It would be great to live in a world that every business for sale was sold at top dollars. There are many problems that can prevent a business from being sold. However, it is impossible to have a perfect business. Here are ten reasons that can lead to a failed sale or a deal being closed for less than its potential value.
The business intermediaries must be open with sellers clients and educate them about the potential challenges they face, as well as the possible impact on closing a successful transaction.
1. UNREALISTIC EXPECTATIONS
a. Valuation/Listing price:
The price at which a business is listed is perhaps the most important factor in a sale. A seller’s emotional attachment to the business and a business intermediary who is inexperienced can lead to disaster. Knowledgeable buyers will be discouraged from communicating with a business if it is overpriced. It will also be very difficult to argue the value of a business if it is priced too high. The result is that listing will be lost in the marketplace, and it becomes harder to recover. After being on the marketplace for several months at the wrong price, the process of re-pricing or re-listing presents new challenges. The least of these is maintaining credibility.
b. Unrealistic Terms and/or Structure
It is important to address tax management, asset allocation, and deal structure early on in the process. Both the Seller and the Buyer often place too much emphasis on the sale price, at the expense or the ‘net after tax results’ of a business transaction. A skilled Tax Attorney/CPA can help a seller structure a transaction to achieve greater economic benefits. There are many other issues that can be problematic in addition to structuring the transaction.
- Seller is rigid about closing cash and inflexible when it comes to negotiating other terms.
- A buyer’s inability to sign a personal warranty
- There is no consensus about the Asset Allocation
- Seller insists on selling stock only (typically with C-Corp).
- Unable to negotiate equity seller financing, an earnout, or terms of the non-compete
2. PROFESSIONAL ADVISORS
A business owner needs to have the right team in place to ensure a smooth sale. A skilled mergers and acquisitions intermediary will play the key role. This includes everything from the business valuation to the negotiation of terms, conditions, price, and the sale. An M&A advisor is not enough. A business attorney who specializes on business transactions is crucial. Again, it is important to find a business attorney who specializes in business transaction. Anyone who has worked in the business for over a year can point out a transaction that failed due to the inability of the chosen lawyer to handle business transactions. A competent CPA, who is skilled in structuring business transactions, will also be a key role. Although the current tax and legal advisors of a business owner may be able to assist with the sale of their business, they should not have any experience with mergers or acquisitions. Sometimes, an offer is only accepted once. It is important to not attempt to close a deal that is too expensive or impossible.
3. INCREASING PROFITS/REVENUES
Most buyers want profitable businesses that have year-over-year increases in revenue and profits. A business with a poor track record, with inconsistent results, or declining revenues and profits, is more likely to be sold. It will not only impact third-party funding availability but also have an impact on the business’s valuation. Buyers traditionally buy businesses based upon future performance. Instead, they value the business based on its past earnings with a primary focus on the 12 to 36 months. Businesses with declining financials will be considered.
