Why Deals Break Down

Businessman is balancing on a rope

By Gareth Smyth, Group Managing Director of Hilton Smythe.

Not all deals break down for the same reason, so, unfortunately, even if you learn from one deal failure, it may be another reason that causes the next buyer to withdraw before the finish line. Knowing the top risks for deals breaking down allows an experienced business broker to implement the preventive measures in preparing the marketing materials, anticipating the issues that may surface during due diligence, and recommending solutions to rectify the issues up front.

Keeping a deal on track is a key element of my services as a business broker and one which requires cooperation by the seller.

1.Time kills all deals

Having the paperwork in order is a key to the ultimate close. In anticipation of that requirement, I ensure that all my selling clients provide financial statements, tax returns, leases, key contracts or franchise agreements and any available environmental reports up front. Sellers need to keep bookkeeping software up-to-date and be prepared to provide monthly or at least quarterly sales reports and financial statements.

In addition, a potential buyer, even a highly qualified one, may be on a different schedule than the seller. Although the seller may want a speedy process toward the ultimate close, the buyer and his broker or attorney or accountant may want to take their time at a more leisurely pace. Kids often say, “If you snooze, you lose.” The adult version of that mantra is “Time kills all deals.”

Preventive measure: Be objective

Time kills “Creative” buyers may start looking for negatives about the business, perhaps deferred repairs and maintenance in the building and equipment or dusty old inventory, as a means of negotiating a price. Don’t take it personally if a buyer is suddenly criticising aspects of your business and seeking a financial accommodation. Both parties are nervous of each other and don’t want to give away

too much when they’re negotiating. To avoid the risk of an emotional blow-up between an offended seller and a stressed out buyer, it’s best for the broker to exert a calm demeanour and resolve the disagreement.

2.The seller is inflexible

Rigidity by the seller, in perhaps refusing to consider partial seller financing, or assist with the transition process, or negotiate the asking price, can be a major factor in scaring away an otherwise qualified buyer.

If a buyer feels like he is the only party making sacrifices, then pride and frustration may drive him away.

Preventive measure: Offer compromise

Give yourself a better chance of realising the highest possible asking price by being flexible with the deal structure. You could offer to let the buyer pay you in instalments, or agree to train the buyer if they are inexperienced in the business area.

In cases where you own the property, a short-term rent concession may serve a long-term benefit in making sure the buyer is successful and financially able to pay you rent for the duration of the lease.

3.Undeclared issues.

As the largest and most complex deal many entrepreneurs will ever undertake, the sale of a business requires mutual trust to succeed. Should the due diligence process, where the buyer examines the premises, books, and contracts and so on, reveal any discrepancies in your account of the business, then it can fatally undermine the deal. Many buyers will think “What else is he hiding?” and few buyers will want to negotiate with someone who has flagrantly betrayed their trust.

Preventive measure: Be honest

It’s not just outright lying that undermines trust; stretching the truth or declining to mention inconvenient facts can wreck a deal as well.

Bold, unsubstantiated claims about the potential for boosting revenue or expanding the facility are of no value to a buyer, especially if there has been a downward trend in sales over the past few years.

4.The buyer is a “tire kicker”

“Tire kickers” are the bane of the business seller. Sometimes it’s a competitor with an ulterior motive parading as a genuine buyer; more often than not it’s a window shopper with neither the financial means nor courage to make a purchase.

Either way, some parties will never actually buy your business, regardless of its merits or your cooperation. They will waste your time, distracting you from more genuine buyers and potentially forcing you to accept a lower price down the road.

Preventive measure: Qualify the buyer

How quickly can you identify a “tire kicker” to prevent your time from being wasted?

If you’re on your own in the task of selling your business, you may very well not be able to make that call. Just as you have developed the skills for “reading” your customers, an experienced business broker becomes adept at detecting a tire kicker after just one or two conversations. A good broker will ask buyer prospects a series of questions to gain insight into their history of investigating businesses and their motivations.

5.Lease disputes

A landlord can kill a deal. If you lease the real estate the business operates from and you have a written lease, you will, almost without exception, need the permission of the landlord to transfer the lease.

Preventive measures: Examine lease terms and extend if necessary

If your lease is close to expiring, you definitely want to speak to the landlord as soon as possible, as you need to know their intentions. The landlord may have decided not to renew your lease, which will almost certainly damage the value of your business and force changes to your selling plans.

Most banks will require that the buyer have a lease or options that extend through the loan term, typically 10 years. Most sellers do not want to make long-term lease commitments if they are selling the business, but getting the landlord to provide an additional “option” term should not increase your exposure if it’s properly drafted.

 

 

Hilton Smythe is a UK-wide business broker service that facilitates the sale of small and medium sized businesses.

It employs more than 40 members of staff at its head office in Bolton and across the country. Since its launch, Hilton Smythe has facilitated the sale of more than 350 businesses nationwide.

http://www.hiltonsmythe.com/

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