Practical articles to help small business owners when selling and buying small businesses.

5 common problems that crash business sales just before the finish line.

Michael Kerr - Wednesday, October 02, 2019

How to overcome 5 common problems that derail many business sales. 

For owners who are selling their business here is an important general rule to remember.

The closer you get to the end of the process of selling your business the more likely you are to encounter unexpected problems that can derail the sale!

This is how it often unfolds. After a long period getting a business on the market you’ve finally gotten a decent offer from a buyer, you have a deposit, documents are being prepared and settlement dates are being discussed.

It might seem like all of your hard work is just about to pay off. 

What could possibly go wrong? 

A whole lot actually. 

Following are 5 common 'last minute' deal killers and advice on how to deal with them. Left unaddressed they will cause your deal to fall over.The upside is there are usually 'tell-tale' signs that you have a potential issue about to emerge. 

1. The buyer's Due Diligence becomes a fishing expedition.

What started as a pretty straightforward process of checking your financials becomes a 'fishing expedition' with endless requests for more and more detailed information about every aspect of the business covering;

  • Past, current and future financial performance, 
  • Customer loyalty, 
  • Supplier contracts, 
  • Technical & product or service information, and so on. 
The request for more and more information can be driven by very different motives ranging from;

  1. The buyer being genuinely nervous or uncertain, and all the way to 
  2. Less scrupulous advisors to the buyer simply wanting to accumulate more billable hours to be '100% certain'. 
Typically the Due Diligence clause in many offer documents is very standardised. In the really big deals done by the large investment banks negotiation of the terms of Due Diligence is one of the most critical activities.For you the key to avoiding, or at least minimising, this potential issue is to spend more time upfront defining exactly what due diligence you think is fair & reasonable. 
If an offer comes in that wants to significantly widen the definition of Due Diligence then think carefully about what this means for you. 

2. Bank computer says no!

Any offer that is subject to the approval of bank financing should put you on alert. It’s really hard to get finance for small business acquisitions so you need to assess whether the buyer has a realistic chance before going too far down the track with an offer and due diligence. 

To get comfortable ask the buyer how far they have already progressed their loan application and what the proposed terms of the deal will be e.g. are they offering any security?

If they are only borrowing say 40% of the purchase price and they have non-business assets e.g. real estate to secure the debt then it may be realistic. 

If on the other hand the buyer needs 100% finance with no security and is just assuming that they will able to borrow the money then don’t waste time with them.

As with a lot of things you need to pay careful attention to the wording of their 'subject to finance' clause in their offer. If it’s really broad then they could use it as a 'free kick' to get out of the contract at a later stage, just in case they change their mind. 

The best way to tighten this up is to make the subject to finance clause very specific so that it includes;

  1. How much money they are borrowing, 
  2. Which bank or banks they are approaching, and 
  3. What security they are proposing to offer the bank.
3. You have second thoughts about selling.

At a time of high stress you get some unprompted advice from a well-meaning family member of friend which causes you to rethink what you want to do. A great example is "surely your business is worth a lot more than x dollars, after all the effort you put in" 

Fuelled by emotions, that are perfectly natural at such a critical stage, you can easily start to question your original objectives, second-guess yourself and/or generally wonder 'am I really doing the right thing'.

On any given day, and driven by the uncertainty about life after business, your view of the offer you have on the table can change.

By the time you have an offer for your business the chances are that more of your nearest & dearest will know. Most of them will be excited for you and genuinely interested in the outcome. But whether they have the all-round commercial experience and understanding to offer worthwhile advice is another question all together.

Where possible I recommend that you keep your business sale as private as possible and be very careful about who you discuss it with. And write down your personal objectives and plans for life after business. In times of stress and uncertainty it's a great reminder of what you really want to do that will help you 'stay on track'.

4. The buyer try's to renegotiate the already agreed deal terms.

Unless you get your key deal terms tightly defined and written down in a document, regardless of how much you might 'trust' the potential buyer, there is always a high risk that there will be requests or demands for changes to key deal terms. 

You need to capture everything you agree in writing. This can take the form of a Heads of Agreement (which may be legally binding) for the pre due diligence stage and a Formal Contract (which will be legally binding) for finalising the sale. 

If you don’t understand something then don’t agree or sign off on it.

Using a well drafted Heads of Agreement is a great way to minimise the risk of changes to key commercial terms before you have invested a lot time, emotion and money in a formal due diligence process. This is the time when an investment in an experienced commercial adviser makes a lot of sense.

5. Your staff threaten to walk.

Whether you have decided to advise staff early or late in the sale process or, not at all, is a matter for your judgement.But staff getting wind of the sale and threatening to walk out unless they receive an additional financial incentive e.g. a one-off bonus, is a common occurrence.

For many businesses there will be staff who are extra important to the future success of the business, and especially to the prospective new owner.

If they feel put-out for whatever reason those key staff can all of a sudden realise their value to the business. They can use that influence and power to hinder or actually stop you getting the deal 'across the line'.

Be prepared that some staff may request other incentives in order for them to go along with the sale. Whatever this might cost financially needs to be factored in when thinking about what net value you expect to get on sale of the business. 

Engage an experienced commercial adviser and really keep your eyes and ears open for these sorts of potential issues. If you lose a sale in the final stages it is really hard to 'dust yourself off' and restart the entire sale process. There is more time, more costs and a real sense of a lost opportunity.

A big part of avoiding these potential issues all together is to only deal with genuine buyers who you know have;

  1. A proven and legitimate reason to buy your business, and
  2. Demonstrated financial capacity to fund the purchase.

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