Have you ever stood at the edge of a diving board, ready to take the plunge, but instead of hesitating, you embraced the thrill of the moment and dived right in?
That exhilarating feeling is akin to what many potential buyers of small businesses can experience. However, in some cases, this sense of trepidation can lead to deals falling through at the last moment, despite months of meticulous information-gathering and due diligence.
In this article, we shed light on the concerns of wary buyers and other potential deal-killers, all while empowering you with strategies to minimize their impact or prevent them from arising altogether.
Let’s dive right in and explore the most common deal-killer of them all…
Deal Killer #1: Inaccurate Financial Statements
In the realm of selling your business, one critical factor stands out as the ultimate deal breaker – inaccurate financial statements.
The origins of these inaccuracies can be manifold, but the solution is straightforward: ensure your financial statements are not only accurate but also up-to-date. It’s essential to have comprehensive supporting material, such as bank statements, receipts, and invoices, to validate your financials.
Engaging the expertise of a third-party accountant or CPA is the most prudent course of action. When you inform them of your intention to sell your business, request their assistance in conducting pre-sale financial due diligence. Alternatively, you may choose to apprise your current accountant of your business sale plans and seek their support in performing this critical review.
By upholding a professional approach to your financial statements, you pave the way for a successful business sale, instilling confidence in potential buyers and maximizing the value of your enterprise.
Deal Killer #2: Landlord and/or Lease
When the success of your business hinges on its location, the landlord wields the power to make or break the deal with a mere gesture. But fear not, for handling this delicate relationship with finesse and tact can secure your triumph.
To avert such challenges, the key lies in gaining the landlord’s cooperation from the outset. Follow these confidently simple steps to ensure a harmonious transition:
1. Initiate early communication with the landlord to disclose your intentions to sell.
2. Engage in a candid dialogue with the landlord to understand their priorities for a new tenant.
3. Obtain a solid confirmation from the landlord that the lease terms will remain unchanged.
4. Strategically position the prospective new tenant to perfectly align with the landlord’s preferences.
By approaching this process with confidence and assertiveness, you can establish a positive rapport with the landlord, safeguarding your business’s future and facilitating a seamless transition for all parties involved.
Deal Killer #3 – Selling Your Business: Buyer Fear
One of the most prevailing deal obstacles encountered when selling a small business arises from buyer apprehension.
Please note that this pertains specifically to individual buyers, not private equity groups, competitors, or other companies.
For many prospective buyers, the prospect of acquiring a small business can be daunting, especially if they have never owned one before. The decision to invest in a business involves parting with a substantial portion of their hard-earned net worth, which may have been accumulated over several decades.
Even embarking on a new business venture, even if it’s a bootstrap operation, can be quite intimidating for those without prior experience. Now, imagine the magnitude of apprehension when they are faced with the prospect of investing a significant portion of their net worth and almost all of their liquidity.
If the buyer opts for a Small Business Administration (SBA) loan, it often necessitates the involvement of their spouse as a guarantor. Furthermore, the bank may request additional assets, such as the buyer’s personal residence, to be used as collateral. Some buyers even utilize their life savings or retirement funds, while others resort to borrowing money from friends and family to finance the business purchase.
Amidst these concerns, instilling confidence in prospective buyers becomes paramount. Assuring them of the business’s potential, stability, and growth prospects can help alleviate their fears and empower them to make informed decisions for a prosperous future.
What Happens if the Buyer Fails?
Facing such a situation is never easy. We recently encountered a business sale where the buyer, unfortunately, encountered struggles. Within a year, the business had to close its doors, and the buyer found himself having lost all his retirement funds. This devastating turn of events led him into a deep depression that took nearly a year to recover from. Moreover, he suffered a financial loss exceeding $500,000, putting his dreams of a contented retirement in ruins. This is a decision that demands utmost consideration, and it’s no surprise that many buyers find themselves paralyzed when the time comes to take the leap.
Indeed, purchasing a business ranks among the most critical decisions in life, and buyer fears have proven to be more detrimental to deals than all other factors combined.
Why is all of this significant?
When selling your business, it is vital to acknowledge and be prepared to manage any fears your buyer may experience. Ignoring this reality might lead to months of fruitless effort with a buyer who ultimately walks away at the eleventh hour or vanishes entirely.
In the world of selling small businesses, it is quite common for buyers to go through the motions while grappling with an underlying sense of unease. Seasoned experts can often sense this apprehension, but many sellers remain oblivious to the warning signs.
Buyers may inundate sellers with a plethora of document requests in an attempt to quell their anxieties. Unfortunately, some sellers might miss these signs and inadvertently exacerbate the buyer’s fears by providing unrelated documents. Eventually, the buyer may abruptly terminate the deal without directly communicating their concerns, resorting to stall tactics and excuses.
Regrettably, we have seen cases where this dance of uncertainty persisted for over six months. Yes, a buyer might keep a seller on the hook for half a year due to their reluctance to take the leap. In such situations, when the buyer lacks the courage to confront their fears openly, and the seller fails to recognize it, no one emerges victorious. The seller endures a prolonged and unsatisfactory process, clinging to hope to salvage the deal and avoid starting anew.
Selling Your Business
Confidence and astute awareness of buyer concerns are essential attributes when navigating the sale of a business. By addressing and allaying buyer fears with transparency and professionalism, sellers can foster trust, expedite the process, and set the stage for a successful outcome for all parties involved.
Selling your Business – Effective Strategies for Managing Buyer’s Fear in a Business Deal
Successfully navigating buyer fear is essential to ensure a smooth and successful business deal. Here are some professional strategies to achieve this:
1. Exclusivity: If possible, avoid granting the buyer exclusivity. If exclusivity is necessary, consider limiting it to short periods, such as 30 days, with the possibility of mutual extensions if needed.
2. Marketing: Keep the business actively on the market throughout the process to keep the buyer engaged and aware that other potential buyers are interested. This can motivate them to stay committed and prevent unnecessary delays.
3. Earnest Money: Request an earnest money deposit, typically around 5% of the purchase price, to demonstrate the buyer’s seriousness and commitment.
4. Hoops: Set reasonable requirements for the buyer to meet, such as signing a non-disclosure agreement and completing buyer qualification forms. If a buyer shows reluctance to fulfill these essential steps, consider moving on to more serious prospects.
5. Milestones: Establish clear and concrete deadlines in the offer or letter of intent (LOI), such as completing due diligence or obtaining financing commitments. If exclusivity is granted, the buyer should understand that failure to meet deadlines may result in losing exclusivity.
6. Reassurance: Be attentive to signs of fear in the buyer. Have open and honest conversations with them to address their concerns. Offer reassurance while acknowledging that buying a business involves inherent risks. Let them know that you will be available to assist even after the transition period is complete.
7. Due Diligence: Carefully evaluate the buyer’s document requests during the due diligence phase. Ensure they are reasonable and logical. Once due diligence is complete, obtain the buyer’s sign-off to signify the conclusion of this stage.
8. Commitment: Look for signs of commitment from the buyer, such as their willingness to invest in professional advisors like attorneys and accountants. The more they invest in the process, the more serious their intent.
While it may not be possible to eliminate buyer fear entirely, employing these strategies can help alleviate potential dangers and enhance the likelihood of a successful business sale.