We outline ten situations that most commonly cause deals to fail, and how to avoid them:
1. The buyer and/or the seller are not serious about the deal
This is not always easy to spot early on, although if you have retained a business broker to help you buy or sell, they will be highly attuned to the warning signs. Some so-called "buyers" might actually not be aware of the long hours and hard work involved in taking on the running of a business, while "sellers" might actually just be testing the market to see what kind of price they could get.
Alternatively, both buyers and sellers may start the sale process in good faith but lack the courage to go through to completion when it comes down to it.
To minimise the risks, buyers should look for sellers who:
Have a clear idea of what they will do after they sell.
Are of retirement age with no family members involved in the business.
Have strong family or health reasons to exit the business.
Have paid an up-front fee - although plenty of genuine sellers do not work in this way, an up-front fee to a business broker is evidence that the seller wants to see the deal through to completion.
Sellers should look for buyers who:
Have a realistic idea of the lifestyle of a business owner, and are not just pursuing a pipe dream.
Can provide evidence of funding for the business early on.
Have formulated viable ideas for the future of the business.
2. The seller isn't upfront about problems within the business
Attempting to hide a business' s flaws in the hope that the buyer won't notice is a risky strategy. If the buyer hasn't noticed them before signing heads of agreement, you can guarantee that they certainly will during the due diligence period that follows. Unearthing problems at a late stage can often cause buyers to lose confidence in the deal and walk away from the whole thing. The sale of a business is dependent upon trust - both parties need to believe that they are involved in a good deal - and last minute changes in circumstances seriously damage the relationship that has been forged during the sale process. By being upfront about the business from the outset, the seller has the control to present any challenges the businesses poses in a positive way.
3. Either party has an unrealistic idea of the business's value
A seller with an inflated idea of what their business is worth and a buyer who is not sufficiently aware of the state of the market are unlikely to reach an agreement. If a fair price is not established during initial negotiations, the buyer may decide later on that the business does not, after all, support the price agreed. The seller also must be able to provide documentary evidence to demonstrate that the business is worth the asking price.
4. Incorrect valuation
If either party has cut corners over the valuation of the business, problems can rear up as the deal nears completion. Banks can refuse financing to buyers who can't provide documentation of an acceptable valuation, and will require them to carry out a further valuation using an approved professional - and foot the bill for the additional expense. Sellers need to bear in mind that business valuers are not chartered surveyors and cannot be held responsible for the condition of property and land beyond what can be seen at ground level. If property makes up a significant part of the value of the business (for example, leisure businesses such as hotels and pubs), then its condition needs to be verified independently to prevent any unwelcome surprises later on.
5. Negotiating seller financing
This can be a stumbling block for many deals. The seller needs to realise that in many cases, if the buyer is unable produce profits from the business while making repayments, it is probably not worth buying. At the same time, the buyer also needs to be prepared to put significant proportion of the asking price down as cash, wherever it may have come from, else it is not in the seller's interests to sell.
6. The deal takes too long
Negotiating the sale of a business is a laborious process and can become frustrating for both buyer and seller. `Buyers tend to want increasing access to more and more areas of the business, while sellers gets tired of having to provide it all and so the sale can lose momentum. It is therefore essential that both parties have a good team of specialists who can guide the deal to its conclusion as swiftly as possible, but without being so aggressive as to scare off the other party. Although it may be tempting to hire professionals you have worked with in the past, such as your regular accountant or lawyer, only do so if these people have specialist expertise in the complex transaction of a business sale.
7. The buyer and seller don't get on
Quite aside from reaching a financial agreement, the seller will only surrender what is likely to be a lifetime's work if he/ she has a good personal relationship with the potential buyer. Many business owners stay involved in the business at least for a transitional period after the deal is completed, so if the two parties don't feel they would be able to work with each other, then the sale is likely to fall through. Ascertain early on in the process whether there is a 'fit' between the parties before continuing.
8. Mis-communication between buyer and seller
Unfortunately, it can sometimes be the case that buyers and sellers only realise towards the end of the sales process that they are not in agreement over key terms of the deal. In this situation, it is rare that an agreement will ever be reached. Using carefully selected advisers (see point 5) will dramatically reduce the chances of this happening.
9. The seller fails to check tax/ legal issues early on
If the seller has waited until a buyer is in place before examining the tax or legal consequences of selling the business, then the financial terms of the deal may need to be re-negotiated to include them. This is likely to be very difficult, as the buyer will have already built up an inaccurate picture of the price the seller is prepared to accept for the business.
10. External factors
Sometimes, everyone involved in making the deal happen can do everything right and some external factor, such as an unexpected economic development, government legislation, environmental problems or a change in personal circumstances suddenly ruins what seemed to be a foregone conclusion. While there is nothing you can do about genuinely unpredictable situations, the vast majority of last minute deal breakers can be avoided by adhering to the following guidelines:
Prepare thoroughly so that key agreements don't need to be altered at the end when expectations are already in place.
Choose your advisers carefully, and remember that you are likely to get what you pay for. A low quotation can be an indication that the person concerned does not know much time is needed to complete a deal of this type, and will therefore either try to up the fees later or not put in the work required to do a proper job.
Don't hide things. Transparency is the key and the transaction is dependent upon trust. Even if this causes the other party to walk away, it is better that way than both parties spending more time and money in pursuing a deal that ultimately will never make it though to completion.
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