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Hi- Helping a family member sell a small, but lucrative business. The sale has to be very confidential due to the nature of the business, so a bit nervous re: trying to sell. The broker has shown the business a few times. These "potential buyers" get privy to all our financials, yet we know nothing of them. The only screening is a confidential questionnaire. The latest potential buyer wants to see business owner's personal tax returns, yet we have seen nothing to even show proof of funds from this guy. Not sure why he needs to see personal tax returns and why that is any of his business. Broker states this is the norm. Broker became quite upset irate when I asked him for proof of funds and some info on the buyer. He states we are going to lose the buyer if we ask too many questions. Hmmm? We have asked nothing of him. Lots of confidential, private info going one way and nothing coming in from buyer. Is this the norm?
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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Originally Posted by jego914
Hi- Helping a family member sell a small, but lucrative business. The sale has to be very confidential due to the nature of the business, so a bit nervous re: trying to sell. The commercial realtor has shown the business a few times. These "potential buyers" get privy to all our financials, yet we know nothing of them. The only screening is a confidential questionnaire. The latest potential buyer wants to see business owner's personal tax returns, yet we have seen nothing to even show proof of funds from this guy. Not sure why he needs to see personal tax returns and why that is any of his business. Realtor states this is the norm. Realtor became quite upset irate when I asked him for proof of funds and some info on the buyer. He states we are going to lose the buyer if we ask too many questions. Hmmm? We have asked nothing of him. Lots of confidential, private info going one way and nothing coming in from buyer. Is this the norm?
Yes, and I asked the same when I bought a business in 1992. Anyone selling a business can make up revenue and expense data on a spreadsheet, or add a lot of false sales data to their invoicing system.
The only way to be sure of the actual sales and expenses are to see a personal tax return with the Schedule C. No one is going to report more income than they actually made to the IRS. Even then, you can't be sure that the tax return provided is what was actually reported to them unless you require the seller to fill out and send the IRS the form 8821, releasing them to send the potential buyer the form actually submitted. As a seller, you do indeed have the right to ask for proof of funds, just as a dealer selling a new Lamborghini might do a credit check and verify funds before allowing a test drive. Your agent is right, however, it could put them off.
Hemlock- Thanks for the info. This buyer is asking for the whole tax return. We had no issue giving Schedule C, but not understanding why they need to see owner's pension, personal investments, etc. So- schedule C is sufficient, right?
Let's me get this straight, you're using a commercial real estate broker to sell a business? I always get inquires about the business and they all use business brokers who deal with the buying and selling of a business over the buying and selling of chimerical real estate. of course, if we are talking a real estate business, that may be different. I've never had a business broker approach discussions without full vetting and disclosure of the purchaser. I usually know more about them compared to what they are asking about me, before we enter any discussions.
We are using a business broker. We were recommended to a particular broker, but he only sold businesses with a revenue of over several millions and referred us to the guy we are using. He is very unprofessional, but we are stuck with him till the contract ends. So..Rabrrita- were you able to see the financials of the purchaser or you trusted the broker had fully vetted them?
It wouldn't be unreasonable to agree to produce tax returns after a contract has been executed during the due diligence period. If the tax returns don't match up to your claims of income, the buyer walks with no penalty.
We are using a business broker. We were recommended to a particular broker, but he only sold businesses with a revenue of over several millions and referred us to the guy we are using. He is very unprofessional, but we are stuck with him till the contract ends. So..Rabrrita- were you able to see the financials of the purchaser or you trusted the broker had fully vetted them?
I have not sold the business yet so my experience is from buying (absorbing) other companies. The sale of a department isn't similar to your situation. The rep I have would not represent a buyer until they vetted the entire financials of that person. When they said they have a potential interested party, the sellers knew those buyer are real and the deal can happen if all goes well. Until I provided detailed financial information on my company and myself, and those details were checked and verified, no business broker or representative would ask the seller for their information. heck, they wouldn't even waste time on an introduction until they knew I was real. I know the specific details of my financials were not shared with the seller, but enough was provided that the sellers could rely in the assurances of the broker/representatives.
What they are asking for is common, but in my book, the pressure to provide with nothing on the buyer is sleaze brokering. Don't provide anything until you have the basics on the buyer or an affidavit from the broker that they did the due diligence on the buyer.
(As an FYI, the sale of one part of my business was actually a sale to the employee's, so that is why it was not similar)
Hemlock- Thanks for the info. This buyer is asking for the whole tax return. We had no issue giving Schedule C, but not understanding why they need to see owner's pension, personal investments, etc. So- schedule C is sufficient, right?
WRONG!!!! A schedule C is not sufficient.
The broker has a prospective buyer that is interested. The normal procedure is for the seller to provide proof of the income. The unusual thing is, the buyer only wants to see one year return, most common is for 3 to 5 years, to make sure it is consistently profitable.
Buyer and the broker know, a lot of businesses are offered for sale, with false claims for the profits from the business. They reduce the expenses, and increase the income. The end results are the claimed profit is far from the the actual income. There are a lot of crooks selling businesses for far more than they are worth, and claiming a nice profit when the business actually loses money. Once a business with false information is sold, the Seller disappears and the Buyer ends up with a business that may even put them into bankruptcy.
What the prospective buyer wants to see, if the seller actually telling the truth about what the business is doing in business. You are talking about a small business, and the buyer wants to see what is actually turned into the IRS. Just a schedule C may not be the true tax return, and any intelligent buyer wants to see more to determine if the business has the claimed income. Most buyers will take the returns you give them to a business CPA to have it checked over.
If the buyer is going to do any financing, etc., not just paying cash, their banker is also going to want to see these returns before they will commit to the loan.
I want to give you an example of crooks selling businesses. One of my investor clients were a married couple both Pharmacists. They had found a Pharmacy in a well known mountain resort town. The seller showed them a safe, crammed full of large bills. Told them that the business was making a lot of money, but he was not reporting it all to the IRS, and they would not need to either. They hired me to drive 100 miles to the town it was located in, time plus expenses. I was a broker and got $100 an hour for consulting back in mid 1970s if I was not involved in the sale. I drove over, and looked things over. I saw his books, and he showed me the safe full of many thousands of dollars. I asked him where the made his extra money off of the books. He showed me a small magazine rack with a couple dozen magazines, and his window display of Moccasins. Said he did not report these sales. The Moccasins were dusty and certainly not going to get many sold if any. The magazine display was too small to do much business. There was no way, that he was making huge amounts of money this way. I advised my investors not to buy it, as there was no way that business was making the kind of money he claimed, even if his safe was full of $50 and $100 bills. They bought another Pharmacy.
Two weeks later that first Pharmacy made all the news. The Pharmacist that ran it, was arrested for being one of the biggest wholesale Illegal Drug dealers in the state with a lot of small dealers buying from him. In a fast paced tourist town, it does not seem out of place, a lot of out of town people walk into a business. In a concealed room he did not show me, they found huge amounts of all kinds of drugs. The government confiscated his safe full of illegally gained money. He was trying to unload his business to some sucker and leave the country with all his money.
My $1,000 time and expense fee, saved my clients a lot of heartache and their losing a lot of money. They bought another pharmacy, and as soon as it closed she threw her husband out, and she ended up with the pharmacy. She just married him apparently so she could use him to help her get her own pharmacy. He ended up taking the job of head pharmacist for a major V.A. hospital.
There are too many small businesses that are being sold by crooks, and any intelligent buyer or agent handling them, is going to see the complete tax returns on the business and owner, and they are going to be gone over by exerts to see if the seller is being honest with them, and the business is making the kind of money that is claimed, and evaluate the potential of maintaining that kind of profit. That is the norm, as the broker has told your family member. Without what they are asking for, no intelligent buyer is going to buy any small business. The more profitable the business is, the more they are going to check to make sure it is profitable, not someone wanting to unload a loser business on some unsuspecting sucker.
Oldtrader- we are talking about a business that has been around for 35 years, not run by some losers, just people who want to retire and have been incredibly successful. This business is considered "the best in the business" and is well known and highly regarded. We have three parties interested in under a week and do not want to give out confidential information to people who are not qualified to buy. There are lots of "losers" as you call them that have zero ability to buy businesses that request info. I am asking if it is the norm to give out information to anyone who emails the broker and get nothing in return. Again, this is a well known business and the owners are very concerned about confidentiality. They feel the financials should only be shown to "REAL" prospective buyers. Broker is emailing financials to anyone who emails him without getting ANY info on who these people are. The Schedule C is included in these financials and one specific prospective buyer, whom the broker has never met nor has any info on is requesting the whole return. We are asking to see proof of funds. And Oldtrader- you think this is wrong? Get outta here!
Oldtrader and hemlock made great posts!! If your family's business is so great why don't you buy it??
If I were looking, I'd request a full shakedown. I'd start with the usual 'books' - you'd be surprised at how many 'successful' businesses don't have them or know what they are...(that's your first sign) followed by a property inspection. If it became more serious, I'd want 3-5 years of personal & business tax returns, credit history, and personal financial statements before I made an offer. Usually, it always turns out the same..... bs and lies. The tax returns never turn up. It's always, 'take my word for it....' lol.
As for 35 years..... Blockbuster had a great run too!
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