Any entrepreneur with experience buying or selling a business knows that deals fall through all the time. Even worse, many have to look back on a deal they went through with that, in retrospect, they probably should have passed on. Knowing when to close a deal and when to walk away is more art than science, but it can be critical to the future success of your acquired business. But how does the sale of a business really work? And how do you know when it’s smarter to walk away? Let’s take a closer look.
Closing the sale of a business, step by step
The real work begins once you’ve reached a general agreement on the sale of acquisition of a business. The sales process can be a little confusing for uninitiated, so let’s go through it step by step:
- Letter of intent. The buyer will draft and sign a non-binding purchase agreement called a letter of intent. This letter outlines the terms of the sale, including the price agreed to.
- Due diligence. Both the buyer and the seller will do their own due diligence to investigate and perform research on the other party. This step is particularly important for the buyer because it can turn up signs that the deal isn’t right for them.
- Financing. Unless the sale is an all-cash deal, the buyer will need to obtain financing, either from a bank or through the seller.
- Purchase agreement. Assuming the buyer obtains financing and neither party finds anything untoward during the due diligence process, a purchase agreement will be executed. The purchase agreement will outline price of the sale, any financing details, and ancillary agreements like noncompete clauses or confidentiality agreements.
- Closing the deal. The final step in the process requires all participants to sign the purchase agreement and any other contracts of sale.
Depending on your level of experience, that list might seem straightforward or downright complicated. In most cases, you’ll have a business broker, attorney, or both to help walk you through the process. Arguably the most important step of the process is step two: due diligence. It’s easy to get caught up in the excitement of a sale or acquisition, but that can be a costly mistake. Here are some signs it’s time to step back from the negotiating table and walk away from a deal.
Signs it’s time to walk away from a deal
- Inconsistencies – Since one of the most important aspects of business due diligence involves reviewing the financial, legal, and business records, it’s important that any inconsistencies are thoroughly investigated and discussed to your satisfaction. Don’t sweep things under the rug or let the current owner sweet talk you out of getting to the bottom of anything that’s not in perfect order. If you don’t get a satisfactory response, walk away.
- Neglect – Most business owners only put their business up for sale after giving it a lot of thought and coming to a firm decision. After the decision is made, it can often take months or more before the right buyer comes along. During that interim period, some owners will consciously decide not to “waste” any more time, effort, or money on building and maintaining the business they’ve already decided to sell. Depending on how long it’s been on the market, that neglect could become apparent, and the buyer needs to take it into consideration. If significant renovations are required, the cost of the acquisition might not make sense. If you can’t rectify the cost of the business with the amount of money you’ll need to invest to get it into shape, walk away.
- Undisclosed problems – Whether it’s a tax lien the current owner failed to mention, an expired inspection on a key piece of equipment, or any other detail the buyer has a legitimate right to know, if it comes to light that the owner has tried to cover up (or just ignore) a problem prior to the sale, warning bells should be going off. Ask yourself: why is this owner really selling the business? If the answer makes you think twice, walk away.
- Poor credit rating – It’s not a guarantee since some business owners simply aren’t great money managers, but if your due diligence turns up a poor credit rating or problematic borrowing history for the company, it could be a sign that otherwise positive financial records may be artificially propped up. If the business’s finances aren’t in order, walk away.
- The industry is in decline – Sometimes, savvy business owners choose to sell their companies because, after years in the industry, they can tell major changes are on the horizon and that could spell big problems for their business. Of course, they’d be loathed to tell a prospective buyer about that fact, so it’s up to the buyer to consult with other industry experts to make sure the outlook is still positive. If that outlook is negative, walk away.
These are fairly general, and it’s certainly not an exhaustive list. But the point is clear: while strategic planning and preparation are key to identifying a great business opportunity in the first place, it’s also vital for prospective buyers to remain alert to any signs of trouble throughout the entire buying process.
That’s not to say every business deal turns sour. In fact, most don’t. Your next deal might not reveal anything that even makes you consider walking away, but you need to be prepared for the possibility. In some cases, walking away from a prospective deal is the best thing you can do. There’s always another deal on the horizon.
One of the best ways to avoid a deal going south is to work with a team of business sale experts who can help vet opportunities and may be able to catch items you would otherwise miss. This team could include a business broker, commercial real estate agent, lawyer, and accountant, as well as niche industry experts appropriate for the specific business you’re considering.
With their help, and with your own sharp eye for detail and gut instincts, you should be able to pass on the wrong businesses until the right one comes along.
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