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Are Founders Under Age 40 Getting Scammed?

If you're under 40, there's a one-in-six chance that someone will offer to buy your business this year. There's also a good chance that offer will be a sham.
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Over at www.SellabilityScore.com, we just analyzed 9,779 businesses that have completed their Sellability Score questionnaire of late and we discovered that the younger you are, the more likely you are to get an offer to buy your business.

The difference is significant.

Of all the businesses we analyzed, 11.6% had received an acquisition offer, and this figure was similar across most age cohorts: 11.5% of 60+ entrepreneurs had received a buyout offer, 9.2% of 50-59 year olds, and 11.2% of 40-50 year olds. The outlier was those business owners under the age of 40 where we found that fully 16.2% had received an offer.


The fly in the ointment

This news would seem to bode well for young entrepreneurs, but as we looked further into the data, we found that the offers younger entrepreneurs were receiving were at a discount to the average. Across all 9,779 businesses that we analyzed, the average price offered was 3.7 times earnings. Some groups did better, like the 50-something's who were offered 4.1 times earnings for their company on average. But the youngest business owners in our analysis did worse, with the average under-40  owner getting offers of 3.4 times.

Typically we see offers and multiples move in lock step: the most attractive businesses are more likely to get an offer and the value of the offers tends to be higher. Why would younger business owners be 40% more likely to get an offer but with the value of those offers being below average?

The vulture capitalist

I believe one reason is the "vulture capitalist" who targets young and naïve business owners. Their approach is simple: find a relatively young entrepreneur running a small but growing company and offer to "buy" their business in return for some future consideration.

Most of the time, the "acquiring" company is offering little or no cash up front but instead the possibility to be paid if you hit targets in the future. Oftentimes, the currency being offered for good behavior is not cash, but stock in their illiquid private company--the value of which is often dubious at best.

Getting an acquisition offer is flattering, and it's downright seductive to a young person who has little in savings outside their business and is keen to grab the first rung on the wealth ladder. But these offers are often an illusion.

I personally received one of these "offers" on a design agency I owned fifteen years ago. The "buyer" and I were exhibiting next to one another at a trade show. We'd never met before the show but by the end of the two-day exhibition, my neighbor was offering to "buy" my company. You may be asking: how would this person be in a position to buy my company just two days after meeting me and without ever seeing my financials, meeting any of my employees, or talking to a single customer?

The vulture had no intentions of actually paying for my business.  The offer was a joke, included no cash and only shares in his company -the value of which would be diluted for every other company he tried to "buy" and inaccessible unless he decided to sell his business at some point in the future (in most cases, a minority shareholder can't force the sale of stock on the majority owner so can remain illiquid forever).

If you're under 40, there's a good chance someone will offer to buy your business this year. There's also a reasonable chance that offer will be a scam: nothing more than a vulture looking to hire--not buy--your energy and enthusiasm to help them build their business. Unless there is cash on the table, say thanks but no thanks.

IMAGE: Getty Images
Last updated: Jul 16, 2014

JOHN WARRILLOW | Columnist | Sellability

John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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