see how they can buy a business for the least amount of cash down as possible.
Zero Money Down
Putting down no money of their own is apparently the goal here with most of these new investors. They appear to be hunting for business listings that offer seller financing, and then many of them are borrowing the down payment from other investors or other sources. In fact, just a quick google search will bring up tons of resources and videos on how these young investors are all buying businesses with zero money. It has caught on like wildfire, and we see more and more of them each day in the market shopping for businesses. This is why it’s so important for us business brokers to ask the hard questions of any prospective buyers. How are you going to purchase the business? What type of loan, how much cash do you have to put down? We want to make sure that the buyer is able to purchase the business financially before we share any confidential details about the business. In fact, it is becoming common practice nowadays to ask the buyer for proof of funds as well. It’s a very risky situation when a buyer has no “skin in the game,” as we call it. Without putting their own money in, there is less risk, and when there is less risk, there is generally less drive and motivation to do whatever it takes to make the business work.
This would be especially concerning to a seller who is considering offering seller financing to one of these equity firms or investment buyers. As with any buyer, a seller needs to be relatively confident that they are the right choice to take over the reins of the business and that they will continue the success of the business. Because without the continued success of the business, the seller will not see any payments from the buyer on the owner financing. In most cases, if a buyer defaults, the seller does get the business and its assets back, and we can work to resell it to a more qualified buyer, but what state will the business be in at that point? Sellers need to think carefully and critically before offering seller financing to any buyer, but especially to a buyer who isn’t putting any of their own money down, who will not be around to personally operate the business, and who has no experience in the industry or in running a business in general. Seller financing is ultimately up to the seller as to who they want to lend to, but this is our best advice, based on our experience, when it comes to these situations. Of course, sellers should always defer to their trusted attorney and/or CPA when it comes to legal or tax-related questions.
Increased Buyer Screening
These new equity firm or investor buyers have brought even more awareness to confidentiality and tightened up buyer screening in our industry, in order to protect our sellers. Any sellers who list with Green & Co. can rest assured knowing that we are doing our due diligence to make sure that the buyer who fills out the NDA and Buyer Questionnaire is who they say they are, and we do everything in our power to make sure that they are a qualified legitimate buyer before we send them the Confidential Business Review. Should sellers have any questions or concerns about the ways that we protect business’s confidentiality, we are happy to explain further, so don’t hesitate to speak with your business broker about strategies for protecting confidentiality. Confidentiality is at the heart of everything we do as business brokers, and we do everything we can to protect it.