For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully. What does it take for the sale of a business to close successfully? Certainly there are reasons that a sale might not close that are beyond anyone’s control. A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado. There might be an environmental problem that the seller was unaware of when he or she decided to sell. Aside from these unplanned catastrophic events, deals abort because of the people involved. Here are a few examples of how a sale closes successfully.
The Buyer and Seller Are in Agreement From the Beginning
In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale. If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line. However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close. This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made. The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business. Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when. The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them. Too many sales fall apart because of a misunderstanding on one side or the other.
The Buyer and Seller Don’t Lose Their Patience
Both sides need to understand that the closing process takes time. There is a myriad of details that must take place for the sale to close successfully, or to close at all. If the parties are using outside advisors, they should make sure that they are deal-oriented. In other words, unless the deal is illegal or unethical, the parties should insist that the deal works. The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves. The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing. Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule. However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.
No One Likes Surprises
The seller has to be up front about his or her business. Nothing is perfect and buyers understand this. The minuses should be revealed at the outset because sooner or later they will be exposed. For example, the seller should consult with his or her accountant about any tax implications prior to going to market. The same is true for the buyer. If financing is an issue it should be mentioned at the beginning. If all of the concerns and problems are dealt with initially, the closing will be just a technicality.
The Buyer and Seller Must Both Feel Like They Got a Good Deal
If they do, the closing should be a simple matter. If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.
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There is a direct relationship between the asking price and the amount of cash on the table at the time of the sale. Buyers and sellers alike should keep one fact in mind. Most businesses involve some level of seller financing. It is customary for both buyers and sellers to have concerns regarding this kind of financing; after all, sellers don’t want to take their businesses back from the buyer. Buyers want to generate enough money to help the business thrive and make a living. One proven way to ensure the successful sale of a business is to turn to the experts.
Screen out Window Shoppers
The simple and very established fact is that when you choose to work with the professionals, it can streamline the entire sales process. Business owners are typically very busy people. That means they don’t have time to waste with window shoppers. They also don’t want to divulge confidential information to parties that don’t possess the means to actually follow through with a successful sale.
Business brokers and M&A advisors know that most prospective buyers are just dreamers or will ultimately fail to qualify. When you work with the professionals, it means that you have a shield to protect you and your valuable time. Experienced brokers have a range of techniques that screen out unqualified candidates and match you with buyers who are the best fit.
Anyone who has ever sold a business, or even contemplated selling a business, knows all too well that confidentiality is of the utmost importance. Sellers need to know that the information they reveal will not spill out all over the web. Brokers are experts maintaining confidentiality and impressing upon prospective buyers the tremendous importance of honoring the agreements they sign.
It is important to note that leaks regarding the sale of a business can cause a range of often unexpected problems. Key employees may get nervous about their future prospects and begin looking for a new job, competitors may begin attempting to poach employees, or customers and key suppliers may get nervous and turn to your competitors. In short, serious buyers and sellers alike benefit from maintaining confidentiality.
Matching the right seller with the right buyer is truly an art and a science. Many factors are involved ranging from financing to psychology. When the right match is made, then it is possible to move through the process of seller financing more quickly and with fewer roadblocks or complications. Working with a business broker or M&A advisor is the single most important step that any buyer or seller can make to help ensure that seller financing, and in fact the entire sales process, progresses as smoothly as possible.
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Only a small percentage of the population is able to go through life without using some form of financing at some point. Most people have little choice but to finance everything from their home and car purchases to their college education. Now, with that stated, most business owners would love to receive an all-cash offer for their business. But the reality of the situation is quite different. The facts are that owner financing is very common, and it is sometimes the only way to put a deal together.
Sellers have to be ready and willing to entertain the idea that they may, ultimately, be called upon to handle some aspect of financing if they want to sell their business. It surprises many to learn that if a seller is not willing to finance the sale, then buyers begin to worry and may even see this as something of a “red flag.” The reason for this is that many buyers feel that if a business is a solid investment, then the business will be profitable and repaying the seller should be no problem.
Buyers may worry that if a seller isn’t willing to help with financing there could be a “hidden” problem with the business. It might occur to them that sellers are “jumping from a sinking ship.” It is important that sellers keep this important aspect of buyer psychology in mind when addressing whether or not they are willing to finance.
Buyer psychology plays a major role in another aspect of seller financing and that comes in the form of collateral. Sellers may want to have some form of outside collateral to secure the loan on their business. While this may seem perfectly understandable to the seller, buyers can have something of a nervous response to this issue as well. As much as buyers worry that a seller’s refusal to provide financing is a red flag, the same holds true for sellers who seek collateral. Once again, the concern is that if the business was healthy and thriving there should be no need for collateral. The buyer is left wondering, “What is going on here? How worried should I be? Why do they need collateral if this business is so great?”
Typically, buyers are “maxed out” when buying a main street business. They are allocating most of their available funds to the down payment on the business. That means they will be unlikely to “push all their chips in” and gamble everything by also putting up the home, retirement funds or other collateral in the process. Sellers need to see the situation from the buyer’s perspective and remember that a collateral requirement could mean that if the business fails, the buyer could be left with nothing.
Navigating the complex interaction between buyers and sellers is no easy feat. It requires a careful balancing of several different skills, ranging from understanding finance to psychology. Working with an experienced business broker can help buyers and sellers connect and find workable agreements so deals can get made.
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Sellers are just like everyone else in that they can make mistakes. In this article, we’ll explore some of the most common mistakes that we see along with some of the repercussions.
1. Not Seeing the Buyer’s Point of View
The first major mistake that sellers make is that they simply fail to look at the situation from the buyer’s perspective. One of the smartest moves any seller can make is to step back and ask themselves two key questions.
“What information would I expect to see if I was thinking about buying this business?
“Would I trust the information being presented to me if I was the buyer?”
While there are many other questions sellers can ask to help reframe their thinking, these two simple questions can orient a seller’s thinking towards a buyer’s perspective. Additionally, investing the time to understand the buyer’s position can help avoid a range of problems and help smooth out the negotiation process.
2. Neglecting the Business During the Sales Process
Another seller mistake we see is that the seller neglects the business during the sales process. This can have significant negative long-term consequences. Sellers must understand that they must maintain the day-to-day operations as though the business is still theirs. The old saying, “Don’t count your chickens before they’ve hatched,” most definitely applies to selling any business. Business deals fall apart all the time. This is true from small deals to corporate acquisitions.
3. Overall Lack of Preparation
Any seller who is truly serious about selling his or her business will have all of their documentation available and well organized. This list would include financial records, environmental studies, business forecasts and more. It is important to make a good impression and convey to prospective buyers that a business is well organized and ready to be sold. Disorganization on any level could make prospective buyers worry that the business isn’t being operated in a professional manner.
4. Holding Misconceptions Around a Business’ Value
Finally, a real “deal killer” can be when sellers don’t understand (or have a mental block) concerning the real value of their business. This issue can lead many business owners to set a price that is simply too high or even completely unrealistic. Many sellers have put years of blood, sweat and tears into a business. Learning that their business isn’t as valuable as they had hoped can be an emotional, psychological and financial blow all in one. But sellers also have to adjust to the realities of what the market will bear.
Avoiding seller pitfalls is incredibly important. Working with a skilled and proven business broker or M&A advisor is a way for buyers and sellers alike to avoid an array of significant problems that could otherwise arise.
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Selling a business isn’t always 100% about the price. It is not like selling a house where typically the most important factor is who places the highest offer. In the end, if the seller is to achieve the most optimal results, there are other variables that should be considered.
The idea of selling to a competitor is one that seems attractive to many business owners. After all, a competitor has the built-in advantage of understanding the business and thus can theoretically understand the value of the business better than an outsider. But while this point is quite valid, selling to a competitor comes with its own problems. Selling means disclosing a great deal of confidential information, and that could prove to be very risky if the deal were to fall apart.
A second avenue that sellers will often explore is selling to a financial buyer. A financial buyer is likely not to be a competitor. But on the downside, a financial buyer may be unwilling to pay the seller’s price. It is important to remember that a financial buyer is considering buying the business with the intention of selling it for a profit within a few years.
The highest selling price may come from a strategic acquirer. But this doesn’t necessarily mean selling to a strategic acquirer is the most prudent course of action for a seller. A strategic acquirer may not have the best interests of the company at heart. When a strategic acquirer takes ownership, key employees and management may be replaced. The company may even be moved. Many owners are unprepared for the shock that may come along with a strategic acquisition.
There are other potential buyers, many of whom are frequently overlooked, who may be the optimal fit for a given business. It is possible that the best buyer for a company could be one of its employees. However, this option comes with risks as well. Key employees and management may leave if the deal falls through, as they now know that the company is for sale.
Finding overlooked buyers is what business brokers do best. Matching the right buyer with the right business is both a science and an art. Teaming with the right business broker or M&A advisor can open up a range of new avenues and help a seller reach the kind of buyer that is as close as possible to the perfect fit.
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