Top 3 Reasons Deals Fall Apart
/“What just happened?” Have you ever felt like the Coyote when the Roadrunner sped by and foiled the plan? Many of our clients who have tried to sell their businesses on their own come to us after a deal that they thought was a sure thing has fallen apart. These seasoned professionals have nurtured the deal and everything seems to be falling into place, and then, out of nowhere, the deal is off.
“We get business owners coming to us shell-shocked after a deal has fallen through. They’re disappointed and frustrated,” says Travis Kellett of Bridgepoint Business Brokers. “These experienced business people are mad at themselves for not seeing the cracks in the deal but we assure them that they are not alone. Business sales fall through for a number of reasons and they shouldn’t beat themselves up for not knowing what they couldn’t know.”
“In our practice, we like to get multiple offers because no offer is rock solid.” Kellett adds, “Having more than one offer not only offsets the risk, but also increases the likelihood of making a deal on your terms.” Here are the top reasons we see deals falling through before a deal is inked:
1. Business results decline – It can happen, a seller mentally checks out from operating the business due to burnout, boredom, illness - the reasons are endless. This can happen well in advance of the decision to sell, but regardless when it happens, the business results suffer. Buyers require a lot of information during due diligence and if these less than appealing business results become uncovered when a year-end or interim statement is requested, it is a major red flag to a buyer.
2. Unrealistic Expectations – One of the largest risks to purchasing a business is that the customers and contracts will disappear after a sale because relations were heavily linked to the owner. We see buyers walking away from deals where owners refuse to take on any of the risk with a buyer to ensure that the business can and will flourish once it changes hands. Seller financing is a way to signal to a buyer that the owner believes in the future of the business and is willing to share this risk in the early transition years.
3. Undercapitalization – Finding that perfect buyer can be challenging. One that has the talent to operate the business and the funds to purchase the business. It can be very disappointing for both the buyer and seller when a deal is nearly a success, but the buyer comes up short with the capital requirements. Creative deal terms can be crafted to some degree, but at the end of the day a buyer has to come to the table “close” in terms of standard deal essentials.
Like the Coyote, most business owners who try to sell on their own have one option and they do their best to make it work. This is especially true when someone comes knocking on the door and makes “an offer you can’t refuse”. If the Coyote had several plans on the go at once, chances are that one of them would eventually catch the Roadrunner.
When selling a business, our objective is to get as many interested parties to make offers as possible. In our experience, deals fall apart. We find that having multiple offers gives sellers points of comparison when evaluating the offers and provides backup for offers that fall through. Don’t leave the biggest transaction of your life to a flimsy, Coyote plan. We don’t!
