Top 10 Ways Selling Your Business Can Go Wrong
I came across this article from Axial that does a good job illustrating some of the pitfalls or challenges that can cause a deal to go sideways when trying to sell a business. Here are a brief description of the top ten ways selling your business can go wrong. To read the entire article click here.
1. Unrealistic Value Expectations
The number one reason deals fail to close is because a seller’s valuation expectations are too high.
2. Unclear Story Elements
Often, because of poor strategic planning, the business owner cannot articulate clearly the company’s competitive advantages, its growth opportunities, its revenue potential, and its ability to produce significant returns on invested capital.
3. Quality of Earnings
Audited financial statements confirm financial accuracy and help validate forecasted performance. Lack of clarity and visibility regarding key business drivers, sales pipeline backlogs, back office operations, and the consistency of growth and earnings inhibit a buyer’s enthusiasm to continue its due diligence.
4. Length of Time
Every deal has a life of its own and its own momentum. Recognizing the ebb and flow of the deal momentum is critical to deal success
6. Customer/Vendor Concentration
If a significant amount of revenues is concentrated in a few customers, or if critical supply chain raw materials are concentrated in one vendor, the buyer’s perception of risk is elevated substantially.
7. Renegotiating Terms of the Deal
Renegotiating the terms, conditions, structure, and representations and warranties of a settled deal can be a deal killer
8. Lack of Robust Internal Controls
Frequently, the buyer’s due diligence process will reveal sloppiness (or worse) in internal controls (e.g., weak collection processes for aged receivables, manufacturing error rates, aberrations in the financial statements, regulatory filing inconsistencies).
9. Reaching for the Last Dollar
It is completely understandable that sellers who have put everything into their business want to get every dollar they can out of their business.
10. Inadequate Advisors
Selecting a quality deal team is critical to deal success. Business owners are very good at building successful businesses, but often stumble when seeking to monetize them in some form of exit.
© Copyright 2015 Business Brokerage Press, Inc.
Read More3 Costly Estate Planning Mistakes Business Owners Make
1. No estate planning at all. This one is a no brainer and a mistake that is common to everyone not just business owners. No estate planning documents means that the family must go through the Probate court to handle all personal and business related issues if the business owner becomes incapacitated or dies. This is costly on a number of levels because dealing with the court is expensive, slow, and stressful for all of those involved and it causes a disruption to the business itself.
2. Establishing a Trust but Failing to Fund the Business into Their Trust. Again, this mistake is extremely common to everyone. A trust is simply a legal contract which allows for the private (outside of court) management and distribution of one’s assets upon their incapacity and death. It is an estate planning tool used primarily to avoid the Probate Court. While it can be a very effective tool, the Trust will only control those assets which are formally and legally tied to the Trust. The common misconception is that if an asset is listed or named in the Trust documents somewhere, it is automatically under the control of the Trust.
THIS IS SIMPLY NOT TRUE!
Example: Business Owner sets up a trust for the benefit of him and his wife during his lifetime, with his children named as secondary beneficiaries upon both of their deaths. He neglects however, to change the title of his business to the name of the Trust. When he dies, his interest in his business entity (S Corp., LLC, Sole Prop.) is vested in his name. When he dies, a Probate court proceeding is required to transfer his interest in his business to his wife because simply naming the business itself in the trust documents is not sufficient to transfer his interest to the trust. Generally, the issuance of new stock shares, a book transfer, or assignment is required for the formal transfer of the business interest depending upon the type of business entity.
3. No Buy Sell Agreement or Business Continuation Strategy. When a business owner becomes incapacitated or dies, the business either has to be sold or it can be continued by another party. However, the mechanism by which this happens needs to be spelled out specifically and plans made ahead of time to provide for the efficient transition of the business. Even if the court is not involved in this process because the business owner has provided for it to be handled through their trust (see Number 2 above), there are a number of issues which should be addressed in more specificity that is best addressed in an additional document such as a Buy Sell Agreement. Some of these issues include the terms of the sale/transfer and the method for valuing the business. A lack of specific instructions can cause a disruption to the business and disagreements among the parties involved.
The moral of the story is that court is expensive, time consuming, and frustrating to deal with. By having properly funded estate planning and business planning in place, business owners can avoid the unnecessary burdens and costs to their families and their businesses of having to deal with the court system.
Cecilia Tsang
Sacramento, CA
Read MoreWhy do Deals Fall Apart when Selling a Business?
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 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
There’s an old saying that “Time and Surprises” will kill a deal. The key is for both the seller and buyer to keep this in mind and be as transparent and keep the deal moving along best you can.
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