There’s a famous idea in economics, first explained using the used car market. If buyers can’t tell a good car from a bad one, they’ll only offer an average price for any car.
Owners of genuinely good cars won’t sell at that price, so they hold on to them. What’s left on the market, disproportionately, are the poor-quality cars, known as “lemons.”
The same thing happens with businesses. In this post, we’ll explain how the idea works, why it applies to company deals, and what warning signs to watch for. We’ll also cover practical steps that help you protect yourself before you commit.
The Used Car Idea in Plain English
Economists call this problem “adverse selection.” It sounds technical, but the logic is simple.
Imagine you’re shopping for a used car. You can’t see inside the engine, and you can’t know how the previous owner treated it. Because you can’t tell good from bad, you offer a price that reflects the average car on the market.
Now think about the seller of an excellent car. They know theirs is better than average, so the average price feels unfair. As a result, they keep the car. Meanwhile, owners of poor cars happily accept the offer, because it’s more than their cars are worth.
Over time, the pool of cars for sale fills up with the weaker ones. Buyers who understand this get more cautious, and prices fall further. Eventually, the market tilts towards lemons.
How the Same Thing Happens With Businesses
Business sales work in a similar way, only with much higher stakes. Buyers can’t see everything inside a company. They rely on figures, forecasts and the seller’s own account of how things really run.
Genuinely excellent, well-run companies rarely need to sell in a hurry. Their owners have options. They can keep earning strong profits, bring in new investors, or wait for the right buyer on the right terms.
In contrast, owners of troubled businesses often feel pressure to sell. Perhaps profits are slipping, a key customer is leaving, or the owner has simply run out of energy or money. For them, a quick sale may look like the best way out.
So when a business comes to market, a buyer should ask a fair question: why is it for sale, and why now?
When a Deal Finds You
The lemons idea becomes especially useful in one situation. Sometimes a business comes to market unusually easily. Or you might receive an unsolicited approach from someone eager to sell you their company out of the blue.
At first, that can feel like a stroke of luck. You didn’t have to search, and the opportunity simply arrived. However, it’s worth pausing to ask why.
Good businesses usually attract several interested buyers. Their owners rarely need to chase anyone, so they seldom send cold approaches. When a seller works hard to find a buyer, that effort can signal something about the business.
Sometimes there’s a perfectly good reason. For example, the owner may want to retire, relocate or focus on another venture. Even so, this is exactly the situation where problems are most likely to be hiding.
Legitimate Reasons to Sell
Fairness matters here. Plenty of excellent businesses do change hands, and not every sale hides a problem. Owners sell for many sound reasons, including:
- Retirement: After decades of work, an owner may simply want to enjoy their time.
- Health or family circumstances: Life events sometimes force a change of plans.
- A new opportunity: An owner may want to put their energy into something different.
- A natural end to their role: Some founders feel the business needs a different kind of leader.
- A strategic fit: A buyer may offer a price that the owner can’t reasonably refuse.
A genuine reason usually holds up under questioning. The seller explains it clearly, the story stays consistent, and the facts back it up. By contrast, vague or shifting explanations deserve closer attention.
Warning Signs Worth Noticing
No single sign proves a business has problems. Nevertheless, certain patterns should make you look harder. Watch out for these:
- An unusual rush: The seller pushes you to decide quickly, or claims other buyers are circling without evidence.
- Reluctance to share information: Requests for records meet delays, excuses or partial answers.
- Figures that look too good: Profits seem unusually high, or recent results jump sharply just before the sale.
- Heavy dependence on the owner: Customers, suppliers and staff all rely on one person who plans to leave.
- Unexplained changes: Sudden shifts in accounting methods, staff turnover or customer numbers.
- A story that keeps changing: The reasons for selling differ from one conversation to the next.
- An asking price with no clear logic: The seller can’t explain how they reached the figure.
Spotting one of these doesn’t mean you should walk away. It means you should ask more questions, and keep asking until the answers satisfy you.
Why Emotion Is the Real Danger
Most bad deals don’t happen because buyers lack intelligence. Instead, they happen because buyers fall in love with an idea.
Perhaps you’ve pictured the business as part of your future. Maybe you’ve told colleagues about it, or spent weeks working out how it fits your plans. By that point, walking away feels like losing something you already own.
Emotion makes people ignore awkward facts. A buyer who feels attached to a deal may explain away a worrying figure or accept a vague answer. They might also skip a step in the checks, simply because they don’t want to hear bad news.
That’s why timing matters so much. Applying discipline before you get emotionally attached is far easier than applying it afterwards. At the start, you can still judge the opportunity clearly and walk away without regret.
Applying Discipline Without Becoming Cynical
None of this is a reason to treat every opportunity with suspicion. Cynicism can cost you good deals, and some of the best acquisitions begin with an unexpected conversation.
The aim is balance. Stay curious and open, but insist on evidence. Treat a deal that arrives easily as a prompt to look more carefully, not as an automatic reason to refuse.
Here are some habits that help.
Ask why the business is for sale
Put the question directly, and listen to the answer. Then check it against the facts. A good reason will stand up to scrutiny.
Look beyond the headline figures
Revenue and profit tell only part of the story. Examine how the business earns its money, which customers matter most, and how stable that income is. Pay attention to cash flow too, because profit on paper doesn’t always mean cash in the bank.
Check the quality of the earnings
Ask whether recent profits are sustainable. Look for one-off gains, unusual cost cuts or changes that flatter the numbers. If results improved sharply just before the sale, find out why.
Test the owner’s role
Find out how much the business depends on the person selling it. If customers and staff mainly deal with the owner, the value may leave when they do.
Speak to others
Where possible, talk to customers, suppliers and key employees. Their views can reveal things the paperwork doesn’t show.
Take your time
A rushed decision rarely favours the buyer. Good deals can withstand proper checks, so a seller who resists reasonable time probably has something to protect.
The Value of an Independent Second Opinion
Even careful buyers have blind spots. When you’ve spent weeks on a deal, it’s hard to judge it objectively. You know the story you want to be true, and your mind quietly filters the evidence.
An independent adviser doesn’t share that attachment. They have no stake in whether the deal goes ahead, so they can look at the facts calmly. Consequently, they can ask the questions you might avoid, and point out risks you’ve stopped noticing.
A second opinion can also give you confidence. Sometimes the review confirms that a business is sound and the price is fair. In that case, you can proceed knowing you checked properly. At other times, it saves you from a costly mistake.
Either way, the cost of advice is small compared with the cost of buying the wrong business.
A Simple Test for Any Deal
Before you commit to a deal, try asking yourself a few honest questions:
- Why is this business really for sale? Do I believe the explanation, and can I prove it?
- Who else has looked at it? Has anyone passed on the opportunity, and if so, why?
- What am I not being told? Which questions have received weak or vague answers?
- Would I still want this deal if I had searched for it myself? Or does its easy arrival make it more attractive?
- Have I let excitement replace evidence? Where have I accepted a hopeful answer without checking?
If you can’t answer these confidently, you probably need more information before you go any further.
The Bottom Line
Genuinely great businesses rarely need to chase a buyer. So if a deal seems to be finding you rather than the other way round, treat that as a reason for more caution, not less.
How H&Hendricks Can Help
Before you get emotionally attached to any deal, H&Hendricks’ Business Support service can give you an independent, unemotional second opinion. If an opportunity has landed in your lap, a conversation early on can help you decide whether to move forward, ask harder questions or walk away.
Ashley Bancroft is a founding Partner of H&Hendricks. A qualified Chartered Accountant and specialises in finance, strategy and entrepreneurship, with particular focus on value creation.
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