I tell my buy-sell clients that I have three primary goals when working with them.
Find potential deals
Get them a win-win deal
Most importantly: Keep them out of bad deals
These goals are not exclusive to buy-sell transactions.
Bad Loans
Bankers are wary of bad deals (loans). As numerous bankers have told me over the years, with a 4% interest rate spread (between what they pay on deposits and what they receive on loans) it takes a lot of good loans to make up for one bad one.
It’s one reason good bankers put an emphasis on relationships. In gathering content for a book I’m writing on business buying I found this memo I sent to clients a few years ago.
I recently received a call from a banker. His first comment was, “We’re getting more comfortable with your client.” A buyer or an owner can’t walk into a bank, drop off paperwork and expect the loan to get approved.
With all banks, but especially with smaller banks, you need to build a solid relationship with the lender. They have to feel comfortable with you. They have to have warm fuzzy feelings for you and your ability to pay back the loan.
Bad Customers
Trainers who speak on customer service often ask audiences, “Have you ever fired a customer?” The answer often is, “yes.” Bad customers can be a bad deal.
Some customers are demanding, some expect you to adhere to the saying, “The customer is always right.” (The customer is not always right; often they’re wrong but won’t admit it).
Others are price sensitive. Have you noticed a trend in car insurance ads? State Farm and Allstate (and maybe others) are sticking it to the “discount” insurance companies by stating that the discount companies have poor claim service. I’m not sure if they are right with what they state in their ads but, in general, you can’t have great quality and great service without paying for it. Bad customers don’t get that. Good customers see the value.
Business Buy-Sell Deals
What’s a bad deal to a buyer? Obviously it’s one where the company doesn’t survive. In addition are the following factors (and there are more):
Misleading information from the seller, which can increase the buyers post-transaction costs (new computers, new machines, staff not capable, etc.)
A declining industry (not known at the time or not researched by the buyer)
Overpaying for the business
Too much debt, which cripples their growth plans
What’s a bad deal to a seller? Besides their “baby” going out of business, it could be:
The buyer doesn’t hit earnout levels so there’s no bonus to the seller
The buyer is a poor business person and can’t make payments
The buyer fires their loyal employees
Too much debt, which may have the seller’s payments subordinated to a bank or, worse,
Getting involved in a lawsuit or renegotiation
Conclusion
Staying out of bad deals, avoiding bad customers, bad loans and just bad business in general should be on the top of all of our lists.
