January 12, 2023
WHY DEALS FALL APART (and what to do about it)
By Gary Herviou
The process of selling your business can be a very rewarding experience – both financially and in terms of lifestyle for you and your family. If handled properly, executing a successful sale to a 3rd party can certainly meet all ownership goals and benefit the organization (including its valued employees) moving forward. However, if improperly handled, an attempt at selling a business can be a nightmare fraught with complex challenges that will surely doom the effort to fail. This can be extremely demoralizing to the owner and put the organization at undue risk.
As Achim Neumann, President of A Neumann & Associates, LLC. and one of the foremost respected M&A advisors on the East coast, says in his 2017 book entitled The Road Beyond – What Nobody Tells You About Selling a Midsized Business, “The transfer of a privately owned business is a very complex transaction with many considerations, elements and factors to be taken into consideration. A business sale is often quite different from what the owner manages on a daily basis and certainly takes them out of their comfort zone. Whatever the ultimate motivation or timing is for the sale, what is most important is setting the planning into motion with as much lead time as possible and having the correct team in place to execute the process correctly.”
Keeping in mind that the business owner can control all aspects of a proposed sale by employing the above-mentioned experienced team and expert process, it is prudent to examine 6 of the most common reasons why a deal to sell a business might fail:
1. Lack of True Motivation to Sell – A fully motivated seller is the #1 most important ingredient needed for a successful sale of the business. Without the business owner being mentally prepared and “at peace” with the decision to sell, it is practically impossible to complete a transaction. The owner’s goals (both monetarily and lifestyle related) must be clearly defined and obtainable. Moreover, they must be willing to go through the process and endure the stress involved in order to meet those objectives. The bottom line is that the seller must be “all in” or it is a doomed scenario.
2. Unrealistic Expectations – In order to be comfortable with a sale, it is imperative that a clear deal structure be defined and supported before going into the market. As a first step, a proper independent accredited fair-market business valuation should be performed and delivered to the owner. A qualified M&A advisor should be in a position to lay everything out for an owner and have all their questions answered. In addition to the value and deal structure, the seller needs to know exactly what to expect from a proposed sale before going into the market – process steps, confidentiality, timeline, tax implications, seller notes, real estate, transition period and life post-closing. If the owner’s expectations are not in sync with reality, then a difficult process to begin with becomes extremely frustrating for all involved.
3. Team Not on The Same Page – In order to complete a transaction, a qualified team of professionals with defined roles needs to be in place to support the owner – CPA, financial advisor, business attorney and an experienced M&A advisor. In addition to this team, it is crucial that all stakeholders be supportive and share the motivation to sell – this is usually spouses, family members and key advisors. The professional team needs to prioritize the transaction and act efficiently on behalf of the owner while the family needs to be on board 100%. Anything less will cast doubt in the eyes of the seller and certainly put the deal in jeopardy.4. The Financial Story Changes – Simply put, if the “financial story” of the business changes while on the market, then the buyers and the banks will no longer trust the opportunity and the deal will evaporate. Financial performance must be estimated, and projections must be met. The marketing docs must be consistent with tax returns. Any negative deviation from projected performance while on the market will certainly open the door to a buyer lowering the business’ valuation and unexpectedly lowering offers – certainly to be declined by a seller with higher expectations. The financials must be strong, consistent and predictable in order to withstand due diligence, qualify for bank financing and get the deal to the finish line.
5. Dependencies & Concentrations – If a buyer perceives a certain threat to continued operations, then a deal becomes much harder to close. The same can be said for the lending financial institution. These threats usually take the form of obvious dependencies or concentrations that can possibly change the stability of the ongoing business. Examples of this include significant sales being directly tied to the owner (or personal relationship), one primary supplier or manufacturer, key employee retiring and (the most glaring) too high a percentage of revenue with one particular client. A simple rule is that “the weakest link of a company will be exploited by the buyer for negotiating purposes”. If a particular threat is too potentially impactful, buyers might walk, and the deal will be off.
6. Poorly Qualified Buyer – Before getting into a deal with a potential buyer, it is critical to know who this buyer is, their management qualifications and their financial capability to complete the proposed transaction. Any proposed buyer must be “a good fit” with the seller and there must be good chemistry, communication, and professionalism between the two. The buyer should be decisive and have a well-prepared vision for success. If the seller is not convinced that the buyer will be successful in growing the company, servicing its clients and taking care of its employees, then it will certainly be an uphill battle to close the transaction. Moreover, if it turns out that the buyer cannot financially qualify for bank financing or properly secure a seller note, then the deal is most certainly doomed.
Now that we have identified some of the most prominent potholes and dangers to completing a transaction – how does a business owner make sure that this does not happen to them? Here are a few basic safeguards that a business seller can take:
• Be Well-Prepared – Truly think about a sale and what is to be accomplished – will that bring true happiness and provide the desired financial result? Be sure to clearly define what is to be accomplished and set realistic expectations.
• Assemble the Right Team – Both professionals and family, all need to serve a role and be dedicated to the success of the proposed transaction. The CPA should be making sure that financial reporting is accurate and the attorney should be protecting interests through the legal documents prior to closing – both in an efficient and pragmatic manner.
• Proper Valuation – An accredited fair-market valuation of the business is a critical first step in understanding the true value and marketability of the firm. The information that is received from this analysis lays the foundation for a successful sale, providing peace of mind and establishing correct expectations well before going into the market.
• The Correct Process – A sales process that is coordinated by an experienced M&A professional will ensure that confidentiality is maintained, buyers will be fully pre-qualified, and an efficient transaction completed. Professional marketing documents, access to the correct buyers, stringent buyer prequalification, expert negotiation skills, accurate financial reporting, and a thoroughly managed approach are all pillars of a successful and discreet transaction process.
As Mr. Neumann adds, “Preparing for and deciding to sell a family or privately held business is a weighty exercise that calls for a thoughtful and proactive approach. The execution of an efficient sale as described above is a complicated process that calls for experience, discretion, and professionalism. The legitimate concerns of a seller must be addressed. Determining the ultimate deal structure with cash at closing defined, preserving confidentiality throughout the process, and maintaining the continuity of the organization are paramount priorities. Proper preparation and an experienced M&A team will go a long way in alleviating any fears involved with a sale of the business and avoiding a failed process.”
If you are thinking about selling your business, you certainly have many things to think about. The process of selling a privately held company is a unique experience and, if handled properly, can result in an extremely rewarding transaction that fully meets the goals of the owner and the firm. Thoughtful planning and a proactive approach will result in an efficient sale of the business on your terms – a transaction that quickly maximizes financial return with the correct buyer in a professional and confidential manner. There is certainly a correct way and an incorrect way to sell a business and it is essential to collaborate with the proper advisors to implement the sale on your terms.
About A Neumann & Associates, LLC
A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or email@example.com