Where businesses for sale come from, and how to screen one quickly

Four channels, four different distortions

Almost every business you will see for sale arrives through one of four routes, and knowing which one you are looking at tells you how to read what you are reading.

Broker listings are prepared to sell. A broker is paid by the seller, on completion, which is not a scandal and is worth holding in mind: the document is organised to produce interest, and the omissions are usually structural rather than deceitful.

Online marketplaces are broker listings with the editing removed. More of them, less preparation, a wider quality range, and a much higher proportion that are not really for sale at the price shown.

Professional referrals come through accountants, lawyers, bankers and suppliers who know a business is coming to market before it does. The information is thinner but the access is earlier, and the person telling you has a reputation involved.

Direct owner contact means there is no listing at all. Nothing has been prepared, so nothing has been shaped, and you are asking somebody to consider a question they may not have asked themselves. That takes longer and produces the least distorted view of a business you will get before diligence.

A listing is an advertisement, so read it as one

The most common mistake at this stage is arguing with the listing. People read a summary, notice that a number seems optimistic, and spend an evening working out whether it is. That is diligence, done for free, on a business you have not decided is worth an hour.

A listing is not evidence. It is a set of claims written to produce enquiries. Your job on the first pass is not to test the claims. It is to decide whether the claims, if they were all true, would describe something you want and could actually buy. Most of the time they would not, and that decision takes minutes.

So read for shape rather than for truth. What does the business do, who pays it, what does it need to keep running, and what is the asking price relative to whatever earnings figure is quoted. If the shape is wrong, the accuracy of the numbers does not matter.

The first pass, in five questions

Ask these in order and stop at the first no. Each one is faster to answer than the one after it, which is the whole point of the order.

One. Can I afford this at all, given what I decided I could commit and how the gap would have to be filled. A listing above your range is not a stretch goal, it is somebody else's deal.

Two. Do I understand how this business makes money, from the listing alone, in one sentence. If the model needs explaining to you now, it will need explaining to a lender later.

Three. Is it where I can be. Not just the drive. Whether an owner needs to be there, and how often, which is a different question from whether the listing uses the word absentee.

Four. Does the earnings figure have a name. Whether it is called seller's discretionary earnings, adjusted profit or something the broker invented, the name tells you what has already been taken out. A figure with no name is a claim with no method.

Five. Is there an obvious reason this cannot transfer. A licence that attaches to a person, a lease with no renewal, a contract that ends on change of ownership, or a business that is plainly one person's relationships.

Most listings fail at two, three or five, and they fail in the time it takes to read the summary twice.

The rejections are the part worth keeping

Almost nobody records the ones they said no to, and it is the single cheapest improvement available at this stage.

Write one line per rejection: what it was, and which of the five questions it failed. After thirty listings that list will show you something no single deal can. Perhaps everything in your range fails on owner dependency, which means the range is the problem rather than the listings. Perhaps everything you like fails on location, which is a decision you have been avoiding.

The pattern in the rejections is a description of your search written by the market rather than by you, and it is usually more accurate than the thesis you started with.

Widen on purpose, not out of frustration

Every search hits a stretch where nothing good appears, and the reflex is to loosen something. That is often correct. What matters is doing it as a decision rather than as a drift.

Loosen one constraint at a time and write down which one, when, and why. Industry, geography, size, or the amount of owner involvement you will accept. If you loosen three at once because you are bored, you no longer have a search, and the next listing that feels exciting will pass a test you have quietly stopped applying.

The constraint that should be loosened last is the one about cash you can lose. That one is not a preference.

What to do with the two that survive

A listing that passes the first pass has earned an enquiry and nothing more. The next step is a short conversation and, usually, a confidentiality agreement before any real information appears.

Go into that conversation with three specific questions taken from your own read, not with a request to hear about the business. Specific questions get specific answers, and they also tell the broker that time spent on you is likely to lead somewhere, which affects what gets sent next.

Keep expectations about that call modest. It is a qualification step in both directions. What you are trying to learn is whether the shape you read in the listing is really the shape of the business, and whether the person representing it answers a direct question directly.