Why Do Deals Fall Apart?

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 In many cases, the buyer and seller reach a tentative agreement on the sale of the business, only to have it fall apart.

 

There are reasons this happens, and, once understood, many of the worst deal-smashers can be avoided. Understanding is the key word. Both the buyer and the seller must develop an awareness of what the sale involves–and such an awareness should include facing potential problems before they swell into floodwaters and “sink” the sale.

What keeps a sale from closing successfully? In a survey of business brokers across the United States, similar reasons were cited so often that a pattern of causality began to emerge. The following is a compilation of situations and factors affecting the sale of a business.

The Seller Fails To Reveal Problems
When a seller is not up-front about problems of the business, this does not mean the problems will go away. They are bound to turn up later, usually sometime after a tentative agreement has been reached. The buyer then gets cold feet–hardly anyone in this situation likes surprises–and the deal promptly falls apart. Even though this may seem a tall order, sellers must be as open about the minuses of their business as they are about the pluses. Again and again, business brokers surveyed said: “We can handle most problems… if we know about them at the start of the selling process.”

The Buyer Has Second Thoughts About the Price
In some cases, the buyer agrees on a price, only to discover that the business will not, in his or her opinion, support that price. Whether this “discovery” is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of prime importance that the business be fairly priced. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts for themselves.

Both the Buyer and the Seller Grow Impatient
During the course of the selling process, it’s easy–in the case of both parties–for impatience to set in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process takes time. However, it shouldn’t take so much time that the deal is endangered. It is important that both parties, if they are using outside professionals, should use only those knowledgeable in the business closing process. Most are not. A business broker is aware of most of the competent outside professionals in a given business area, and these should be given strong consideration in putting together the “team.” Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar, but these people may not have the experience to bring the sale to a successful conclusion.

The Buyer and the Seller Are Not (Never Were) in Agreement
How does this situation happen? Unfortunately, there are business sale transactions wherein the buyer and the seller realize belatedly that they have not been in agreement all along–they just thought they were. Cases of communications failure are often fatal to the successful closing. A professional business broker is skilled in making sure that both sides know exactly what the deal entails, and can reduce the chance that such misunderstandings will occur.

The Seller Doesn’t Really Want To Sell
In all too many instances, the seller does not really want to sell the business. The idea had sounded so good at the outset, but now that things have come down to the wire, the fire to sell has all but gone out. Selling a business has many emotional ramifications; a business often represents the seller’s life work. Therefore, it is key that prospective sellers make a firm decision to sell prior to going to market with the business. If there are doubts, these should quelled or resolved.

Some sellers enter the marketplace just to test the waters; to see if they could get their “price,” should they ever get really serious. This type of seller is the bane of business brokers and buyers alike. Business brokers generally can tell when they encounter the casual (as opposed to serious) category of seller. However, an inexperienced buyer may not recognize the difference until it’s too late. Most business brokers will agree that a willing seller is a good seller.

Or…the Buyer Doesn’t Really Want To Buy
What’s true for the mixed-emotion seller can be turned right around and applied to the buyer as well. Buyers can enter the sale process full of excitement and optimism, and then begin to drag their feet as they draw closer to the “altar.” This is especially true today, with many displaced corporate executives entering the market. Buying and owning a business is still the American dream–and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.

And None of the Above
The situations detailed above are the main reasons why deals fall apart. However, there can be problems beyond anyone’s control, such as Acts of God, and unforeseen environmental problems. However, many potential deal-breakers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.

A Final Note
Remember these three components in working toward the success of the business sale:

  • Good chemistry between the parties involved.
  • A mutual understanding of the agreement.
  • A mutual understanding of the emotions of both buyer and seller.
  • The belief, on the part of both buyer and seller, that they are involved in a good deal

What Does a “Unique Business” Mean?

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Quite commonly, business owners feel that their business is unique, but is it really?  There are a variety of different ways that businesses can be unique.  Yet, there are some key variables and factors that simply must be in place if a business is to be simultaneously unique and valuable.  This leads us to an important question, are these unique and valuable factors transferable to a new owner?

Here are five key factors to look for in a business.

Factor One-The Assets

Having an intangible asset, such as the perfect location with a locked in long-term lease (which would, of course, transfer to a new owner) is of vital importance.  However, this is not the only example of critical intangible assets.  Other examples would include a robust mailing list of past and current clients that was built up over a series of years, a popular franchise relationship, trademarks and copyrights or a respected and known product line.

Factor Two-Is the Business Easily Replicated?

If a business is easily replicated, then it can fall prey to knockoff artists.  One example would be the fact that franchises often, but not always, limit the number of franchises in a given geographical area.  Another example would be whether or not a business has a liquor license, since most jurisdictions have limiting factors on the number of liquor licenses available.

Factor Three-What is Proprietary?

Proprietary technology, services or products are, simply stated, always a good thing to see when you are considering a business and evaluating how unique and valuable it may be.  Attractive factors would include buying a business that has developed unique technology, such as software, or a process that is patented or extremely difficult to reproduce.

Factor Four-Reputation

Is reputation everything?  In business the answer is, “yes!”  Reputation matters a great deal, and having a business that possesses a great reputation in a given community can mean money in the bank.  A good example would be a pharmacy that is well known for its ability to deliver prescriptions in a timely fashion, or perhaps it is the local hardware store that always has “everything you need” in stock and ready to go.  Just remember it will be up to you as the new owner to keep up a good reputation as you progress into the future.

When you are considering a business to buy, it is necessary to go beyond the simple numbers and dive deeper.  This means accessing a business to determine what makes it unique, how robust it is likely to be to challengers and what characteristics it has that could help ensure its long-term survival.

Value vs. Price

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Value is one thing. Price is a different thing.

We appraise every business we list so that the owner knows the “most probable selling price”.  Often we will take the opportunity to  market at a higher price to allow for a “premium buyer” or negotiations.

Many businesses we sell settle at more, or less, than the appraised value. This may result from the different motivations and negotiating skills of the parties. A seller compelled to sell urgently through illness may not maximize the price received because we are unable to carry out a full marketing program.

Conversely, a buyer may pay top price because the business offers special benefits for that particular buyer, e.g. location.

Apart from motivations and negotiating skills the deal structure can greatly influence price.

Finance – an old saying is “you can name the price, if I can name the terms”. With banks still not crazy about lending for business purchases on reasonable terms and conditions, we are finding vendor finance more common than in the past. This can be a win-win for the parties.

The buyer can secure a larger business, and the seller can receive a better return by investing in something he/she knows.

Earn-outs have become increasingly common in some sectors. With these, part of the purchase price is withheld for a period of time subject to certain sales or profit targets being met.

Employment, or on-going consultancy can also affect price. A business owner may wish to “cash out” but be happy to continue working for the new owner on a part-time or full-time basis, or provide consultancy services. These arrangements can provide security for the new owner (e.g. retaining relationships) plus cash flow and employment for the exiting party.

A well-thought out deal structure can benefit everyone – maximizing price for the seller, minimizing risk for the purchaser, and rewarding the business broker for a successful transaction.

Who Are Potential Buyers?

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Once a business owner has made the decision to sell, he or she should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying businesses have also become more divergent and complex. The following are some of today’s most active categories of business buyers:

Family Members

Members of the seller’s own family form a traditional category of business buyer – a category of buyers that is “tried” but not always “true.” There is something appealing about a family member taking over the business. There is a sense of keeping the business in the family and an assumption that such an arrangement will translate into the prime advantage of continuity. Continuity may in fact be the result as long as the family member buying the business treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.

Too often, however, the difficulty with the family member as buyer lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business itself and/or to the sales transaction, not to mention the impact on family relationships. An outside buyer eliminates these often insoluble problems.

When considering a family member as a buyer, a business owner should carefully evaluate three factors: ability, family agreement, and financial worthiness.

Business Competitors

This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.

The Foreign Buyer

Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.

These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.

Synergistic Buyers

These are buyers who feel that a particular business would compliment their business and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.

Financial Buyers

This category of buyer comes with perhaps the longest list of criteria and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money—such as selection of key employees, location, and other issues.

For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.

Individual Buyer

When it comes time to sell, most owners of the small to mid-sized business gravitate toward this category of buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream of theirs, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.

The buyer who needs to replace a job can be an excellent prospect. Although owning a business is more than just a job, and the risks involved can frighten this kind of buyer, the buyer without a current job will have the “hunger” necessary to take the leap. A further advantage is that this category of buyer comes with fewer complications than many of the other types.

A Final Note

A business intermediary has the experience needed to sort out the “right” type of buyer.

Why Sell?

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There are a number of different reasons why selling a business can be an emotional event. The business may have been in the owner’s family for generations. The owner may have built it from scratch or bought it and then poured the necessary energy into it to grow it into a successful, profitable business. For these and many other reasons, “seller’s remorse” is actually one of the major causes of a deal falling through. However, despite the emotional ties to a business, there are times when selling is the best course to take. Here are just a few examples of those times.

Burnout

According to industry experts, burnout is a major reason owners consider selling their businesses. Over time, the long hours and 7-day workweeks can take their toll. On the opposite end, business owners who thrive on challenge may get to the point that the business has just become boring – the challenge of creating it or growing it has been replaced with the mundane daily activities of running it. Losing interest in one’s business usually indicates that it is time to sell.

No succession option

Sons and daughters may be disenchanted with the family business by the time it’s their turn to take over. They may have their own dreams to fulfill that do not include the family business.

Unexpected circumstances

This is the number one reason a business owner should make plans about selling even if he or she is not planning to sell for many years. A good question for a business owner to ask is, “If an unexpected circumstance should occur tomorrow that would require me to sell my business, what would I wish I had already done?” Unexpected events include such things as accidents, illness of owner or family members, divorce, and partnership issues. Unfortunately, these events are seldom predicted, and too many times, a forced sale does not bring maximum value.

Need to cash out

The need to cash out may be caused by an unexpected circumstance, such as a costly accident or illness. Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. In such situations, an owner in need of additional cash has two options: borrowing against the assets of the business or selling the business.

Outside pressure

Successful businesses create competition. There are times when a business owner discovers that the competition has built to the point where it is easier to join it than to fight it.

An “out of the blue” offer

There are times when a business may not even be on the market, but someone or some other company sees an opportunity and makes an unexpected offer. This may be a great time to sell as the owner is likely entering the negotiations from a position of strength.

There are obviously many other reasons why businesses are sold. The most important factor is that the owner is convinced that it is time to sell and has a clear understanding of his or her reasons. And, whether that time is now or many years in the future, the wise owner will consider the following: “The time to prepare to sell is the day you start or take over the business.”

The Process of Selling Your Business, Completing the Sale Page 5 of 5

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Completing Your Sale

 

Due Diligence

The period between offer and approval and closing could be the trickiest. Contingencies need to be removed, 3rd parties must get entangled, and the final details need to get nailed down. Required research, the method in which a Buyer will perform the jobs critical to confirm the financial and operations information represented by the Seller, and a Seller will confirm the finance and business strength of a buyer, is usually the 1st action item that follows offer and acceptance.  A buyer could have his accountant aid or perform required Due Diligence.

To keep up a smooth exchange, and to reduce the potential damage in the event of a sale fail, we provide one or two tips referring to Due Diligence:

 

  • Don’t permit in depth required Due Diligence to be performed till offer and acceptance has been reached.
  • Have a clear time-frame incorporating the process. A time-frame in which mandatory info will be supplied, and a time-frame in which required Due Diligence will be finished, keeps an exchange moving in a forward motion.
  • Don’t move on to other contingencies concerning 3rd parties (lease transfer arrangements, provider transfer agreements, for example), till the Due Diligenc contingency has been removed.

 

Sale Documents

Once all the other contingencies have been removed, your lawyer will draft the sale documents important to complete the transaction and the purchaser’s lawyer will examine and approve or make changes. It is vital that both parties are represented by legal counsel. Contracts executed in a normal business sale carry major default implications for both parties.  Sale documents prepared may include a Sale Agreement, a Bill of Sale, a Non-Compete Agreement, a Security Agreement, and Private Guarantees.

 

Escrow

Escrow closing (the conclusion of the sale), frequently happens at an escrow office or other location neutral to both parties. A business escrow service will prepare closing statements, work out and break up pro-rated costs and money, perform the searches important to convey clear title to property, file liens for the vendor, and coordinate the execution of sale documents and the collection and disbursement of sale proceeds. Escrow costs are generally split between the Buyer and Seller similarly.

The Process of Selling Your Business– Offer and Acceptance Page 4 of 5

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An offer may come first as a Letter of Intent (LOI).  It’ll generally include the price and terms being offered, the sale structure (asset sale versus stock purchase), a closing date, contingencies and conditions of a sale.

Terms presented in an offer may outline the payment method, scope and length of a non-compete agreement, transition terms, incentive payments, identification and condition of assets being bought, identifying of liabilities to be thought, any seller guaranties, and other exchange details. Contingencies will detail all action items needed before completion of sale.   Verification of monetary and operations information ( Due Diligence ), acceptable inspections, adequate lease transfer arrangements, adherence to licensure and regulatory bodies certifications, financing approval, lawyer review and approval of all sale documents, are all common sale conditions. Contingencies will most likely be tied to completion dates. An offer might be accepted, defied, or changed and presented back to the buyer as a counter-offer. Till agreement is reached by both parties, either party may withdraw their offer. In considering an offer, be certain to appraise the purchaser’s qualifications, financial resources, and methodology of securing any payments to be made. A great price from a risky buyer won’t be the best answer.

The Process of Selling Your Business, The Confidential Marketing Memorandum Page 3 of 5

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The Confidential Marketing Memorandum

 

The Confidential Marketing Memorandum

 

The information presented to a certified buyer after execution of a non-disclosure agreement may include :

 

  • A record of your business
  •  An top level view of your business, including info about your firm’s services and goods, operations info, and staff structure
  • Information concerning your market, including client mix, rivals, and industry developments
  • A listing of the assets included in the sale
  • Information per your facilities, including lease terms, for example.
  • Fiscal info that might include : Balance Sheets, Earnings Statements, details on any liabilities to be assumed, equipment leases
  • Details on the price, terms, and sale structure of which you are providing your company

 

Private or sensitive information need only be disclosed during Due Diligence process.

 

 

 

 

 

 

The Process of Selling Your Business– Confidentiality Page 2 of 5

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Marketing Your Business

Once you’ve established offering price and terms, your hunt for the right buyer starts. Customers might be found through a specific search of potential applicants in your industry, or maybe the business ventures section of local and regional papers. Pro business brokers are in communication with several qualified prospects, and aid in the circumspect search and screening of strategic consumers. The Significance of Confidentiality is the KEY in keeping up the goodwill of your company and in minimizing the interruptions of the work place during the promotion of your business. Doubtful about the way ahead for an organization that is for sale, staff and consumers could start to look somewhere else for work and services. It is generally best to delay until an exchange looks imminent before vital people are told of a sale. To help minimize exposure, categorical information pertaining to your company should be made public only to qualified shopper prospects after they have executed a non-disclosure agreement.

A certified buyer prospect is an entity which has established:

*  A need to acquire a company

*  Monetary capacity critical to complete your exchange

* The qualifications and resources critical to run your company

* The eagerness and capability to go forward in an opportune fashion.

The Process of Selling Your Business Part 1 Of 5

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Valuation & Structuring a Sale Price

The value of any business is the price and terms that a consumer is content to pay, and a seller is content to accept for that company.

That said, a professional business broker will have the power to supply an opinion of worth that reflects what a consumer would expect to pay, given an arm’s length exchange. There are plenty of valuation techniques, and one must take care to include the numerous factors 100% unique to each business.

Very frequently, easy industry “rule of thumb” analysis techniques aren’t relevant to your business.

While it is normal to use an EBITDA or some multiple/ratio to establish value there are several reasons for that proportion to alter.

For Instance :

Provable revenue has a higher acknowledged worth than non-recorded revenue ;

Repeat income has a higher accepted worth than does one off sales ;

A well diverse client base has a higher acknowledged value than a customer base that includes 1 or 2 buyers accounting for the majority of all sales.

Industry developments, company trends, company history, FFE  price and condition, capital wants, entry barriers, intellectual property, worker turnover, and owner’s obligations are simply a few of the factors that may impact a firm’s value.

Building a reasonable price with terms competitive with other companies for sale will help you in achieving acceptable results. Your business broker or other pro will work with you to find that range.

Structuring a Sale Price.

Alas, establishing a price is only a bit of the puzzle! Valuation is mostly determined with the presumption the seller will be offering terms compatible with the present market.

If you’re thinking about retirement, offering longer than “market” terms could be of advantage to you alongside upping your chance of finding a professional buyer. If you’re in a scenario where a all cash sale is the sole possible alternative, your business broker can work with you to explore diverse sales structures including presumption of liabilities by a buyer as a type of payment, 3rd party financing, or discounted sales costs.