7 Signs the Buyer or Seller You’re Working With Is a Flake (M&A Edition)

Is the buyer a flake?

When it comes to selling or buying a business, you really need to know if the buyer or the seller is not a flake. But, how do you know all these? It’s not as if it’s written on their foreheads.

Spoiler alert: The largest asset you’ll ever buy or sell is a business. Selling or buying a business can be quite pressuring, mixing that with emotions running high and then having the deal fall through can really be heartbreaking, disappointing, and demoralizing.

As a CPA, CVA, and CFO who has been on 6 public boards, raised $35M, and valued 100+ businesses, I’ve seen <15% of attempted acquisitions get completed. The simplest things can make a deal go sideways in the blink of an eye. I’ve also been hired as expert witness when a flake buyer/seller commits fraud – like my Metro Cellular case where seller claimed $300k revenue and actually had $72k.

Fortunately, there are tell tale signs that can point out that you may be dealing with a person who is impractical, flighty, unreliable, inconsistent, indecisive, deceitful or will flake out on you before you lock in an agreement.

If you’re worried that you might be dealing with a flake, just look for these 7 signs. Believe us, the signs are always there, you just have to look closely enough to see it.

#1: The buyer or seller is untrustworthy – No background, no references

Before buying or selling, learn to do research on the buyer or the seller. It is still your asset before they buy it, and it will be your asset when you buy it from them, so it is best that you do a background check on the individual you are in business with.

Red flags:

• No LinkedIn, or LinkedIn with 50 connections and no work history
• Won’t provide references from prior business deals or banker
• Uses Gmail only, no business entity, no website
• Name search shows lawsuits for fraud or breach of contract
• Refuses to sign NDA but wants financials

What I do: Pull Secretary of State, check if buyer entity exists. Pull litigation search on county court portal. Ask for 2 references: one banker, one attorney. Legit buyer provides in 24 hours. Flake says “I’ll get it later” and never does.

They may just be there to waste your time with nothing in particular to return as an offer. Rather than indulging yourself, hire a business valuation expert to pre-qualify buyer – I do Quality of Earnings (QOE) and background check as part of due diligence package.

#2: The buyer or seller has financial problems – No proof of funds

Most times the prospective buyer or seller may not be untrustworthy or have major character flaws, but if there are indications of financial issues, there’s a very likely chance that there would be an increase in the odds that they will flake out during the buying or selling process.

A buyer should show proof of funds for a down payment in order to make an offer on a potential purchase or get prequalified for a loan. You shouldn’t entertain an offer that is submitted without proof of funds, or low funds.

For business M&A ($200k-$5M), proof of funds means:

• Bank statement showing 20-30% down payment liquid (not 401k, not “my friend will invest”)
• Pre-qual letter from SBA lender (Live Oak, Wells Fargo SBA, etc.) or bank – not just “I talked to my bank”
• If search fund, POF from investors with capital call letter

Example from my practice: You’re selling a restaurant for $700k, buyer offers $160k and says “I’ll get a loan for rest.” Don’t even think twice on the offer, simply walk away from it. That’s not an offer, that’s a wish.

So, if the buyer claims to have the funds but can’t provide proof of those funds upfront, it can be a red flag that the person doesn’t have enough money for a down payment and is stalling. This happens often. Get proof of funds for the down payment upfront, always.

Seller side flake: Seller says business does $1M revenue but won’t show tax returns or bank statements. That seller has financial problems – hiding losses. See my fraud-purchase-retail-store case.

#3: The buyer or seller is slow to act – IDK, maybe, I’ll let you know

When a seller drags his feet in providing disclosures to a client he had who was interested in buying it could mean lack of interest.

If they are very serious about buying or selling an item, rest assured, they’ll be very quick to act and respond with a reply that is more than just a word. Once you see signs of “IDK,” “maybe,” or “I’ll let you know,” just know that they are flakes and are not ready for you.

If you inbox them “can you meet me @ XYZ @ 5:30 today to review QOE?” And they reply with “I gotta see”, or “I work today”, and don’t reply with a follow up time and place they can meet you, chalk this one up to the birds. They’re not serious about doing business.

M&A timeline for serious buyer:

• NDA signed within 24 hours
• CIM review within 3 days
• IOI (Indication of Interest) within 7 days
• On-site meeting within 14 days

If buyer takes 2 weeks to sign NDA, they are shopping 10 deals and you are #10. Move on.

#4: A lack of transparency – Hiding financials or deal breakers

If a buyer or seller seems to be less forthcoming, it doesn’t mean the deal will fall through, but it isn’t a good sign. If there’s any attempt at anything less than full transparency, there’s generally a reason.

A lack of transparency has a lot of gray areas, it could mean that they can’t really provide all the information that you have asked for and are just trying to buy time till they can get it. Nonetheless, a lack of transparency is a sure sign of a flake buyer or seller.

Seller transparency red flags:

• “QuickBooks is a little messy, but trust me”
• Won’t give access to POS system, only gives P&L PDF
• “My CPA does taxes, I don’t have monthly financials”
• Won’t disclose lease expiration or key employee leaving

Buyer transparency red flags:

• Won’t tell you source of funds (“private investor”)
• Won’t disclose they have never operated a business before but buying $2M business
• Hides that spouse/partner is not on board (see #7)

My due diligence rule: I require video export of POS, direct bank feed, and tax return transcript from IRS (Form 4506-C). Transparent seller provides in 48 hours. Flake makes excuses for 2 weeks.

#5: The seller, buyer or agent is taking a long time to get back to you – Communication breakdown

One of the biggest signs a sale is going to fall through is if there’s a noticeable change in the communication from the once cooperative client.

We get it that we all live busy lives and have things to do, we also know that we may not always be able to check our texts and phones, BUT, when it comes to doing business, and signing deals, we need to know that time is money. So, once a buyer takes DAYS to reply to your email or message, then it means that she is wasting your time.

Pattern I track:

• Week 1: Replies within 2 hours, excited
• Week 2: Replies within 1 day
• Week 3: Replies in 3 days, short answers
• Week 4: Ghosts

That deal is dead 80% of time. Serious buyer keeps pace or tells you why delay: “My SBA lender needs 3 days for pre-qual.”

Still, don’t assume that the seller or buyer is no longer interested. Oftentimes, a message can be crossed or misinterpreted via text or email, therefore picking up the phone and calling the other party is imperative. Nonetheless, avoid anyone that is taking longer than usual to reply to you on an average.

My rule: If no reply in 48 hours after LOI, send “Is this still a priority?” email. If no reply in 72 hours, move to next buyer. Time kills deals.

#6: Low enthusiasm with the buyer or seller overall – No excitement

Enthusiasm is a sign that they want in and they want it. If you tend to sense that the other party isn’t all that excited to be selling his or her business or jazzed to be buying yours, it’s a negative sign, and you’ll definitely want to keep your emotions in check.

There’s a fair chance that this isn’t going to happen. Sometimes clients themselves don’t know what they want. This could also be a signal that the prospective buyer has found a different business that he or she is excited about.

There are so many layers involved with acquisitions and financing. Unfortunately, below 15% of attempted acquisitions get completed. The simplest things can make a deal go sideways in the blink of an eye.

Seller low enthusiasm signs:

• Cancels meetings, “too busy running business”
• Says “I don’t really need to sell, just testing market”
• Won’t stay for transition – wants to leave Day 1

Buyer low enthusiasm signs:

• Never asks about employees, customers, growth – only asks about lowest price
• No questions about operations during site visit
• Says “I’m looking at 3 businesses” – you are the backup plan

Serious buyer: Asks about key employees, customer concentration, growth opportunities, and wants to meet staff. That’s excitement.

#7: One potential buyer is more excited than his or her partner – Partner mismatch

We had to save the best for last, the No. 1 sign that a purchase is going to fall apart is when one person loves the business, but their partner is more hesitant.

If it’s a joint venture then both partners should be equally excited to sell or buy, it shouldn’t be a one way venture.

Often times, flakes don’t just give off signs, they give loud and glaring signs with their indecision and lack of preparation.

Classic scenario: Husband loves restaurant, wife does books and says “We can’t afford $700k, and I don’t want to work 60 hours.” Husband continues meeting with you without wife. Deal dies at SBA application when wife refuses to sign personal guarantee.

Or: Business partners buying – One partner is operator, other is investor. Operator excited, investor sees financials and says no.

How to prevent:

• At first meeting, ask: “Who are decision makers? Who signs personal guarantee for SBA?” Both must be at the second meeting.
• If buying with spouse, both spouses must attend a site visit and buyer should meet the accountant
• If buying with partner, get both partners’ resumes and proof of funds

Final takeaway: Flakes don’t just give off signs, they give loud and glaring signs with their indecision and lack of preparation. So, hire HP Accounting who will also work as forensic accounting expert for your business. Our expert will assist you to bring all evidence in one spot so that you can make an impartial opinion.

If you are buying or selling a $200k-$10M business and want to avoid flake buyers/sellers, I offer QOE and due diligence package: financial statements analysis, POS vs tax vs bank three-way match, and working capital peg review. Contact hpaccounting.com/contact.