What Could Possibly Go Wrong?

We’re often asked – most often by people who are looking to do business with us – what are the worst things we’ve seen happen in the M&A world.  We all have our experiences and our stories, but two major ones always make it to the top – the buyer with no money and the seller with no time.  In this installment, we’ll talk about the former.

The buyer with no money scenario is probably the most frequent problem we hear about from business owners who have attempted, unsuccessfully, to sell their businesses without a broker.  The story begins like this:

The owner, seeking to avoid paying broker commissions, starts sending out discreet inquiries to his business cronies and at the same  looks on-line for listings of buyers looking to make acquisitions.  The cronies ask other business associates if they know of anyone interested in such-and-such type of business (without divulging names), and the word gets out that somebody in a certain industry in a certain geographical location might be looking to sell.  Meanwhile, the seller may or may not find potential buyers on-line who are looking for companies like his.  At any rate, one or more of these activities turns up an interested buyer candidate, and he and the seller meet to discuss a potential deal.  The buyer seems to be a good guy, polished without being slick.  “Not surprisingly, the buyer assures the seller that he has plenty of money to do the deal, not to mention numerous banking contacts that can complete the financing easily,” says Achim Neumann, President of A Neumann & Associates, a New Jersey based M&A Advisory and Business Brokerage firm.  “The seller may be a bit concerned about the financial wherewithal of the buyer, but feels that any attempt to force the buyer to prove that he has the liquid funds would create ill will that would negatively influence the offer or kill the deal entirely.”

The process of finding one or more candidates and coming to some agreement can take weeks, but more often, months.  Hashing out the details of the agreement can take some more months.  But ultimately a deal is reached and the parties plan to close in another month or two.

The papers are drawn up, and the closing date is scheduled.  At the closing, however, there is a problem.  Something has come up with the buyer, and he “no longer” has the liquid funds for the down payment.  In addition, the bank financing hasn’t come through.  The buyer still wants to buy the business, though, so he asks the seller to provide financing to complete the deal.  What would you do?

There are two variants to the “buyer with no money” scenario. In one, the seller cries, “Wait a minute.  You want to buy MY business with MY money?  No way!!”  So the seller calls off the deal.  Some time and money has been wasted, but perhaps he can just start the buyer search process over, right?  Yes, but not so simple.  Over the months of inquiry and discussion and negotiation with cronies, lawyers, and potential buyers, many people have gotten an inkling that the business might just be up for sale.  The best, key employees, and the largest, most important customers, may hear about the pending sale and start looking for alternate, less risky employers or suppliers.  Business performance is in serious jeopardy.

In the other variant, the seller, not wanting to waste all the time and effort he has already put into the deal, says “OK” to the seller financing and the deal goes through.  Whew!  Dodged that bullet, right?  Yes, but perhaps only temporarily.  Many buyers, even those without serious financial “skin in the game,” do well initially as past momentum carried the successful business forward.  But if problems occur – loss of key customers or staff, or changes in the industry – the new owner may not have the proper skills or incentives to right the ship or weather the storm.  “So many deals that rely heavily on seller financing wind up with the business returning to the seller,” says Michael “Mick” Feite, Managing Director Eastern PA.  “But the business that comes back isn’t the business that was sold.  It’s smaller, less successful, more risky – often about to collapse!”

Without a buyer with money and legitimate financial backing, no business deal makes sense.  Only a miracle prevents a disaster.  Most often, the seller at least wastes serious amounts of time and effort – and perhaps money.  At worst, the seller loses everything. This is precisely the reason a “mediating” business broker is needed in the transaction in order to perform the pre-qualification.