Maybe the owner is aware that;
- the new highway overpass or median in front of his building that is being planned that will potentially divert traffic around his location or prevent people driving in one specific direction from entering his place of business.
- Wal-Mart just purchased a large tract of land 1 mile down the street.
- his key supplier of product is being bought out and will most likely be utilized strictly as an in-house supplier.
- his prime customer is up for sale, and it is likely that it will be purchased by a larger company that manufactures the parts that the business that you are looking at acquiring currently supplies.
- a very large competitive company that has never operated within his sales area has plans to attack his market in full force.
- the distribution agreement that he has with the XYZ Corporation will not be renewed when it expires in eighteen months.
- the service agreement that he has with a very large fast food restaurant chain is going to be cancelled because they are hiring their own staff to perform the work.
- the license agreement he has with the ABC Corporation which has provided more than 40% of his net profit over the last four years is not going to be renewed when it expires in nine months.
There are so many possibilities and all of them are potential business disasters for the new buyer.
Be wary of any forward looking statements such as, “there is no reason that sales and profits shouldn’t grow by 30% next year!” If a seller is that sure of the future of his business, tie the selling price to an “earn out” agreement whereby the seller will benefit if the business does in fact grow by 30% but will be penalized if it doesn’t.
One question that I always want a responsive answer to is: "Have you offered the business to any or all of your employees?" If the response is no, I always want to know why. I always ask if the employees are aware that the business is up for sale. If the response is yes, I want to know why they are not interested in acquiring it.
Situations that involve the health of the seller, or family, other business interests, or a desire to retire or semi-retire (he will only accept a six month employment contract) make much more sense as the reason that the seller wants to divest himself of his enterprise.
Use your eyes and ears. There is absolutely nothing wrong with parking around the corner from the business you are considering acquiring and getting a feeling for the overall business, traffic, etc. If the business is a contractor or service oriented business, go out to job sites and watch what is going on. Call the business on the phone and pretend to be a potential customer, pay attention to how you are treated and how much interest is shown in you as a prospective new client.
It is a major mistake to idly accept guarantees by the seller as a reason not to perform adequate due diligence. Words such as “protect” and “save harmless” are only as good as the seller’s financial situation at the time you need to call on him, and that is only if you can find him! This does not mean that those clauses should not be in the Purchase Agreements and other closing documents. They need to be there to protect you from unexpected problems or items not apparent during the due diligence process, but they definitely do not replace proper and adequate due diligence.