Today, we're diving into an important topic for anyone looking to buy a small business: how to recognize and avoid scams and frauds that can lurk in the business-buying process.
Understanding the Key Players
When buying a business, there are typically three main parties involved:
Buyer: That's you, the individual looking to purchase a business.
Broker: An intermediary who helps connect buyers and sellers. This could be a business broker or another type of agent.
Seller: The current owner of the business who is looking to sell.
Each of these parties can potentially be involved in scams, either directly or indirectly. Let’s break down some common scams and how to protect yourself.
Common Scams and Red Flags
1. Broker Scams
Upfront Fees: Some brokers might ask you for a fee before they provide any detailed information about the businesses they claim to represent. In legitimate transactions, the seller typically pays the broker's commission. If a broker is asking for money upfront just to provide details on a business, it’s a red flag.
False Listings: Some brokers may list businesses that don’t actually exist just to attract fees or interest. Verify the legitimacy of the broker and the business listings before proceeding.
2. Seller Scams
Pay-to-Peek: Sellers may ask for a non-refundable deposit or payment to access financial statements or other critical information. This is akin to a car dealer asking for a fee just to view the inside of a car. Don’t pay to view financials; you should be able to see this information as part of the due diligence process.
Misrepresentation of Financials: Sellers may exaggerate or fabricate financials to make the business appear more profitable than it is. Always perform thorough due diligence. Check the financial statements against bank statements, sales receipts, and other supporting documents.
3. Transactional Scams
Fake Financials: Sellers might create fake or inflated financial statements to make the business seem more valuable. They might show inflated sales figures or under report expenses. Scrutinize the financials and cross-check with actual business operations and documentation.
Fabricated Sales: Some sellers may create fictitious sales or revenue spikes to boost the appearance of profitability. Watch out for sudden, unexplained increases in sales figures and investigate the reasons behind them.
Protecting Yourself
Verify Broker Credibility: Check the broker’s reputation and reviews. Ensure they are licensed and have a history of successful transactions.
Due Diligence: Always verify financial statements and business operations with independent sources. Request detailed records and cross-check them with bank statements, purchase invoices, and sales receipts.
Avoid Paying Upfront: Do not pay any fees to view information or access business details. Legitimate brokers and sellers will provide this information as part of the due diligence process.
Structured Deals: Structure the deal to share risk with the seller. For example, you can negotiate terms that allow you to pay a portion of the purchase price based on future performance.
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