No, this article is not about religion; although for those of us in the business brokerage industry, getting the deal done becomes a religion. Every brokerage deal I have ever been involved with has at one point in the process effectively died. Fortunately, even though many deals suffer setbacks, they still can and do consummate. The important concept is that just because a deal has gone sideways, it may still be salvageable. We always continue working on the deal until the coffin is definitely shut. Why do deals die? Here are just a couple of reasons with perhaps some anecdotal remedies.
Financing the deal is always challenging, and securing the financing for the buyer through banking sources is truly the bane of our existence. Having multiple lending sources available is paramount. Just when it appears that the deal won’t work because of the lending community, another viable source comes to the rescue. For some odd reason, one lender won’t get its arms around a deal while others will; and it happens interchangeably. An important factor to realize is that the banking community in general (and banks individually) go through cycles. One day they are begging for deals, the next they can’t be satisfied with a perfect deal. The key is to just move on once a deal has been rejected. Getting turned down from one bank is not necessarily indicative of the merits of the deal; submit it to another reputable lender. By the way, the current environment for SBA financing is excellent.
I doubt there is anything worse than spending a lot of valuable time with a buyer, including meeting with seller clients and structuring a letter-of-intent, only to find out that the buyer exaggerated his/her ability to financially close the transaction. When a buyer indicates they have $300,000 in capital to fund a project, rather than taking their word carte blanche, find out specifically where the money is. If their money is liquid and immediately accessible, great. Just because they are in the process of selling some real estate, or they have some money tied up in their 401-k doesn’t mean they are ready to execute on a business acquisition. They key is to effectively interview the buyer and review his/her financial statement to understand every line item. I’ve even dealt with buyers who put value on their financial statement attributable to their uncle who said he would help fund a transaction. I’ve found that buyers, who are counting on family or friends to fund the deal, are likely not real buyers.
The longer I’m in the brokerage arena, the more detailed questions I ask of the seller before starting an engagement to sell a business. Having ghosts in the closet, or undisclosed issues on the part of the seller, is a sure fire way to kill a deal. The remedy is to ask the seller pertinent questions such as: “Are the financials statements accurate in their entirety, or are their income and expense items missing? – the buyer will likely find them if there are”. Or another good one is: “Is there any outstanding litigation currently against the company, or any anticipated? – we don’t need any surprises before closing (or after for that matter)”. And of course an important question to understand is: “Tell me specifically why you are selling the business? – is there any other reason why you are selling now?” Resolving these and other questions will help prevent the deal from dying midstream. It can be very frustrating to be within a few days of closing on a transaction only to have a due diligence item raise its ugly head.
Understanding why the business is for sell is paramount. I’ll never forget being within a day of closing and having a seller say, “I’m not going through with the deal; I just can’t part with the business – sorry”. Know why the seller is selling and what he/she plans on doing post transaction. Sellers who have a concrete idea of what they’ll be doing in a few months are great clients, those who have no idea are suspect.
-Bradley G. Marlor MBA, M&AMI, CBI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary. Utah Business Consultants is a full-service Business Brokerage and Valuation firm
While there are several distinct benefits to consulting with a quality business broker before buying or selling a business, one of the top such themes is the ability to correct misinformation. Business valuation and selling, like many other areas, is rife with myths and misconceptions that have arisen over time for a variety of reasons, but a top business broker can ensure you don’t fall victim to any of these myths during important negotiations.
At Utah Business Consultants, we’re here to help with everything from business valuation to exit planning and much more. Let’s go over a few of the top misconceptions that have made their way into the mergers and acquisitions world, setting the record straight in some important areas.
Misconception #1: LOI Signals Negotiations Are Over
LOI stands for “letter of intent,” and it’s a very important piece of any sale. However, some buyers or sellers have a tendency to look upon this document as a final sale – this is false and potentially dangerous.
Until there’s a specific purchasing agreement in place, an entirely separate document, no business sale has been truly completed. There’s a big gap between these two things, one that involves several areas of due diligence to ensure that intent to purchase is realized in reality. Lots can change during this due diligence process, so understand that your negotiations remain ongoing even if a LOI has been signed.
Misconception #2: Having the Money
Another possibly dangerous myth is the idea that any individual or entity who makes an offer on a business always has the money to back it up. This is often not the case, and some will offer at a business without actually securing the money first. This can waste everyone’s time, and you should do proper diligence on potential buyers if you’re selling rather than just assuming they’re good for their offer amount.
Misconception #3: Going Solo
Some sellers assume they can just handle things themselves when they’re looking to move on from the business, and while this might technically be possible, here’s a bet that you won’t get the desired results. Strong business brokers provide incredible value, from handling the detailed paperwork and other time-consuming elements of a given sale to helping you avoid common pitfalls in negotiations.
Misconception #4: Selling the Entire Business
Finally, while most business sales involve transferring 100 percent of the business to the buyer, this does not always have to be the case. There are many situations where selling or retaining a minority stake in a company might be valuable, and there’s no legal requirement that you sell the entire business all at once.
For more on the common myths surrounding business sales and purchases, or to learn about any of our business valuation or other brokerage services, speak to the staff at Utah Business Consultants today.