Buying or Selling a Business: Why Do Deals Fall Apart?

arguing businessmen selling a businessBuying or Selling a Business: Why Do Deals Fall Apart?

 

In many cases, the buyer and seller reach a tentative agreement when selling a business, only to have it all fall apart. There are some reasons this happens, and once they are understood, many of the worst deal-breakers can be avoided. Understanding is the key word. Both the buyer and seller must develop an awareness of what the sale involves–and such an awareness should include facing potential problems before they swell into the flood-waters and “sink” the sale.

Now, what keeps a sale from closing successfully? Surveyed business brokers across the United States found similar reasons that were cited so often that a pattern of causality began to emerge. A compilation of situations and factors of which affect the sale of a business are explained below.

 

The Seller Fails to Reveal Problems

If and when a seller is not up-front about any of the problems with the business, that does not mean these problems will go away when the buyer takes over. The problems are bound to show up later, usually sometimes after a tentative agreement has been reached. The buyer then gets cold feet–hardly anyone in this situation likes surprises–and the deal promptly falls apart. Event though this may seem a tall order, sellers must be as open about the negatives of their business as they are about positives. Again and again, business brokers surveyed said: “We can handle most problems…if we know about them at the start of the selling”.

 

The Buyer Has Second Thoughts About the Price

In some cases, the buyer agrees on a price, only to discover that the business will not support that price, in his or her opinion. Whether this “discovery” is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of paramount importance that the business be fairly priced when selling a business. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts form themselves.

 

 Both the Buyer and the Seller Grow Impatient

During the process of buying or selling a business, it’s easy for either party to let impatience settle in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process of selling a business takes time. However, it shouldn’t take so long that the deal becomes endangered. It is important that both parties should use only those knowledgeable in the business closing process if they are using outside professionals. A business broker is one of the most competent outside professionals in a given business area, and these should be given strong consideration in putting together the “team”. Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar with, but these people may not have the experience to bring the sale to a successful conclusion.

 

The Buyer and the Seller are Not (Never Were) in Agreement

How does this situation arise? Unfortunately, there are business sale transactions wherein the buyer and the seller realize too late that they have not been in agreement all along–they just thought they were. Cases of miscommunication 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 all too many instances, the seller does not really want to be selling the business. The idea had sounded so good at the start, but now that things have come down to the wire, the fire to sell has all but diminished. Therefore, it is key that prospective sellers make a firm decision to sell a business prior to going into the market with the business. If there are doubts, these ought to be quelled or resolved. Some sellers enter the marketplace just to test the waters; they want to see if they could get their “price” if they ever get really serious. This type of seller is the bane of business brokers and buyers alike. However, business brokers generally can tell when they encounter the casual (as opposed to the serious) seller. But an inexperienced buyer may not recognize the difference until it’s too late. Most business brokers will agree that a willing seller, is a good seller.

 

Or the Reverse: The Buyer Doesn’t Really Want to Buy

What’s true for the mixed-emotion seller can be flipped around and applied to the buyer as well. Full of excitement and optimism, buyers can enter the sale process but then begin to drag their feet as they draw nearer to the “altar”. This is especially true today with so many displaced corporate executives entering the market. 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.

 

None of the Above

The situations detailed above are the just the main reasons why deals fall apart. However, there can be problems beyond anyone’s control, such as Acts of God, unforeseen environmental problems, etc. But the good news is that many potential deal-crushers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.

 

A Final Note

Remember these four components in working toward the success of the business sale:

  • Good chemistry between the parties involved
  • A mutual understanding of the agreement
  • A mutual understanding of the emotions of both buyer and seller
  • The belief, on the part of both buyer and seller, that they are involved in a good deal
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DISCLAIMER: TM Business Brokers, LLC does not offer securities for sale, real estate brokerage services, accounting, tax or legal advice, or financing negotiations. TM Business Brokers, LLC does not audit / verify any information provided by business owners and their third party advisers, and we make no representations or warranties thereto.