Why Deals Fall Apart
There are lots of reasons why the sale of a business falls apart. The reasons can be grouped into four major categories: those caused by the buyer; those caused by the seller; those caused by a third party; and those caused by “acts of fate”. (Anything that does not fit the first three categories can be lumped into this fourth category of things that just happen.)
Sellers
Some sellers really don’t a valid reason for selling. Without a strong commitment to selling, a deal is very difficult to hold together. Some sellers are just testing the waters. Others are holding out for a price that is just not supportable by the numbers. Sellers who didn’t check with their tax advisors or other outside advisors may be in for some surprises forcing them to withdraw from a pending sale. An unusual, but common, reason is that the seller panics about what they will do once the business is sold.
Buyers
One could almost change the Seller’s information above and label it Buyers. Buyers may discover some unknown (or unmentioned) problem, such as an environmental issue or governmental one.
Many buyers realize during the due diligence process that they aren’t cut out to run a business. Or, they can’t make that “leap of faith” necessary to buy their own business.
Third Parties
Landlords are probably the leading third party cause of a sale not being completed. The next biggest cause comes from outside advisors giving overly aggressive advice to buyer and/or sellers.
Many outside advisors, in their zeal to assist their clients, forget that the goal is to put the deal together.
Acts of Fate
This includes everything else! The seller may not be able to substantiate, at least to the buyer’s satisfaction, the earnings of the business. Problems may arise, unknown to either party, from federal, state or local government agencies.
Your professional business broker is aware of all of the reasons outlined above and knows how to deal with them. Although business brokers cannot provide legal advice, they are quite familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in business transactions. These attorneys will usually be more efficient and cost-effective than attorneys who do not specialize in business transactions.
Pre-Sale Tuneup
Business owners are often asked, “Do you think you will ever sell your business?” The answers vary from: “Only when I can get my price” to “Never” to a realistic “I don’t really know” with everything else in between. “When will you sell your business?” is often asked, but very seldom answered. Certainly, misfortune can force the decision, but no one can predict this event. Most don’t believe or accept the old expression that advises, “It is always a good idea to sell your horse before it dies.”
There is an also an old adage that says: “You should start planning on exiting your business the day you buy or start one.” You can’t predict misfortune, but you can plan on it. Unfortunately, most sellers wait until they wake up one morning, and just drive around the block several times working up the courage to begin the day working in their business. This is a common sign of “burn-out” and is an-going problem with small business owners. Or, they face family pressure to start “taking it easy,” or to move closer to the grandkids. Now what?
There are really only four ways to leave your business. Obviously, the easiest is to put the key in the door and walk away. It’s also the worst way! The years of hard work building a business has a value. Another way is to transfer ownership to one’s children or child. Assuming one of them is interested and capable, it can mean a successful transfer and a possible income stream. A third way is to sell it to an employee. The employee may know the business, but may lack the interest or skill for ownership or the funds necessary to pay for it. The fourth way, and the one taken by the majority of small business owners, is to sell it and move on. Every business owner wants as much money as possible when selling, so now may be a good time to begin a pre-exit or pre-sale strategy. Here are a few things to consider.
Buyers want cash flow.
Buyers are usually buying a business with a cash flow that will allow them to make a living and pay off the business, assuming it is financed – and most are. Buyers will look at excess compensation to employees and family members. They will also consider such non-cash items as depreciation and amortization. Interest expenses along with owner perks such as auto expense, life insurance, etc., will also be considered. A professional business broker is a good source of advice in these matters.
Appearances do count.
Prior to going to market, make sure the business is “spiffed up”. Do all of the signs light up properly at night? Replace carpet if worn; paint the place and replace that old worn-out piece of equipment that doesn’t work anyway. If something is not included in the sale – like the picture of Grandfather Charlie who founded the business – remove it. An attractive business will sell for much more than a tired and worn-out looking place.
Everything has value.
Such items as customer lists, secret recipes, customized software, good employees and other off-balance sheet items have significant value. They may not be included in a valuation, but when it comes time to sell, they can add real value to a buyer.
Eliminate the Surprises.
No one likes surprises, most of all, prospective buyers. Review every facet of your business and remedy any problems, whether legal, financial, governmental, etc., prior to placing your business up for sale.
Your professional business broker can assist in all facets of preparation. They know what buyers are looking for and they also are familiar with current market conditions.
Read MoreThinking About Selling?
Here are some tasks business owners should consider completing before going to market to help their
businesses sell.
- Remove any items not included in the sale. That family heirloom portrait behind the counter of Grandfather William, founder of the business, should be removed.
- Remove or repair any non-functioning equipment.
- Prepare an operations manual to show a new owner all the functions of the business, how things are done, the major customers and suppliers, samples of advertising, and any other information that would help a new owner manage and operate the business.
- Take care of any outstanding bills and resolve any legal, tax, or governmental issues.
- Bring your financial statements up to date, and have your accounting professional prepare them for a buyer’s inspection.
- Clean up the business inside and out. Fill the shelves, clean up the inventory, and paint the interior if necessary.
When Is the Best Time to Sell Your Business?
Many experts say that the best time to sell is when the business is better than it’s ever been. This may be good advice, but few follow it. Why sell when business is good? You just suffered through a few not-so-great years and now the experts are telling you to sell? Right or wrong – good or bad – the decision to sell is generally event-driven. For example: declining health, a partnership break-up, personal issues, too much competition, family member elects not to purchase the business, etc. Retirement sounds like a good reason, but it has no time pressure, unless a seller has made the decision to retire at a certain age. Even then, when the seller realizes that he or she will have nothing to do after a sale…the idea loses its appeal.
However, one thing that a seller can do, without creating any pressure about selling or not selling, is to take a bit of time every year and prepare – just in case. This means tying up loose ends. Make sure financial records are current and complete, leases reviewed and renewed if necessary, any litigation resolved if possible, licenses and permits updated, agreements and contracts renewed and updated if necessary. You could call this eliminating the surprises, and you could also call it good business.
By doing this, if a potential sale comes out of nowhere – you’ll be ready.
Confidentiality Agreement – What Is It ?
Confidentiality Agreement – A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others.
It is common practice for the seller, or his or her intermediary, to require a prospective buyer to sign a confidentiality agreement, sometimes referred to as a non-disclosure agreement. This is almost always done prior to the seller providing any important or proprietary information to a prospective buyer. The purpose is to protect the seller and his or her business from the buyer disclosing or using any of the information provided by the seller and restricted by the confidentiality agreement.
These agreements, most likely, were originally used so that a prospective buyer wouldn’t tell the world that the business was for sale. Their purpose now covers a multitude of items to protect the seller. A seller’s primary concerns are to insure that a potential buyer doesn’t capitalize on trade secrets, proprietary data or any other information that could essentially harm the selling company. A concern of the prospective buyer may be that similar information or data is already known or is being developed by his or her company. This can mean that both parties have to enter into some discussion of what the confidentiality agreement will cover, unless it is general in nature and non-threatening to the prospective buyer.
A general confidentiality agreement will normally cover the following items:
- A general confidentiality agreement will normally cover the following items:
- The purpose of the agreement – it is assumed that in this case it is to provide information to a prospective acquirer.
- What is confidential and what is not. Obviously, any information that is common knowledge or is in the public realm is not confidential. What information is going to be disclosed? And what information is going to be excluded under the disclosure requirements?
- How will confidential information be handled? For example, will it be marked “confidential,” etc?
- What will be the term of the agreement? Obviously, the seller would like it to be “for life” while the buyer will want a set number of years – for example, two or three years.
- The return of the information will be specified. For example, if the sale were terminated, then all documentation would be returned.
- Remedy for breach or determine what will be the seller’s remedies if the prospective acquirer discloses, or threatens to disclose any information covered by the confidentiality agreement.
- Obviously, the agreement would contain the legal jargon necessary to make it legally enforceable.
One important item that should be included in the confidentiality agreement is a proviso that the acquirer will not hire any key people from the selling firm. This prohibition works both ways: the prospective acquirer agrees not to solicit key people from the seller and will not hire any even if the key people do the approaching. This provision can have a termination date; for example, two years post-closing.
The sale of a company involves the disclosure of important and confidential company information. The selling company is entitled to protection from a potential acquirer using such information to its own advantage.
The confidentiality agreement may need to be more specific and detailed prior to commencing due diligence than a generic one that is used initially to provide general information to a prospective buyer.
Tips on Maintaining Confidentiality
- Use a code word or name for the proposed merger or acquisition.
- Don’t refer to any principal’s names in outside discussions.
- Conversations concerning the merger or acquisition should be held in private.
- Paperwork should be facedown unless being used.
- All documents should be kept under lock and key.
- Important data maintained on the computer should be protected by a password.
- Faxing documents should be done guardedly.
