Why business sales fail – Fake buyers

Fake buyers are difficult to spot. 

Every few years a buyer comes along who manages to pull the wool over everybody’s eyes with their audacity and mischievousness at best, and evil dishonesty at worst. They act with authority, profess goodwill (often with a dash of religion), and dismiss with disdain any question of financial barriers. In short: they will talk a good fight, appear to know a great deal, and claim great resources.

A true story about a fake buyer

I once introduced one such buyer to the seller of a fantastic manufacturing business. The buyer was a chartered accountant, married to a lawyer, with letters of credit amounting to millions. We had an enlightened conversation in the board-room of the company which went well. After an hour he asked to go to the bathroom. When he came back a few minutes later he announced: “I really like your bathrooms. I will buy your company at your price. Please draw up the agreements.” It was one of those moments one never forgets.

I emailed him draft agreements two days later with a suggested due diligence structure. There was a bit of back and forth, and the next week both buyer and seller signed the agreement.

And then the “what for”, and “how’s your father” started. To be clear, he never actually cancelled or challenged anything about the deal. He always answered his phone, but the goal posts moved and moved and moved.

Some months later the seller cancelled and called it a day on the deal. The world was moving at speed into the Global Credit Crisis, and other things became more important.

In writing this, I ran a quick google search on the same man. It turns out that he has destroyed 3 major companies through M&A activity. He borrowed more than R100M from a foreign development fund for the deals but appears to have paid for nothing. The final nail in his solvency coffin was an accumulated liability of almost half a billion Rands across a conglomeration of acquisitions.

Also on the internet is this comment from an unhappy associate:

“PLEASE BE CAREFULL WHEN AND IF YOU DO ANY BUSINESS WITH T%$#@ C&*^%. THE OWNER AND OPERATOR, MR &$#*@ IS A DECEITFULL, LYING, FRAUDSTER”.

The special characters are mine as I don’t want to be sued by somebody who may or may not have R100million squirreled away somewhere. And you can go do your own Google search on the sentence.

Spotting fake buyers

Fake buyers can be very difficult to spot early on in the process of dealing with them. Any of the warning signs can just as easily be confirmation signs of a good and honest buyer. So the best one can do is take the warning signs in combination and do some more research.

Fake buyers make quick decisions

Of course, seeing quick and often brash decisions in a buyer can be very edifying. “At last, someone else who sees this business for what it is and appreciates the value”. A seller will want to hug the buyer.

Don’t jump to the conclusion that the buyer is fake, but put a little star next to their name to remind you to be careful.

Fake buyers gloss over contracts

Contracts are important things. The contents are important, and they can change the course of someone’s life. If someone reads through a contract without questioning its contents, or appears to read through it, and then picks up a pen… This person should be treated with care.

• It could be that they are not competent to contract
• They may be intimidated by everyone else in the room, and feel the need to appear in control.
• They may have spotted the loophole which gets them out of it, and the rest does not matter
• They may be totally bona fide in their intentions, and trust you because of the rapport you have built up

If a buyer does not take the agreement to his attorney to have a look at before signing it, and does not ask about anything in the agreement, you should be careful. As much as you are changing your life, so are they.

Fake buyers flaunt their morality

Look, nobody expects people to be dishonest or lying. Think of the old joke about when someone prefaces a statement with: “I’ll be honest…” and the joker says: “Oh, aren’t you always honest?”

The fact is that we kinda expect people are being honest when they speak to us. It shouldn’t make any difference if they actively tell us:

• I never lie in business
• I’m a Christian, you know
• Muslims are not allowed to lie
• I’ll be honest with you
• We should pray over it?
• I trust what you are telling me

So where nobody expects people to be dishonest, we should not assume that everybody is honest all the time. And that is why sellers avail their businesses of a due diligence process, to buyers.

Buyers who profess their unsolicited honesty, piety, or virtue, should be asked some for some due diligence information themselves.

In my 30 years in the M&A industry, the chances of deceit is unexpectedly high when people lead with moral qualifications suggesting that they are better than others.

I know this section can trigger people, so let me be clear: I am not suggesting that religious people or moralists are predisposed to dishonesty. We assume all people negotiate in good faith and do what they promise. 

Fake buyers say "money is no problem"

Money is a problem for everyone. We spirit away our excess cash one way or another. It may be on money markets, fixed deposits, exchange traded funds, crypto currency, or gold bars. We naturally want it to work for us. At the same time we tend to buy things to a higher value than we currently have floating around as cash. That is why banks exist – to allow us to over-extend ourselves from time to time. Or all the time!

If a buyer tells you that money is no problem, they are almost certainly lying. That does not necessarily make them a fake buyer. If they think money is no problem, they haven’t considered that someone else thinks this money is a problem.

If they have to borrow it, and are certain that they will get it, they haven’t considered that the lender will want to know it is secured. If the buyer doesn’t consider whether the free cash flow is sufficient to repay the debt, they are fools.

I sold a distressed business to a public company for what was a fraction of their own net asset value. They could have paid for it out of their cash holdings. Instead they went to their biggest shareholder on a rights-offer to raise the cash.

Disdain for cash and speed in spending it is a sure way of getting into trouble. Accepting that a buyer with this attitude will stick to the agreement is foolhardy.

Fake buyers have scant regard for norms

Their disdain for norms will stretch to agreed rules, and even laws. They will often be brash in their statements of dealing with hurdles which may be placed in their paths. Typically: “Oh, I don’t worry about that sort of thing,” or “I’m sure we’ll be able to work something out to get around it.”

It is difficult for sellers to point out light transgressions of the agreement in the early days, but it is a mistake to not do so. The very first transgression is often a test of the seller’s mettle. “How far can I push them? Let’s see.”

When they tell you they intend to screw you, believe them.

Fake buyers have no shame

In particular, fake buyers have no shame in walking back their previous  erroneous positions.

Perhaps "shame" is not something which should be considered when apologising for a mistaken opinion following an interview or argument. That would be "embarrassment".

When a fake buyer makes a hasty decision, then compounds it with an ill-considered agreement, they are committed. If they then attempt to walk back their commitments, it is with no shame. Instead, they will find faults with the sellers in an effort to avoid all responsibility. The damage inflicted by their actions on the sellers is of no consequence to them.

Fake buyers are selfish

There is no win-win for these guys at the end. Through the negotiations – during the confidence-building campaign – they will bring in the win-win trope again and again. But when the confidence campaign fails, the winning will be only on their side. Nothing they do will be in the interests of their victims – the sellers.

Not an exhaustive list of fake buyer traits

There are other warning signs, I’m sure, but as I have been considering Elon Musk’s hostile takeover of Twitter, and subsequent events, I have rushed through some quick thoughts here. These don’t all apply to him, but some do. I have tackled the application of the tag “fake buyer” to Elon Musk in another post.

I will be adding to this list as things occur to me. Let me know of any thoughts you have on where and how fake buyers show up. Use the comments below, or if you need to stay confidential, drop me an email. (mark at {this domain})