If you’re serious about buying a business, it’s essential that you provide useful feedback to brokers when they take the time to present listings they feel are relevant to you. I’m often surprised by the reasons people make in rejecting a business for sale.

Here are my “Top 3” terrible reasons for not buying a business:

1. “It’s too expensive.”

Derivatives of this reason include “sales are too low”, “cost of goods are too high”, “profit is too low”, etc., which all factor into the price of the business (unless it’s a plant & equipment sale).

But if you think long and hard about it, price is the easiest figure to adjust in the sale of a business. And given that everything else is postitive (e.g. good income, highly visible location, motivated staff, modern equipment, etc.), why not make an offer based on a fair price?

As a broker, I usually reply with “Why don’t you make an offer as to what you feel it’s worth?” The response I usually get is somewhere along the lines of “Oh, I’m just not interested.” which usually indicates to me that the buyer feels that I’m not entitled to the real reason.

2. “Cost of goods or wages is too high.”

COGS and wages are perhaps the next most easy-to-fix figures in a business. If someone felt that those were too high, then why not buy the business at a fair price and then optimise the costs? In a year or so, the business will be worth much more than before.

3. “Rent is too high.”

This is a very interesting reason, as I feel this comes more out of fear and ignorance rather than anything else. This is especially relevant to retail rents in shopping centres.

In my personal experience, I haven’t seen too many cases of rent being significantly above the market rate. In any case, if a rent was obviously too high, it can be negotiated at the next market review… OK, I admit I may be pushing it a bit there

Conclusion

Have you noticed a pattern yet in the reasons I stated above? They all directly impact the profitability of the business. And profitability directly affects the price of the business. And compared to all other things (e.g. long lease, strong brand, well-protected intellectual property, etc.), price is by far the easiest figure to adjust for the sale of any business.

So moral of the story is, if you like everything about a business but its price, then make an offer based on the price you feel is fair.

Here at Business for Sale blog, I’m sometimes asked, “What is a trial?” in respect to business listings. If you’ve spent time looking at business listings online and offline, you’ll eventually see wording along the lines of “Will trial at $8,000 per week” (or any amount – it depends on how well the business is doing).

So what does this mean?

Well, it’s all about making sure you’re comfortable with what the business makes each week.

If you had read my post on multipliers, you’d know that a business can be valued based on a multiple of its sales or profits. And if you’re buying a business priced that way, you want to get what you paid for, right?

You’d want to make sure those sales or profits are reproducible, right?

But how do you know the seller is telling you the truth?

A trial allows you to be part of the business for a set period of time (usually two to four weeks), where you can be in the shop to see money flow through the cash registers. You’d also be able to check end-of-day reports to see totals and ensure that the sales are in line with what the trial says.

At the end of the trial period, if the average of all weekly sales equal or exceed the trial amount, the contract goes through and the business is yours. But if it falls short, the contract can still go through…

Huh? What’s the point of the trial then?

That is, unless you let the seller know that you want to terminate the contract, based on the grounds that the trial wasn’t met. You have to notify them in writing within two business days of the trial’s expiry date (as per the standard conditions of the REIQ business sale contract).

Finally, a trial is only really used in food & beverage businesses, like cafes, take aways or restaurants. Other types of retail businesses can also offer a trial, but it is not very common.

OK, I understand. But what if…

Now if you’re the skeptical type, you might say that sellers could bring in their friends to artificially boost sales during the trial period. And you could be right – I’ve heard stories of sellers going to great lengths to do exactly that. So the truth of the matter is, trials are not a solution in itself – you’ll still need to do your due diligence before and during the sale of the business to ensure you’re getting what you paid for.

If you liked what you read, leave a comment below!

Chris Khoo
Business Broker