Common deal breakers in a business sale transaction involve lack of transparency and an inflexible position that prevent both sides from reaching common ground.
Contracting parties back out from negotiations as a result of the impasse. Here are some warnings to watch out for that often unravel what should have been a done deal.
Over-valuation of the business
Often the buyer and seller come up with substantially different figures on how much the business is worth. Business owners may factor in their investment in time, effort and money, expecting a just entitlement for their life's work. They may view the sale as a major source of their retirement fund.
On the other hand, buyers demand a realistic, accurate assessment in terms of cash flow projections, associated risks and current market value. They may entertain serious doubts about the sustainability of the business and baulk at the prospect of inheriting liabilities. For example, increasing costs of labour, pension and benefits programs may weaken the company's financial position. If both parties do not arrive at a mutual agreement on a fair selling price, they will walk away from the negotiating table.
How to avoid this: You may feel like you know your business inside out, but that doesn't necessarily mean that you can establish it's worth correctly. Getting your business valued professionally is usually recommended to avoid bias.
Sorry state of business affairs
Due diligence may uncover undesirable existing conditions in management and operations. The company's products and services may have non-compliance issues with industry standards and government regulations. Investigation of business relationships with shareholders, suppliers and customers may reveal unacceptable or illegal practices, exposing the company to litigation risks.
Expiring property leases and client contracts that are not being renewed raise red flags on the continued viability of the business. Low employee morale, job dissatisfaction, high turnover rates and pending retirement of key personnel bring up serious administrative and operational concerns during the transition period and beyond.
How to avoid this: Due diligence is just as important for the seller as it is for the buyer. The buyer will cross-examine your business and go through your records with a fine toothed comb - so the best thing you can do is be prepared.
Misrepresenting the facts
Buyers are aware that a perfect enterprise does not exist. When sellers or agents conceal or gloss over the internal weaknesses in the business structure, their underhanded tactics will only work against them. When the real picture emerges, they stand to lose not only the deal but their business reputation as well.
Low employee morale, job dissatisfaction, high turnover rates and pending retirement of key personnel bring up serious administrative and operational concerns during the transition period and beyond.
Presenting the facts upfront demonstrates business ethics and integrity, and wins trust and goodwill. When business problems are laid out in the open, serious buyers may be willing to offer their resources and work out solutions together for a smooth transition. It is in every buyer's interest to learn the ropes from the previous owner and resolve issues in a timely manner during the transfer of ownership.
How to avoid this: Be honest with your buyer. Nothing good will come from making things up or covering up the truth. If there are any skeletons in the closet, it's always best to be upfront about them. After all, they will probably discover them during the due diligence stage anyway. If you are dishonest, it could lead to trust issues and embarrassment on your part.
Slack record keeping
In many instances there may be good faith on the seller's part; it may just be a case of shabby paperwork. Critical aspects of production, logistics and standard operating procedures may not be properly documented.
Regulatory reports and contracts may not be up to date or a real-time inventory tracking system may not be in place. Sloppy record keeping reflects poor administrative practices and may result in buyers having second thoughts on moving forward with the deal.
How to avoid this: Get your house in order and keep it that way. Make sure all of your documents are filed away and up to date. Not only is this best practice but it will also increase buyer confidence.
Sale agreement before due diligence
"Sign the sale agreement now, conduct due diligence later" is a practice that's spreading in the South African business sector. Despite the due diligence clause in the contract, its terms still bind the buyer to the transaction in the event that unsatisfactory circumstances come to light. This one-sided condition favours the seller at the buyer's expense, for whom there is no way out except the right to renegotiate a price reduction. It can be a big turnoff to prospective buyers, causing them to cap their pens and quickly withdraw their offer.
How to avoid this: Go for the traditional approach of conducting due diligence before the sale agreement. If you have nothing to hide, this shouldn't be a problem. This way the buyer will proceed with confidence in both you as a seller and in their purchase.
Back and forth haggling and failure to meet in the middle ground may result in weariness and eventual breakdown in negotiations. This untenable situation may arise from a number of reasons. In the first place, the seller may be reluctant to part from his business or the buyer may just be canvassing possible opportunities with no intention to purchase. Perhaps both parties have never been in accord on major issues from the beginning, leading to further collapse in communication efforts.
The seller may fail to submit the required information after repeated requests. The buyer may insist on voluminous documentation, causing the seller to put up his hands in surrender. Unreasonable demands on either side will end up discouraging the other party and stall or completely halt the closing process.
Buyer and seller incompatibility
Even though a business owner is looking to exit their company, it's still important that they find the new potential owner likeable, or a sale is unlikely to take place. A well performing business is likely the result of hard work and sleepiness nights. Both parties will usually want to make sure they're a match.
How to avoid this: Think like a buyer and make sure you are on the same page. Be honest about your intentions, your asking price and be wary of timewasters.