The following article was adapted from an article first written and published by Tom West. The text has been updated and additional information and experiences have been added by Touchstone. Understanding why some deals do not complete, may help parties to future transactions to avoid these pitfalls.
In some cases, a buyer and seller reach and sign an agreement subject to certain contingencies for the purchase of a business, only to have the deal fall apart. It is incumbent on both the buyer and the
seller to understand the specific provisions of the agreement, the expected timing of events and the expectations of each party. The business broker involved in the transaction should explain these thoroughly, and each party should consult professional advisors (attorney, accountant) familiar with business transactions.
Sometimes problems arise that lead to one or both parties deciding to exercise their right to terminate the agreement. These problems may include:
The Seller Fails To Reveal Problems
When a seller is not up-front about disclosing significant issues with the business, they will usually be discovered in due diligence. The buyer then gets cold feet -- leading to the buyer to question the seller's honesty -- and the deal promptly falls apart. Even if the problems are not discovered until after the deal completes, representations and warranties may provide a right of offset or other rights for the buyer to pursue an action against the seller.
Trust is difficult to recover...full disclosure should be the rule.
The Buyer Has Second Thoughts About the Price
In some cases, a buyer agrees on a price, only to discover in due diligence the stated cash flow, FMV of assets or level of inventory are, in his or her opinion, insufficient to support the agreed upon price.
It is of prime importance that the business be
fairly valued and that the documentation support the seller's rationalization of the price.
Both the Buyer and the Seller Grow Impatient
During the course of the due diligence and closing process, it's easy for impatience to set in. Buyers often request volumes of supporting documentation, ask endless questions and seek advice from an attorney or
accountant with whom they are familiar (but may not have the experience to bring the sale to a successful conclusion) and sellers grow weary
of it all. Conversely, buyer requests for legitimate documentation sometimes takes days or weeks to produce, and the buyer questions the seller's motivation to sell. Both sides need to understand that the closing process takes
time. However, it shouldn't take so much time that the deal is
endangered. It is important that both parties, if they are using
outside professionals, to use only those knowledgeable in the
business closing process. Many are not. The business broker can recommend competent outside professionals.
The Buyer and the Seller Are Not (Never Were) in Agreement
Unfortunately, there are business
sale transactions wherein the buyer and the seller realize belatedly
that they have not been in agreement all along -- they just thought they
were. Cases of "a failure to communicate" are often fatal to a successful
closing. A professional business broker is skilled in making sure that
both sides know exactly what the deal entails, and can reduce the
chance that such misunderstandings will occur.
The Seller Doesn't Really Want To Sell
In some instances, the seller is conflicted as to whether this is the right time to sell
the business. Selling a business has many emotional ramifications; a business
often represents the seller's life work. Therefore, it is key that sellers explore the emotional, financial and lifestyle ramifications of the proposed sale. If there are doubts, these should quelled or
resolved. A professional business broker can help business owners through the process of exit planning and consideration of all pertinent issues.
Or...the Buyer Doesn't Really Want To Buy
What's true for the mixed-emotion seller can be true for the buyer as well. Buyers can enter the business acquisition process
full of excitement and optimism, and then begin to drag their feet as
they draw closer to actually making the commitment. This is especially true today, with
many displaced corporate executives entering the business acquisition market, while looking for another job in parallel. Buying and
owning a business is still the American dream -- and for many it becomes
a profitable reality. However, the entrepreneurial reality also
includes risk, a lot of hard work, and long intense hours. Sometimes
this is too much reality for a prospective buyer to handle.
And None of the Above
The situations detailed above are some of the reasons why deals fall
apart. However, there can be problems beyond anyone's control, such as
Acts of God, and unforeseen market or financing problems. However, many
potential deal-breakers can be handled or dealt with prior to entering a transaction agreement, to help ensure that the sale will close
successfully.
A Final Note
Remember these four components whether on the buy or sell side of a transaction to ensure success:
- Good communication and full disclosure between the parties involved;
- A mutual understanding of all the provisions and timing of the agreement;
- A mutual understanding of the emotions and motivations of each of the parties; and,
- The belief that they are involved in a deal that will be beneficial to both parties.
Whether you are a owner of a business considering a sale; or you are a buyer looking for an acquisition opportunity...call or email
Touchstone
today to talk with an advisor.
Niche Manufacturer Construction Company