A business sale requires the full attention and cooperation of the seller. Take your vacation before putting the business on the market. Then be prepared to dig in, be available and be actively involved in the stages of the selling process. Once it’s sold, then it’s time for that trip of a lifetime.
Your tire or auto service business has provided for your livelihood. It has created jobs, sales, profits, equity and marketplace visibility. And now you’re ready to move on. Maybe you’re seeking an exit right away. Maybe you’re planning for the future.
Either way, and regardless of the phase you may be in regarding the sale of your shop, if you have questions about how to proceed, you’re not alone. I regularly address those questions in my ongoing series of articles in Shop Owner.
For those who have moved through the many stages of a business sale, few things in business are more frustrating than the collapse of a sale, especially when the deal is tantalizingly close to completion.
So many hours of often-tiresome work — the paperwork, responding to timewasters, showing people around the premises — proves to be in vain.
But at least you found a serious buyer, albeit they ultimately withdrew interest. Many businesses, more than many realize, languish on the market for months or years without finding a remotely credible purchaser.
Why Deals Break Down
Not all deals break down for the same reason, so, unfortunately, even if you learn from one deal failure, it may be another reason that causes the next buyer to withdraw before the finish line. Knowing the top risks for deals breaking down allows an experienced business broker to implement the preventive measures in preparing the marketing materials, anticipating the issues that may surface during due diligence, and recommending solutions to rectify the issues up front.
Of course, deals can break down for reasons beyond the seller’s control. The buyer may withdraw after finding a more suitable business elsewhere or deciding not to buy a business at all. Occasionally, the buyer gets talked out of it by a spouse, accountant or lawyer.
But you can reduce the chances of a sale collapsing. Just as your business has thrived because you’ve convinced your best customers that preventive maintenance is the key to avoiding costly repairs, there are now preventive measures you can take to avoid the top five typical risks to sales being abandoned.
Keeping a deal on track is a key element of my services as a business broker and one which requires cooperation by the seller.
Risk 1: Time kills all deals.
Having the paperwork in order is a key to the ultimate close. In anticipation of that requirement, I ensure that all my selling clients provide financial statements, tax returns, leases, key contracts or franchise agreements and any available environmental reports up front. Sellers need to keep their Quickbooks® or other bookkeeping software up-to-date and be prepared to provide monthly or at least quarterly sales reports and financial statements. For example, it’s a bank/SBA requirement that financial statements be no older than 90 days at the time of application and at closing. Because this may be the first time you’ve ever sold a business, you cannot be expected to anticipate all the documentation that will be needed.
In addition, a potential buyer…even a highly qualified one…may be on a different schedule than the seller. Although the seller may want a speedy process toward the ultimate close, the buyer and his broker or attorney or accountant may want to take their time at a more leisurely pace. Accountants and attorneys are oftentimes overloaded with work from other clients or court dates and it becomes necessary for the broker to play the role of the squeaky wheel in keeping the sales process on track and on schedule. Kids often say, “If you snooze, you lose.” Well, the grown up version of that mantra is “Time kills all deals.”
Preventive measures: Don’t take it personally.
When a lifelong business is being sold to a new owner, feelings can get hurt and that’s a good reason to have a business broker: to assist in the management of feelings and emotions. It’s not uncommon during the sales process for a buyer to discover unforeseen expenses involved in the transaction and suddenly the buyer is wondering if there will be enough cash available for a down payment.
“Creative” buyers may start looking for negatives about the business, perhaps deferred repairs and maintenance in the building and equipment or dusty old inventory, as a means of negotiating a credit to offset their down payment shortfall. Don’t take it personally if a buyer is suddenly criticizing aspects of your business and seeking a financial accommodation. Both parties are nervous of each other and don’t want to give away too much when they’re negotiating. To avoid the risk of an emotional blowup between an offended seller and a stressed out buyer that kills the deal, it’s best for the broker to exert a calm demeanor and resolve the disagreement.
Buyers are also seeking a smooth transition of ownership, entailing post-closing training and consultation and the seller’s assistance in encouraging the employees to support the new leader. Buyers may withdraw from the deal if they feel that emotional disagreements during the sales process will result in a lack of support from the seller during the critical transition phase.
Risk 2: The seller is inflexible.
Rigidity by the seller, in perhaps refusing to consider partial seller financing, or to assist with the transition process, or to negotiate the asking price, can be a major factor in scaring away an otherwise qualified buyer.
If a buyer feels like he is the only party making sacrifices, then pride and frustration may drive him away.
Preventive measures: Be prepared to make concessions.
Give yourself a better chance of realizing the highest possible asking price by being flexible with the deal structure. For example, if the bank is requiring a high down payment from the buyer, you could accept a small portion of the asking price in installments. If the buyer is nervous about their shortage of prior automotive experience, you could offer additional training and consultancy beyond the sale to ease any misgivings the buyer has about your business.
In cases where you own the property, a short-term rent concession may serve a long-term benefit in making sure the buyer is successful and financially able to pay you rent for the duration of the lease. The bigger the perceived gamble, the less a buyer will pay — and an acquisition will naturally seem safer if the outgoing owner offers his support post-sale.
Risk 3: Due diligence uncovers undeclared issues.
As the largest and most complex deal many entrepreneurs will ever undertake, the sale of a business requires mutual trust to succeed. Should the due diligence process, where the buyer examines the premises, books, and contracts and so on, reveal any discrepancies in your account of the business, then it can fatally undermine the deal.
For example, an inspection of the premises could reveal deferred roof maintenance or environmental issues. Researching Internet customer reviews of your business could invalidate claims of high consumer satisfaction levels.
“What else is he hiding?” many buyers will think. With their financial security potentially at stake, few buyers will negotiate with someone who has flagrantly betrayed their trust.
Preventive measures: Be honest.
It’s not just outright lying that undermines trust; stretching the truth or declining to mention inconvenient facts can wreck a deal as well. No buyer will blame you for highlighting your business’s strengths and downplaying your weaknesses — just don’t hide anything.
Bold, unsubstantiated claims about the potential for boosting revenue or expanding the facility are of no value to a buyer, especially if there has been a downward trend in sales over the past few years.
Risk 4: The buyer is a “tire kicker.”
“Tire kickers” are the bane of the business seller. Sometimes it’s a competitor with an ulterior motive parading as a genuine buyer; more often than not it’s a window shopper with neither the financial means nor courage to make a purchase.
Either way, some ostensibly interested parties will never actually buy your business, regardless of its merits or your cooperation. They will waste your time, distracting you from more genuine buyers and potentially forcing you to accept a lower price down the road.
Preventive measures: Qualify the buyer as soon as reasonable.
So how quickly can you identify a tire kicker to prevent your time from being wasted?
If you’re on your own in the task of selling your business, you may very well not be able to make that call. Just as you have developed the skills for “reading” your customers, an experienced business broker becomes adept at detecting a tire kicker after just one or two conversations. A good broker will ask buyer prospects a series of questions to gain insight into their history of investigating businesses and their motivations. If they’re not a serious buyer, why risk the disclosure of your confidential financial information and tax returns, and why waste precious time giving evening and Sunday tours of the facilities? Why subject yourself to the emotional roller coaster ride of being excited to have a buyer prospect, only to be let down if they go dark after a few weeks?
Part of the buyer’s qualifications, of course, is their capacity to finance the business. One of the first things I work out is whether a buyer has the necessary down payment to finance the business, a good credit score and no history of a bankruptcy. Whenever possible, I get the business “pre-qualified” by a major national bank and engage them early with a buyer to make sure they will qualify for financing.
Risk 5: Lease dispute with landlord.
A landlord can kill a deal. If you lease the real estate the business operates from and you have a written lease, you will, almost without exception, need the permission of the landlord to transfer the lease.
Preventive measures: Examine lease terms and extend if necessary.
If your lease is close to expiring, you definitely want to speak to the landlord as soon as possible, as you need to know their intentions. The landlord may have decided not to renew your lease, which will almost certainly damage the value of your business and force changes to your selling plans. Review the date of expiry, whether the lease includes any options to renew, as well as the terms. Can you, as the lessee, assign or sublease, and, if so, will you be released from further liability?
Most banks will require that the buyer have a lease or options that extend through the loan term, typically 10 years. Most sellers do not want to make long-term lease commitments if they are selling the business, but getting the landlord to provide an additional “option” term should not increase your exposure if it’s properly drafted.
Many sellers tell me that they don’t want to go to the landlord until they have a deal with a buyer in hand. I’m not necessarily advocating that a seller immediately tip off a landlord that they’re selling their business, but there are many reasons for a business owner wanting to secure an additional lease option, such as a refinancing of the business or making a large investment in equipment.
If you wait until you have a buyer to talk to the landlord, you may find them less willing to favorably negotiate the option terms. The landlord will know you are time constrained because the buyer needs the extension for their bank and may not be very flexible, creating an unfavorable impression on the buyer. Or the landlord just drags their feet, and, as we know, “Time kills all deals.”