Real Estate Agents Bringing Offers
20 September 2021: Real Estate Agents
Real estate agents, as a rule, are a group of mostly professional individuals that know how to sell houses like they know how to find their way home.
But they can be the bane of the existence of other professionals when they try to involve themselves in something they know nothing about. Like selling timber or Facebook ads or bulk oil… or businesses.
For instance, if you hire even the best real estate agent to repair a bad oil seal on your Lamborgini Huracán – or even your ’79 Pinto – you’re unlikely to be very happy with the job. Similarly, if you hire even the best real estate agent as the opening act for Madonna’s North American tour, neither you nor Madonna will likely be pleased with the decision or outcome.
But for some reason, otherwise intelligent people will hire a real estate agent to sell their business. And though I’ve written about this phenomenon before, it took a position at the head of the queue recently.
The Latest Challenge
Our office received an offer last month from a buyer represented by a real estate agent. Not surprisingly, because the agent is accustomed to – and probably very proficient at – selling houses rather than businesses, none of the subsequent contacts, communications, documentation or discussions made any sense whatsoever.
Capital gains taxes, allotment of purchase price, due diligence, inventory valuation, aging receivables, environmental issues… NONE of this was addressed anywhere in the offer to purchase. There was, needless to say, no Letter of Intent. The buyer – presumably with the agent’s advice – went right to contract.
The business in question was, admittedly, rather small; valued at a hair under $1 million. But the issues involved in business transfers are no different in the Main Street Market than they are in the Middle Market. And those issues impact both buyer and seller.
The real estate agent, being unschooled in selling businesses – or even in commercial real estate, as it turned out – used a form prepared by the regional association of Realtors that she was a member of; a form for the sale of real estate. A simple fill-in-the-blanks document that addresses the disposition of chandeliers, homeowner association dues, sexual predator databases, title insurance and a dozen other things having absolutely nothing to do with a business.
But much worse, it also omitted dozens of aspects of a business sale that could land the buyer in BIG trouble – which was the case in this particular instance.
The Best Way to Handle This
Anyone who has followed this blog for any period of time knows of the epic problems dealing with real estate agents when selling business entail and that the only real way to get anything done is to advise the agent to refer their buyer to us, get out of the way and enjoy a handsome referral fee once the deal is done.
You probably also know that this method will piss off some agents, especially those who have been successful selling houses and who believe that selling a $3 million healthcare company is no different than selling a median priced house.
Well, it ain’t so, Bucko!
The sale of a business is FAR more complex than the sale of a house – and, as a result FAR more financially rewarding.
And, unless the principals involved know what they’re doing, there is danger lurking everywhere that could haunt an unwary and unknowledgeable buyer for years to come. And that was the situation our broker was facing.
Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to value and sell businesses.
Become a Professional Business Broker…
First off, the business in question has roughly $300,000 in inventory, a sum that would put the transaction value at something north of $1.25 million. Some of that – 15%? 25%? Who knows? – is surely outdated or obsolete. Without considering that likelihood and without knowing how to handle such inventory, the buyer is likely to end up paying dollar-for-dollar for $75,000 worth of inventory that has zero value.
Next is environmental. Knowledgeable buyers – and those represented by professional business brokers – will require some sort of environmental survey.
In the United States, the most basic such survey is referred to as a Phase 1 study.
A Phase 1 will let the buyer know if there might be something to worry about and whether a more in depth study should be commissioned. Remember, in the U.S. an environmental problem attaches to the land – specifically, to the owner of the land when the problem is discovered.
For example, it matters not if, in 1934, De Soto Automobiles had a brake-lining operation in the facility, disposed of several tons of asbestos over five acres out back, sold the facility in 1967 to the maker of some arcane bottom shelf bourbon that in turn sold it in 1996 to a contract apparel manufacturer making specialty garments and gear for the likes of Adidas, Fruit of the Loom and Urban Outfitters. If the ownership of that business – let’s call it Premier Brands – is selling, whoever is buying better do a Phase 1 study because if, during a company softball game three years from now, an oily stench begins to permeate the infield after George from Accounting slides into third base trying to stretch a double into a three-bagger, the ownership at the time of that dust up at third base is responsible for the hundreds of thousands of dollars in fines, clean-up, legal fees, and more that are about to land on the top dog’s mahogany desk!
From the buyer’s standpoint, it would be a good idea to clear the deck of this issue BEFORE acquiring what could become the worst move of the buyer’s life. But without a knowledgeable broker, the buyer could lose everything once the Feds got wind of George’s manic dash for heroism.
We’ve launched a coaching program specifically tailored to Realtors that want to sell businesses, business owners and to anyone that wants to become a business broker.
If you’d like to learn more, email me at jo*@Wo*******************.com
What about receivables?
If the seller shows $250,000 in receivables, what are the chances of collecting 100%. Without an analysis of those receivables, the buyer might discover – several months after closing – that 10% are 180 days past due and some 40% are over 90 days past due.
What do you think the chances are of collecting on these?
I suggest the chances are about ZERO but the new owner paid good money for worthless “accounting entries”. If that owner had someone who knew how to value and sell businesses, these “uncollectibles” would have been discovered during due diligence and the price the seller would pay for the business would be reduced by $100,000 or so.
The allotment of the purchase price – how much of it is for FF&E, how much for inventory, how much – if anything – for payables and receivables, how much for good will – will impact the tax implications of the deal for both buyer and seller.
Real estate agents have not been trained to even recognize these issues, let alone address them with their clients and advise them on how to consider them in the context of the transaction.
The Bottom Line
I again stress that I have nothing but respect for good, professional real estate agents – and I strongly believe that they leave tens of thousands of dollars on the table simply because they don’t know how to value and sell businesses. They also waste copious amounts of their valuable time trying to do something they’re completely unfamiliar with.
And that’s a pity because they could be making FAR more money selling one mid-size business than they will make selling 10 median-priced houses.
But the key take-away here is that buyers and sellers that hire someone who has been trained in valuing and selling businesses are FAR more likely to avoid problems – both near- and long-term – that result from not knowing where problems might be lurking.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
This week the inquiry we received is similar to last week’s “Searching” item. As with many recent inquiries, it came from a small private equity fund looking for industrial service/contractors (in field or in plant, infrastructure, municipal/utility, maintenance driven) or value-add industrial distribution companies with $4mm or more in Discretionary Earnings. If any of you know of something that might fit, please let me know and I’ll put you in touch with the buyers.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.