Receiving an acquisition offer is exciting. You’ve presented your business (and your professional reputation) on the table and someone has come by and found it appealing.
But before you start planning your retirement, just remember that almost half of all acquisition offers don’t make it to the final stages. In fact, receiving the offer is the easy part. For most business owners, it’s closing the deal that’s difficult.
After piquing a potential buyer’s interest, there are a lot of factors which come into play during the business sale process that could make or break the success of the transaction.
Let's Consider This Example:
You have a business that you are positioning for sale.
To paint it in the best possible light, you set ambitious growth projections for the year.
An acquirer seeing these numbers feels positive and wants to move to the next stage.
So far everything is progressing nicely.
As you engage the acquirer into a due diligence period, they begin to dig deeper. They request updated financials because it’s been a few months since the initial financials were reviewed. They now discover that you are not on track to meet those initial numbers.
This is the first crack in the process.
Buyers don’t like surprises, especially when it comes to the long-term financial validity of what they’re intending to purchase.
The acquirer now adjusts their price down. Of course this does not sit well with you as you you’ve already banked on the initial offer. The discussions begin to break down and when you and the buyer can’t come to a compromise, the deal fizzles out.
Of course we can pin a myriad of reasons to deal failure - poorer than expected financial results, legal issues and operational issues. Many of which do not bubble to the surface until you are further along in the transaction period.
In reality no business is perfect. But ultimately there is a root cause to every single issue that plagues a business deal. The extent to which these issues impact a sale will depend on how much weighting is placed on them by the acquirer and whether they can be rectified during negotiations.
The biggest reason for an acquisition offer not converting to a sale is because of you, the business owner. It’s the actions and inactions of the owner preceding the sale process that in most cases, kills the deal.
It might seem that way, but we see many entrepreneurs who have built successful businesses fall short when it comes time to sell. Mainly because they have not considered their personal drivers, business value drivers and value inhibitors before going to market.
Selling a business is an emotional roller coaster, even under ideal circumstances. There are many ‘moving parts’ and items that will test you. If you decide to embark on this journey, you must be 100% committed. If not, you’ll see the deal unravel before your eyes.
Knowing this, we can analyse why business deals routinely fall apart. By knowing the pitfalls in advance, it will help you avoid backing yourself in a corner and better position you for a successful and profitable business sale, when the time is right.
Here Are The 7 Key Reasons Deals Fall Apart
After pouring years of blood, sweat, and tears into creating and nurturing your business, it’s natural to harbour a deeply personal attachment. For many owners, their personal identity is also tied to the business, so deciding to sell presents many emotional considerations. Questions such as these are common for business owners to deliberate over:
- Is it the right time to sell my business?
- Why am I selling my business? Are there ulterior motives?
- What will I do after I’ve sold?
- Do I really want to sell my business?
- If I hold out, will I receive a higher offer in future?
- If I wait, will I still be able to sell for as much as I can right now?
While simple on paper, these questions are not often easy to answer on your own. Holding a personal attachment could hinder the decision making as you won’t be able to think clearly or objectively.
Having a framework to help answer these questions is critical.
This is where a trusted exit advisor may prove themselves invaluable in assisting with the process. They can help you to clarify your motivations, understand your exit options as well as your personal readiness and business readiness for an exit.
Owners who have a clear understanding of why they want to sell, what their options are, and what they plan to do after the transaction is complete, are more prepared to handle the speed bumps that will undoubtedly pop up throughout the sales process. They will be empowered to make rational decisions rather than emotional ones due to a clear end goal in sight.
2. Lack of Preparation
Lack of preparation is the most common mistake that business owners make. In the same way you would spruce up your house before selling, it's critical to address several key aspects of your business before listing it on the market.
If business owners rush into listing, they could affect their profit margins down the track, either through a lower valuation or by drawing out the sales process through lack of accessible documents or data.
Going into the negotiation phase, if you don’t have information at your fingertips when an acquirer asks, or you can’t explain certain deficiencies and reposition them as opportunities for a new buyer, it’s seen as a sign of weakness and you are not going to close the deal with the upper hand.
There are a number of things that impact the ‘sellability’ of your business. From financial documentation, to leasing issues, staffing problems and a holistic overview of your systems and processes, it’s important to review and improve these aspects before deciding to sell.
Most business owners underestimate the amount of time and effort this preparation takes. It’s advisable to start this process a minimum of 6 months before you go to market - ideally longer.
As a business owner, what happens if you enter the marketplace with a lack of preparation?
Joe had been running his company for 23 years, a manufacturing business which he had grown to $2.5 million in annual revenue...
In 2016 he had a health scare, and suffered a heart attack. Luckily Joe made a full recovery, but he was understandably rattled by what he had gone through. Deep down, he knew part of the reason for the heart attack was due to the stress of running his business day-to-day. After some introspection, he made the decision that, at 67 years old, it was time to prepare for retirement.
Joe believed his business was in a good position financially. He knew things weren’t perfect, but he’d always been able to pay himself a reasonable salary without running into financial problems.
He was involved in running the business intimately, taking a hands on approach, and felt that after a new owner learnt the ropes, they would be able to do just as good a job as he had been able to.
With this mentality at hand, Joe didn’t spend much time investigating his options. He’d known a few acquaintances to sell their companies over the last few years. While he didn’t discuss details with them, they appeared reasonably happy post exit, so he assumed the sales process would be fairly straight forward.
Joe got an appraisal from a business broker but didn’t feel it truly represented what his company was worth. Though they had suggested he make some improvements, he decided to take the business to market quickly and test the waters - after all it was the market that would truly decide the value of his business.
Unfortunately this didn’t work out the way he anticipated.
He was disappointed at how few buyers viewed his business and eventually Joe decided to pull the business off the market.
Owners with this mindset are generally unprepared. They have not done their homework, it’s unlikely that they have gone through an internal due diligence nor developed a process they can put potential acquirers through. They are putting themselves at a huge disadvantage. Unfortunately, this may also damage any future chances of selling the business as well.
If the owner decides to relist after learning from the mishaps during the first round, they may find themselves in a harder spot than before. A certain pool of buyers will have formed perceptions (either fairly or unfairly) and view the business as tainted.
That either the seller is indecisive and won’t see through the sales process, or that something is wrong with the business.
It’s then up to the seller’s advisory team to prove these perceptions are wrong, ease buyers concerns showcase the financial validity to a potential acquirer.
Regardless, it’s not the ideal position to be in from the outset of the negotiation period.
The best way you can prepare for the sale of your business is to give yourself enough runway to make a difference. Find an exit strategy advisor, they will be able to identify your personal goals and lifestyle requirements, perform the appropriate benchmarking analysis to understand where you are and what needs to be done, then provide you with an effective exit strategy.
You’ll have someone experienced to guide you through negotiations, ensure you’ve completed a sell-side due diligence and introduce you to a specialised team of advisors that will help you finalise the transaction such as an accountant, lawyer and wealth advisor (to help you protect your proceeds after the sale).
3. Hiding Problems From Advisors
You may be accustomed to omitting or downplaying any problems of your business with your customers, vendors and other key stakeholders.
After all, who doesn’t want to present their business in a positive light as a well-oiled machine?
Although hiding problems from your advisor comes with much harsher consequences.
Much like a lawyer, your advisor needs to know everything no matter how embarrassing it may be, lest it lead to a deal breaker during negotiations.
- Was there an issue with the ATO due to your ‘creative’ tax reporting?
- Was there a legal issue raised by an employee in the past?
- Do you have a silent minority owner no one else knows about?
Whatever the situation, it’s crucial for your advisor to know about every aspect of your business. If you fail to do so, rest assured it will be unearthed during your acquirer’s due diligence process.
When it does, it may ruin any chance of you selling your business both now or in the future.
Almost every successful business owner has had to go through the often uncomfortable and vulnerable process of revealing their business’ flaws for advisors to see.
Exit advisors aren’t judgmental. Instead, they will be able to come up with strategies in order to counteract or minimise any flaws. But, first, they need to know which flaws they need to focus on.
If a buyer uncovers a problem you’ve been trying to sweep under the rug, it will mean you’ll lose your professional credibility. It’s likely the deal won’t be able to recover from this and will fall apart or will close at a discounted sale price than originally discussed.
All this may be avoided by providing a comprehensive overview of your business, including troubleshooting problem areas before they become a problem.
4. Hiding Problems From Buyers
Misrepresentation is a serious matter and can have deep implications in a business sale.
Let’s look at this from a few different angles.
As we’ve already discussed, putting all your cards on the table for your advisor to see is very important. A good advisor will be able to navigate the challenges and develop the right strategy for you.
However, some sellers choose not to reveal certain information to their advisor or the buyer hoping that it may be overlooked. It’s a very dangerous game to play and can backfire with devastating effects. Remembering that a buyer hates surprises, they’ll despise you more if they feel you were intentionally withholding or covering up information.
Where the misrepresentation is not picked up until after completion and losses flow to the new owner, you might face the transaction being voided and either having to reverse the deal or pay damages to the buyer.
It’s common for issues to arise during the presentation of financial information. While you may not be deliberately misrepresenting information, this is why it’s very important to make sure you involve the right advisors to help you understand the financial information that you have been given. You need to be able to verify and check those figures independently.
5. Loose Lips Sink Ships
Maintaining confidentiality around the sale of your business is top priority. If word gets out to your creditors, customers, competitors or employees, this could trigger a negative reaction, which could damage your business and weaken its market value.
What is likely to happen if employees, customers, or competitors find out you are selling your business?
Employees - In a worst case scenario, your employees will update their CV and look for a new job immediately. It may affect their mental health with additional anxiety or stress, which will affect productivity.
Competitors - If found out, they may aggressively compete against your company, while trying to poach your customers too with the lure of a more stable business environment.
Customers - If they feel uncertain about the future they’ll lose confidence. They may consider taking their business to your competitors prematurely.
Finding the right time to inform your employees and customers of a sale is difficult. It’s recommended to wait until after the negotiation is finalised, and the deal has been signed.
For more information about the right time to tell employees you are selling, check out our article - Selling Your Business? How to Break It To Your Staff
6. Not Letting Your Broker Do The Heavy Lifting
Although business owners spend a lot of time negotiating, the stakes are usually a lot lower. So when it comes time to sell your 6 or 7-figure company, you need to move over and let the high-stakes negotiations begin, with the experts at the wheel.
It’s imperative to have a good broker on your side. Negotiating the sale of a business not only requires technical skills, it calls for experience, tact and diplomacy. As the owner of the company, you are ‘too close’ to it. We find that anxiety gets in the way and impacts your negotiation skills. After all, your business is your baby. You’ve spent years nurturing it and it’s natural to be sensitive as you transition it to someone else.
Often when a buyer and seller start to engage in a business sale, things start off really positive and you can be lulled into a false sense of friendship. Numerous deals have fallen through when a buyer and seller start speaking without the knowledge of the broker (or against the advisor’s strategy). It causes confusion, and conflicting messages are often sent to the buyer. The buyer then has to work out what your true intentions are.
While there will be plenty of time to communicate with a buyer, your broker will ensure this is handled appropriately. Having an ‘arms length’ relationship with the buyer can shelter you from many awkward discussions during the transaction process.
Remember, you usually only have one shot to sell your business. It’s not something you get to practice often, that’s why you need to have trusted advisors in your corner. They’ve played this game before and have the experience to get the deal done.
7. Losing Focus On The Business
It’s easy as a seller to become distracted during the selling process. But during this time, it’s more important than ever that the business keeps performing. Your job is to run your business as if it’s not being sold. It’s the best way to maintain a strong negotiating position throughout the duration of the sale.
It often takes a lot longer to close a deal than most business owners anticipate. You may even entertain a few buyers before one finally closes. If you take your eye off the ball during this time and perhaps lose a key customer or contract, it is going to change the terms of the deal . Buyers will be scrutinising your projections, watching closely to see if anything changes the longer term trajectory of the business.
It’s imperative to keep applying the right resources to the business and avoid distractions during this critical time. Stay focused on your existing customers, as well as trying to grow leads for new ones.
A good exit strategy advisor will help keep you focused on your business while they handle the intricacies of the sales process. They’ll be the point person for qualifying and vetting buyers, taking care of early stage discussions and guiding the due diligence stage.
Ready To Sell?
The sale of a business can be an emotional and disruptive time for any owner.
While it's almost impossible to predict the exact outcome of any sale, if you are aware of the most common deal killers you can take the necessary steps to avoid them and increase the likelihood of a successful company acquisition.
At Exit Advisory Group, we help entrepreneurs develop growth and exit strategies to maximise their wealth and provide options.
We do this by giving business owners the tools and strategies to design more profitable, efficient and enjoyable businesses to own - that are also less dependent on them. When they choose to exit, they are in the best position to unlock the wealth in their business and be rewarded for their hard work.
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