UPDATED: December 23, 2018
One of the frequent early requests from buyers is the demand for substantial amount of unfettered business documents such as the annual Profit & Loss Statements, Balance Sheets, Goods & Services Tax (GST) Business Activity Statements (BAS), Sales Report to the Franchise Turnover Report etc.
On the outset of the buyer's inquiry, a seller may provide limited or general information (such as an Information Memorandum) but if there is no relationship between the buyer and the seller, why would the seller bare everything about their business to a complete stranger, even if the business is for sale?
This is true of any business. If the National Australia Bank was for sale tomorrow, you would not be able to unconditionally request their complete customer client list, major transactions in the last 12 months, legal correspondence, asset registers etc. They would have to ascertain first that you are a legit buyer.
With smaller businesses, the rationale is the same with a few nuances.
Firstly, small businesses often have a large cash component. For example, restaurants, trade services and retail shops collect a huge quantity of cash that is often not declared in their official tax reporting (otherwise known as the black economy).
Furthermore, some businesses are too busy to fully comply with the zillion regulations in Australia such as policing international students on keeping with their visa restrictions, ensuring Occupational, Health & Safety requirements etc. And the last thing they want is to give away incriminating evidence about possible breaches in their business that Government investigators can use against them.
Many business owners are fearful of ATO auditors posing as buyers. So they won't be overly keen to handover these potentially incriminating confidential documents without some checks first.
Next, small business owners are extremely busy because they are involved in every aspect of the business. This is just the reality of small businesses. When a buyer asks for a variety of documents, business owners may need to contact their accountants, solicitors and other advisors to get these reports ready. This could take months.
I once knew of a business that was 10 quarters (30 months) behind in their Goods And Services Tax BAS reporting to the ATO.
Unfortunately, this is not the exception, but the norm. The owner may not take serious action to prepare these documents unless they know that the buyer is serious, genuine and legitimate. If they have not met the buyer, they may delegate this request for much later or worse, the request is simply ignored.
Thirdly, some business owners may control multiple businesses and have complex tax structure that they are hesitant to explain.
For example, the seller may own Business A, Business B and Business C together under the same Australian Business Number (ABN). And the legal owner of the ABN is a family trust controlled by a company acting as its trustee. It can get awfully complicated quickly. Business owners are wary to give buyers unedited financial documents because it would disclose outside confidential interests.
Even if the buyer is able to obtain a copy of these documents, it may not make much sense as the data is likely to be aggregated and not specific to the business. Sellers prefer to meet with the buyers to firstly satisfy themselves that the buyer is genuine and legitimate, and secondly to explain and interpret the supporting documents to the Buyer.
Another legitimate concern for business owners are competitors. For some niche industries, business owners are fearful that their competitors will pose as buyers to 'steal' their business secrets, poach employees and unethically obtain intellectual property. Hence some business owner would feel compelled to first 'interview' the buyer to ensure that they are not competitors.
Finally, the simplest of reasons why business owners do not respond quickly to requests for business financials, tax returns, ATO documents, lease contracts and the many different myriad of information demanded by buyers is because they are too busy.
They simply don't have the time for a buyer that has not earned their trust yet so their precious time is better spent elsewhere first (e.g. quality time with family). Some buyers rationalise that business owners should provide these documents freely and quickly if they are motivated to sell.
Don't assume that all business owners are equally motivated to sell. Many vendors are only moderately motivated. Some are only mildly motivated. After all, if a business is making seriously good money, then this would limit and counter the motivation to sell.
In any event, the fear of a Government auditor of any kind posing as a Buyer is enough to spook the owner from taking shortcuts to filter the buyer.
As a buyer, you may be concerned about ultra-motivated sellers. This could mean (but not always) serious problems with the business, such as endemic losses or business debts that they are hiding from buyers.
For buyers, the fastest way to procure any business documents is to meet with the business owner (or at least have a three-way conference call with the assistance of the broker).
A meeting creates trust and rapport. If the meeting goes well, then the business owner should be more comfortable in furnishing the requested documents quickly if the seller is satisfied that the buyer is serious and legit. Even if the owner is unable to provide the documents, he/she can explain in person so the trust stays intact.
Conversely the buyer is also able to tell if the owner is trustworthy and honest. If the owner is evasive about questions and there are question marks over the owner's integrity, then the buyer can choose not to proceed further and thus save time.
Some buyers see buying a business like the latest LCD television set. They prefer to compare the numbers side-by-side, tick (or un-tick) the boxes and shortlist businesses before they are willing to meet with the Owners. They are met with frustration when Business Owners do not give them the necessary documents or data for comparison.
From my experience, when it comes to buying a business, the path of least resistance and the easiest way to get from point A to point B for all parties concerned is a meeting.
If a meeting is not possible or not preferred, then the next best alternative would be a three-way conference call (between the seller, buyer and agent). Either way, the buyer will need to win the confidence and trust of the seller to proceed further with the sale. **
** The information in this article is not advice in anyway. The content is provided as an educational resource and is not intended as a substitute for professional advice of any kind. The author and contributors assume no responsibility for the use or misuse of this material, including any omissions or inaccuracies. Copyright 2019.