There are three main players involved in the sale of a business, plus one other factor – that could be termed “the hand of fate.” The players directly involved are: the sellers, the buyers and the third parties. Each one of these has an important role in the successful closing of the sale of a privately held business. Conversely, each one can directly contribute to the deal not closing at all. Although in many cases there can be a combination of two or more, usually one side is the main contributor, or, at least, starts the ball rolling uphill. Here are the primary reasons why deals end up not closing and then how the “fickle hand of fate” can also have a negative impact on the deal.
• Many times, sellers are not really committed to selling the business. Although it may have sounded like a good idea at the time, or they may suddenly realize that they won’t have a thing to do if it sells, or they discover that the marketplace will not pay them what they think their business is worth. A seller who is committed to selling will be willing to overcome the complexities necessary for closing the sale.
• In some cases, a seller may not reveal a problem, or may not think it is important enough to reveal. Buyers, like most people, do not like surprises. Sellers must understand that only by openly discussing all issues about the business can a sale close successfully.
• Sellers should consult their outside advisors prior to putting their business on the market.
• Sellers must understand that their business is only worth what someone is willing to pay for it. Also, a seller who is willing to offer reasonable terms to a buyer almost always will receive a higher price.
• Like their counterparts – the sellers – buyers must also be motivated to act. Without the need or desire to own their own business, the sale will not close. This need and desire must be coupled with the courage to “make the leap of faith” necessary to be a business owner. There are no guarantees.
• Buyers must have realistic expectations of just what their money will buy – so to speak. A buyer who has $50,000 to invest in a business can’t expect to buy a business that has $250,000 in profits. He or she may be able to increase the business to this level, but one can’t expect to buy it with a minimum down payment. A rough rule of thumb is that a buyer can hope to buy a business with a bottom line equivalent to the amount of down payment available.
• Buyers must be willing to work hard and understand they are usually the proverbial “chief cook and bottle washers.” Long hours and long days are generally necessary to succeed in operating one’s own business. However, there is nothing like being one’s own boss.
• Buyers should listen to their advisors, but understand that only they can make the decisions.
• Advisors may be overly aggressive and try to make decisions for both buyers and sellers. Assuming that the buyer and seller are in agreement, the role of the advisor or professional is to make the deal happen unless it is illegal to do so. Outside advisors may, with all good intentions, throw up so many roadblocks that the deal goes sour.
• Landlords can also be stumbling blocks. They are usually the only party to a business sale that gains nothing from it. The lessor is asked to draw a new lease or assign an existing one. It is best if the landlord or his or her representatives are consulted prior to the business going on the market. This way there are no surprises once a qualified buyer is found.
Acts of Fate
Situations can develop that are the fault of no one, but the “fickle hand of fate” can occur causing a sale to fall apart. Here are a just a few instances:
• The proverbial “truck” hits the buyer. This has happened, as has the fire that destroys the business a day before the sale is to close. Such acts are rare, but these acts of fate do happen.
• An unsuspected environmental issue may arise that – best case – merely postpones the closing, but – worst case – wreaks the deal.
• The buyer or seller may have misrepresented something along the way that comes back to force the sale not to close. This may have been unintentional, but the damage is done. It is important that everyone is open about every phase of the transaction.
Business brokers have seen almost everything that can cause the sale of a business to fall apart. They are aware of the problems that can cause a sale not to close and can usually resolve them before they can impact the sale. Business brokers have been through the selling process and have worked with outside advisors and professionals. They are familiar with all of the intricacies of the business transaction. Most business sales can have happy endings if any potential problems or difficulties are handled and resolved at the appropriate time.
A contingency in the sale of a business is a condition in the contract of sale or offer that must be resolved, satisfied or rectified by either a buyer or seller. If they are not satisfied then the sale will generally not go forward. Most offers on a business contain one or more contingencies. The sale may be subject to the buyer obtaining financing, or the seller repaving the parking lot. Experienced business brokers have seen just about every contingency there is. Most of these are placed in the offer by a buyer who has concerns about one or more issue and needs it or them to be satisfied before proceeding with or closing the sale.
It may be as simple as the sale is contingent upon the buyer receiving a five-year extension of the lease by [a certain date]. Or, the offer to purchase may state that the sale is conditional upon the buyer’s approval of the seller’s books and records.
The difference between the two examples is that in the first one, it is a specific event that must be satisfied, and a time limit is specified. The second example is open-ended, meaning that a buyer could opt out of the deal by disapproving the books and records essentially for any reason.
Here are some tips on contingencies:
• There should be a time period in which the contingency must be satisfied. Without it the deal could go on almost forever.
• It, or they, as the case may be, should be reasonable. There is no point in making the sale contingent on moving the building to the next state. As they say – “it ain’t going to happen.”
• Contingencies should be limited to very important or critical issues – those that impact whether a buyer will actually purchase the business or not. Minor items should be resolved prior to an offer being written.
• Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller is not willing to proceed until an offer containing price and terms is agreed upon.
Contingencies come in all sizes and shapes. Very few offers don’t contain at least one, and usually more than one. They are an inevitable part of selling – and buying a business. A business broker knows what is reasonable and what is not.
The breakdown that follows is from the 2003 Business Reference Guide and is based on data from: BizStats, InfoUSA, the U.S. Small Business Administration, and various other sources. It points out that over 75 percent of all businesses in the U.S. have nine or less employees and revenues of, on average, $792,000.