Having worked with clients over the years on many business acquisitions and sales, I have had the benefit of seeing the process from both sides of the fence. One thing I know to be true is that the deal will only be successful when both parties in the transaction walk away feeling like they have got what they wanted.
In my experience, only 1 in 10 deals go through, and my top 4 reasons for them failing are:
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Lack of financial records
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Lack of customer contracts
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Lack of funds for the buyer
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Lack of goal for the seller
Whilst all 4 pitfalls are vitally important to avoid, which reason do you think is the most likely to scupper a deal? You may be surprised by the answer!
Read on to find out which of these 4 reasons is the serial killer of deals!!!
Lack of financial records
This will always have a detrimental impact on the price you can achieve for your business, as the prospective buyer will naturally err on the side of caution. The financial history of your business will help to evaluate its future profitability, growth potential, and overall health. Without these records, you’re asking the buyer to hold the risk. At best, they will pay you over a longer period of time, or at worse reduce their offer to a level that they feel is right. However, in most cases some form of financial records do exist, so this will rarely stop a deal. However, getting your financial house in order will definitely turn the tide in favour of a successful sale.
Lack of customer contracts
Having contracts in place shows that your customers will be there when you leave, and that the sales forecasts you have given have substance. This will give the buyer more confidence, and will increase the multiple a buyer will pay. Having customer contracts in place not only provides a sense of security, but also demonstrates the stability of your business. Without them, potential buyers might be wary of what they’re getting into. Like the lack of financial records, this will increase the risk to the buyer and therefore lower their offer. But rarely will this stop a deal. If you have been successfully trading with your clients for years, and you help with the handover for a year or so, then the buyer should be fine in retaining the majority of them.
Lack of funds for the buyer
This can stop a deal in its tracks if the seller insists on cash up front, but most deals these days are structured with deferred payments and loan arrangements. If you do want a big chunk of money up front, then make sure your buyer has the funding available before starting the process. Alternatively, only approach potential buyers that you think have the source of funding. But don’t let the lack of funds stop you achieving your goal of selling/buying. There may be plenty of untapped equity in the current business which the buyer can leverage. The seller should always remember that your business is not you. If you want the maximum out, then agreeing to get your money over a number of years will allow this as you are sharing the risk with the buyer. So as long as you get what you want, how the buyer funds this is down to them.
Lack of goal for the seller
Here it is…the Jeffrey Dahmer of deal breakers! More often than not the seller is not ready to sell, but not for business reasons – for personal reasons. They cannot visualise their life once the sale has gone through. In fact, they feel they lose their identity by not being a business owner. Only silly amounts of money will overcome this, and even then I have seen deals fall through, because they don’t know what they would do with the money, or the time it would give them. Even after months of negotiation and on paper a good deal, they back down with excuses, but the real reason is that they are fearful of what their life will be like once they are out.
How to avoid the killer
So, the moral of this story is that if you are looking to buy a business, you have to find out why the owner is looking to sell, and what they plan to do once they have sold, before you enter negotiations. You need to be sure there is an emotional connection to the sale and that they are excited about their new life, otherwise you are just wasting time.
If you are looking to sell, then before you entertain a buyer, you need to be clear what the sale of your business gives you, not just in financial terms, but in life terms. After all, we are only on this planet once, and nobody lies on their deathbed thinking “I wish I had worked for one more year!”
The sale of a business can be a challenging process. To avoid having your sale scuppered, remember, the devil is in the detail, and addressing these common pitfalls can significantly increase your chances of a successful business sale. If you need some advice to ensure you avoid the deal killers, whether you are looking to buy or sell, please get in touch- kevinstansfield@actioncoach.com