Why you definitely should not buy a business

There is a lot of buzz out there about entrepreneurship via acquisition, more than I realized. Good news, you can count on me to tell you if it's all what it's cracked up to be.

I regularly speak to individuals who have been thinking about buying a business for a while, and others who just repeat what they’ve heard from the social media influencers in this space (we all know who they are). There’s a lot of noise and conflicting information, so I figured I’d take some time to write down all the worst parts of trying to acquire your own business, based on my experience so far.

Time

Not only does it take a lot of time to find a business, it also takes a lot of time to analyze the businesses. Even once you’re in the process, each stage is negotiated: Letter of Intent (LOI), purchase agreement (PA), etc. And the banks and SBA have their own timelines. The more people and entities involved, the longer the process takes.

This can also impact your financial situation. If you have X dollars set aside for purchasing a business but also need that money to pay your bills, like in my case where my current income doesn’t support our current spending, then each month that passes leaves you with less to invest.

If you’re using brokers or listing sites like BizBuySell, finding businesses is definitely easier / less work. But other roadblocks come at the cost of that speed (see Brokers and Lack of Standards sections below). Ohh, and the competition from people like you, or just those dreaming and reaching out like a middle-aged person on Zillow.

Trying to find an off-market deal? Your time will go to sourcing business prospects, reaching out, and meeting with owners (if they even respond). I’ve also spent a lot of time at local Chamber of Commerce meetings and other networking events in the hopes of finding someone who’s interested in selling or knows someone who might be.

Money

Down payment. The SBA is scheduled to change seller financing rules in July. ETA influencers like Codie Sanchez preach that you can buy businesses with little to no money out of pocket using seller financing. But big ol’ government is making that tougher. Specifically, they’re changing how much seller financing can count toward the down payment, and any portion that is allowed doesn’t get paid back until after the bank is paid in full. Meaning the seller might wait 10 years to see that money they lent you. That's risk on them and many owners actually do want to exit and not think about their business again, not worry for 10 years if they are going to get their payments for something they wanted to forget about a decade ago.

Post-purchase needs. You’ll likely need cash for growth (sometimes rolled into the loan) or just to keep the business afloat. And you may not even be able to pay yourself for a while, especially if you need to hire someone to take over the seller’s role. I have found that the owners tend to always be more involved than they lead you to believe, presumably because it's just normal to them, not that they are trying to mislead you.

Personal guarantee. You go to the bank for a loan. The bank doesn’t want the risk, so they use the SBA to "guarantee" it (I think it is 75%). But if you default, the SBA still comes after you, personally, for the money. That means your LLC or trust offers no protection...you’re on the hook. Have partners? You're either each on the hook for your share or the whole thing, depending on what the bank negotiates. From my experience, SBA will not allow a partial guarantee and banks may not either depending on if the loan is secured (enough collateral) or not. So if you have partners, that seems great because that means you have more up front for a down payment, which means a bigger purchase, but each has to take the same full guarantee of the loan. No thank you.

Collateral. On top of the personal guarantee fun, the bank might also require collateral, like your house or investment properties. This is especially true for "unsecured" or "undersecured" loans without enough hard assets. And I've learned some “assets” don’t count. One bank told us that certain manufacturing equipment didn’t qualify because it had no real resale value for them.

Collateral + Personal Guarantee. My understanding so far is if you default on a loan with the SBA, firs thing is they take all the collateral (i.e. your house if that's what you put out there). Then they figure out still what you still owe. From there, they go after other assets or accounts. It appears they try to avoid touching retirement accounts (e.g. 401(k)), but I don't have concrete evidence of that. Regardless, they still may come up with a payment plan. For example, if they see you were an accomplished employee at a big tech company for a long time, they know they can still get a lot of money back so you'll be back to finding a job to pay back your loan over time.

Brokers

Not going to lie...brokers have been super frustrating. Sorry if you’re a broker reading this. Some are better than others, but overall this has been my least favorite part of the process.

Here’s how it usually goes:

The listing is vague - either on their website or a collection website like BizBuySell. You often don’t even know where the business is, just the state, maybe the county. Supposedly it’s to avoid alerting competitors or employees. While there’s some truth to that, it feels overused and like a bait and switch.
You have to sign an NDA to get anything useful (location, basic finances). Some brokers use easy e-sign docs. Others make you print, sign, scan, and send back. Not terrible, but it's another step.
Many brokers demand “proof of funds” just to give you real info. They’ll say, “The seller requested it.” No, it's the broker who wants it because they don't want window shoppers (understandable, but again over used). What I learned here, it doesn't matter what you show them, they will accept it. For example, you could just show them your unused HELOC amount and they will take it, even if you have no intent of using it. I even had one broker that wanted me to visit the business in-person and make an offer before showing any financials. What the literal F.

On the flip side, one broker sent a great PDF with financials, calculations, pictures, building layouts, list of assets, you name it. That’s how it should be. Not just for buyers, but for sellers too. But this is unfortunately the exception and not the rule.

Most brokers won’t answer questions in emails either. At this point, many won’t respond unless you submit a LOI. An LOI is like a Memorandum of Understanding (MOU) in big business speak: supposed to be non-binding. But horror stories exist where ambiguous language turned them legally binding. So you’ll want a lawyer… and lawyers cost money. So to get the information you need to understand if you want to proceed, you need to pay a lawyer to help you with a document. Once you get good at this, you can re-use your own LOI template and not pay a lawyer, but there is risk associated with that.

The whole LOI thing is strange to me. It makes the conversation between buyer and seller confidential and exclusive. This is good for the buyer because that means the seller isn't talking to other prospective buyers. But the for the seller...those buyers could have LOIs with other businesses. So some online consultants in this space drive getting out a lot of LOIs to multiple businesses if you are a buyer. It gets you the insight you need on the businesses to really dive in, but that feels disingenuous to me. Half the time I just want to know a few basic things so I can understand if it is worth both my time and the seller's, but brokers want nothing to do with those questions. LOI or bust I guess.

Note that if you are not using a broker and you are going after unlisted businesses, this is great. The best conversations I have had in this process are directly with business owners who are not using a broker. But that too comes with its own challenges.

Lack of Industry Standards (Or Any Standards at All)

Unlike real estate, there’s no licensing requirement to sell a business (in Michigan, at least, unless it includes real estate). No standard process, no consistent expectations.

As I mentioned in the Brokers section, documentation ranges wildly. I have received sideways, blurry scans of documents to polished PDF business overviews and projections.

Compare that to real estate: mandatory disclosures, standardized listing documents, regulated forms, even fairly standard commissions. In real estate, most of the negotiation is just over price. You might ask for a washer/dryer or tree removal. With businesses? Everything’s on the table. Endless possibilities to structure a deal.

You’ve also got asset vs. stock sales. In an asset sale, the buyer gets all business assets and liabilities stay with the seller. It's cleaner, legally speaking, but worse for the seller tax-wise. In a stock sale, it’s easier for the seller, just hand over the keys. But the buyer takes on all risks, known and unknown. No thank you, I'll take the asset sale.

Risk

When a business is listed for sale, odds are the owner has already been trying to make it look good. Maybe they’ve boosted sales in the last year just to inflate value. Overvaluation is common. Seller expectations can be through the roof.

With off-market deals, this pressure to "dress it up" might not be present, but now you have to work harder to figure everything out yourself (or hire people to do it) because they are not necessarily prepared for you and the conversation.

To truly mitigate risk, you need a team:

A broker or consultant who knows the acquisition space to help you navigate.
Someone skilled at financial analysis not just your average CPA, but someone who knows how to value businesses.
A lawyer experienced in acquisitions. Ideally, one with LOI templates and process knowledge to save you time and cost.

And this only covers the acquisition phase, not what it’s like to run the business afterward. If I get that far, I’ll let you know how it goes.

What did I miss? Anything you want to hear more about? Email me or drop a note below.