Selling a Business

There are myriad reasons why the sale of a business doesn’t close successfully; these multiple causes can, however, be broken down into four categories: those caused by the seller, those caused by the buyer, those that just happen (“acts of fate”), and those caused by third parties. The following examines the part each of these components can play in contributing to the wrecked deal:

The Seller

1. In some instances, the seller doesn’t have a valid reason for entering into the sale process. Without a strong reason for selling, he or she has neither the willingness to negotiate nor the flexibility to see the sale to a conclusion. Without such a commitment, the desire to sell is not powerful enough to overcome the many complexities necessary to finalize the sales process.

2. Some sellers are merely testing the waters. As detailed above, they are not at that “hungry” stage that provides the push toward a successful transaction. These sellers merely want to see if anyone wants to buy their business at the price they would like to receive.

3. Many sellers are unrealistic about the price they want for their business. They may be sincere about wanting to sell, but they are unable to be realistic about how the marketplace will value the business. The demand for their business may not be there.

4. Some sellers fail to be honest about their business or its situation. They may be hiding the fact that new competition is entering the market, that the business has serious problems or some other reason the business is not salable under existing circumstances. Even worse, some sellers do not disclose that there is more than one owner and that they are not all in agreement about selling the business.

5. A seller may decide to wait until a buyer is found and then check with their outside advisors about the tax and/or legal consequences. At this point, the terms of the deal have to be altered, and the buyer won’t agree. Sellers should deal with these complications ahead of time. Nobody likes changes–especially buyers!

6. Sometimes sellers don’t understand that almost all businesses are seller-financed. Buyers have to be able to make the payments while still making a living from the business. If the business cannot offer this necessity, no one will buy it.

The Buyer

1. The buyer may not have an urgent need or a strong desire to go into business. In many cases the buyer may begin with positive intentions, but then doesn’t have the courage to make “the leap of faith” necessary to go through with the sale.

2 Some buyers, like sellers, have very unrealistic expectations regarding the price of businesses. They are also uneducated about the nature of small business in general.

3. Many buyers are not willing to put in the hours or do the type of work necessary to operate a business successfully.

4. Buyers can be influenced by others who are opposed to the purchase of a business. Many people don’t or can’t understand the need to be “your own boss.”

Acts of Fate

These are the situations that “just happen,” causing deals to fall through. Even considering the strong hand of fate, many of these situations could have been prevented.

1. A buyer’s investigation reveals some unmentioned or unknown problem, such as an environmental situation. Or, perhaps there are financial deficiencies discovered by the buyer. Unfortunately, these should have been on the table from the beginning of the selling process.

2. The seller may not be able to substantiate, at least to the buyer’s satisfaction, the earnings of the business.

3. Problems may arise, unknown to both the seller and the buyer, with federal, state, or local governmental agencies.

Third Parties

1. Landlords may become difficult about transferring the lease or granting a new one.

2. Buyers and/or sellers may receive overly-aggressive advice from outside advisors, usually attorneys. Attorneys, in their zeal to represent their clients, forget that the goal is to put the deal together. In some cases, they erect so many roadblocks that the deal can only fall apart.

Most of the problems outlined here could have been resolved before the selling process was too far advanced. There are also some problems that could not have been avoided–people do sometimes enter situations with the best of intentions only to find out that this is not the right answer for them after all. These are the exceptions, however. Most business sales can have happy endings if potential difficulties are handled at the appropriate time.

Business brokers are aware of the various ways a deal may fall through. They are experienced in resolving issues before the business goes onto the market or before a buyer is introduced to the business. To buy or sell a business successfully, sellers should resolve any potential deal-wreckers, following the advice of a professional business broker.

Although business brokers cannot provide legal advice, they are famililar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in the details of these transactions. These attorneys will usually be more efficient, and therefore more cost-effective, than the attorney who handles a general practice.

The “loose lips” tagline was a common World War II phrase and was on posters everywhere. The problem continues on the business battlefront today.  Leaks of confidential information coming from, apparently, some of the Directors of HP have been in the news everywhere. This is an ongoing story. If it can happen to HP, it can happen to anyone. Leaks of confidential data are a serious issue at any time, but are especially serious if they involve the sale of a company.  Sellers are very concerned because of the impact a leak can have on their company and their employees.

Unfortunately, confidentiality is a Catch—22 issue. On one side, the seller wants to maintain it; on the other side, the seller wants to get the highest price possible, which can mean exposing the business to numerous potential buyers. The more potential buyers contacted, the better the chance of a good price being obtained—and the greater chance of a leak.

Owners may be overly concerned about leaks of confidential data, but since this is a concern, the issue must be dealt with. The shorter the time table between going to market and a sale the less chance there is for a leak. The selling process should not drag on! This is one reason why the price, terms and deal structure should be as fair as possible from the very beginning. The longer negotiations take, the greater the chance for word to leak out. If all of the red flags are dealt with early on, the more likely there can be a quick closing. That way, if there is a leak, the deal can be concluded before any damage can be done. The only other alternative is to deal with just two or three potential buyers. This, of course, lessens the chance of getting the seller a better deal.

Sellers should make sure that all documents involving a sale or potential sale are kept under lock and key, marked “Confidential,” and only transmitted to buyers in a secure manner. Confidential information should only be emailed or faxed when one is absolutely sure it can’t get into the wrong hands. Buyers and sellers have to be cautioned about the confidentiality issue. Too many times when there is breach of confidentiality, the leak comes from the seller. The seller tells his golfing partner, mentions it to a neighbor at a cocktail party, reveals it to a relative – indeed, it is usually a case of “loose lips sinking ships.”

If there was ever a reason to use a professional business intermediary, this is it. They can be the conduit between the buyer, seller and the outside advisors. Business intermediaries are experienced in preventing breaches of confidentiality, e.g. by requiring buyers to sign strict non-disclosure agreements. What’s even more important, they are pros, knowledgeable about dealing with one if it happens. This is just another reason to use the services of a business intermediary.

The 65-year old owner of a multi-location retail operation doing $30 million in annual sales decided to retire. He interviewed a highly recommended intermediary and was impressed. However, he had a nephew who had just received his MBA and who told his uncle that he could handle the sale and save him some money. He would do it for half of what the intermediary said his fee would be – so the uncle decided to use his nephew. Now, his nephew was a nice young man, educated at one of the top business schools, but he had never been involved in a middle market deal. He had read a lot of case studies and was confident that he could “do the deal.”

Inexperience # 1 – The owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement. The nephew felt he could handle the financial details. Neither one of them realized that a potential purchaser would expect to meet with the CFO when it came to the finances of the business, and certainly would expect the CFO to be involved in the due diligence process.

Inexperience # 2 – It never occurred to the owner or his nephew that revealing just the name of the company to prospective buyers would send competitors and only mildly interested prospects to the various locations. There was no mention of Confidentiality Agreements.  Since the owner was not in a big hurry, there were no time limits set for offers or even term sheets. It would only be a matter of time before the word that the business was on the market would be out.

Inexperience # 3 – The owner wanted to spend some time with each prospective purchaser. Confidentiality didn’t seem to be an issue. There was no screening process, no interview by the nephew.

Inexperience # 4 – The nephew prepared what was supposed to be an Offering Memorandum. He threw some financials together that had not been audited, which included a missing $500,000 that the owner took and forgot to inform his nephew about. This obviously impacted the numbers. There were no projections, no ratios, etc. This lack of information would most likely result in lower offers or bids or just plain lack of buyer interest.  In addition, the mention of a pending lawsuit that could influence the sale was hidden in the Memorandum.

Inexperience # 5 – The owner and nephew both decided that their company attorney could handle the details of a sale if it ever got that far. Unfortunately, although competent, the attorney had never been involved in a business sale transaction, especially one in the $15 million range.

Results — The seller was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience in putting transactions together. The owner decided to call most of the shots without any advice from an experienced dealmaker. Any one of the “inexperiences” could not only “blow” a sale, but also create the possibility of a leak. The discovery that the company was for sale could be catastrophic, whether discovered by the competition, an employee, a major customer or supplier .

The facts in the above story are true!

The moral of the story – Nephews are wonderful, but inexperience is fraught with danger. When considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals.  A professional intermediary is a necessity, as is an experienced transaction attorney.

In many cases, the sale of a small company is “event” driven. That is, the reason for sale is health, divorce, partnership issues, even decline in business. A challenging reason is one in which the owners want to retire and live happily ever after. Here is the problem:

The owners have a very prosperous distribution business. They, unfortunately, are the embodiment of a value-enhanced business (see “12 Ways to Increase the Value of Your Company,” under Selling a Business). They each draw about $250,000 annually from the business, plus cars and other benefits. If the company sold for $2 million, after debt, taxes and closing expenses, the net proceeds would be, let’s say, $1 million. Sounds good until you realize that this sum represents only 2 years income for each (and that doesn’t include the cars, health insurance, etc.) – then what? Unfortunately, many owners of smaller companies claim they want to retire when the reality is that they just want to slow down, or eliminate the day-to-day responsibilities of running the business.

Those who want to retire, but don’t think they can afford to, may want to reconsider their decision. Perhaps they can’t afford not to sell.  These owners may have already retired, at least mentally. The owner loses focus, decides not to invest the capital necessary to continue to grow the business and ultimately loses sales and profits or loses a key manager or salesperson, etc. This lack of enthusiasm will no doubt impact their business, lowering its value to a buyer when selling becomes inevitable. In the meantime, following their decision not to sell, they could lose a major customer, a major competitor might begin to eat away at sales — and profits — or a new competitor may move into the market. All circumstances that will reduce value!

Perhaps the owners will not have the “luxury” of changing their minds and deciding not to sell. If they are eventually forced to sell the firm because it is declining, they most likely won’t receive anywhere near the $2 million they might have earlier. The time to sell is when the business is at a high point. Using the services of a professional intermediary can bring the highest price possible.   If you are thinking of selling but hesitating because “the time isn’t right,” take the step that can make all the difference. Seek expert advice, which is as close as your nearest business intermediary’s office.