Author: Platinum Business Brokers

In many cases, the buyer and seller reach a tentative agreement on the sale of the business, only to have it fall apart. There are reasons this happens, and, once understood, many of the worst deal-smashers can be avoided. Understanding is the key word. Both the buyer and the seller must develop an awareness of what the sale involves–and such an awareness should include facing potential problems before they swell into floodwaters and “sink” the sale.

What keeps a sale from closing successfully? In a survey of business brokers across the United States, similar reasons were cited so often that a pattern of causality began to emerge. The following is a compilation of situations and factors affecting the sale of a business.

The Seller Fails To Reveal Problems
When a seller is not up-front about problems of the business, this does not mean the problems will go away. They are bound to turn up later, usually sometime after a tentative agreement has been reached. The buyer then gets cold feet–hardly anyone in this situation likes surprises–and the deal promptly falls apart. Even though this may seem a tall order, sellers must be as open about the minuses of their business as they are about the pluses. Again and again, business brokers surveyed said: “We can handle most problems . . . if we know about them at the start of the selling process.

The Buyer Has Second Thoughts About the Price
In some cases, the buyer agrees on a price, only to discover that the business will not, in his or her opinion, support that price. Whether this “discovery” is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of prime importance that the business be fairly priced. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts for themselves.

Both the Buyer and the Seller Grow Impatient
During the course of the selling process, it’s easy–in the case of both parties–for impatience to set in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process takes time. However, it shouldn’t take so much time that the deal is endangered. It is important that both parties, if they are using outside professionals, should use only those knowledgeable in the business closing process. Most are not. A business broker is aware of most of the competent outside professionals in a given business area, and these should be given strong consideration in putting together the “team.” Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar, but these people may not have the experience to bring the sale to a successful conclusion.

The Buyer and the Seller Are Not (Never Were) in Agreement
How does this situation happen? Unfortunately, there are business sale transactions wherein the buyer and the seller realize belatedly that they have not been in agreement all along–they just thought they were. Cases of communications failure are often fatal to the successful closing. A professional business broker is skilled in making sure that both sides know exactly what the deal entails, and can reduce the chance that such misunderstandings will occur.

The Seller Doesn’t Really Want To Sell
In all too many instances, the seller does not really want to sell the business. The idea had sounded so good at the outset, but now that things have come down to the wire, the fire to sell has all but gone out. Selling a business has many emotional ramifications; a business often represents the seller’s life work. Therefore, it is key that prospective sellers make a firm decision to sell prior to going to market with the business. If there are doubts, these should quelled or resolved. Some sellers enter the marketplace just to test the waters; to see if they could get their “price,” should they ever get really serious. This type of seller is the bane of business brokers and buyers alike. Business brokers generally can tell when they encounter the casual (as opposed to serious) category of seller. However, an inexperienced buyer may not recognize the difference until it’s too late. Most business brokers will agree that a willing seller is a good seller.

Or…the Buyer Doesn’t Really Want To Buy
What’s true for the mixed-emotion seller can be turned right around and applied to the buyer as well. Buyers can enter the sale process full of excitement and optimism, and then begin to drag their feet as they draw closer to the “altar.” This is especially true today, with many displaced corporate executives entering the market. Buying and owning a business is still the American dream–and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.

And None of the Above
The situations detailed above are the main reasons why deals fall apart. However, there can be problems beyond anyone’s control, such as Acts of God, and unforeseen environmental problems. However, many potential deal-breakers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.

A Final Note
Remember these components in working toward the success of the business sale:

• Good chemistry between the parties involved.
• A mutual understanding of the agreement.
• A mutual understanding of the emotions of both buyer and seller.
• The belief, on the part of both buyer and seller, that they are involved in a good deal

“Deep-pocketed investors often set aside money to buy into private equity funds.  Such investments tend to be riskier but can generate higher returns than stocks or bonds.  Here are some of the key players and terms in the world of private equity investments.

• Private equity firms: A broad category.  It includes venture capitalists and buyout specialists who raise money from limited partners and use it to help companies develop products and markets.

• Limited partners: Investors in venture capital or buyout funds.  These are typically pension funds, foundations, university endowments, insurance companies, or wealthy individuals.

• Venture capital firms: Firms that use their investment funds to finance start-ups, often in their early stages and typically in the technology, life sciences, or telecommunications fields.

• Buyout firms: They usually raise larger funds and invest them in more mature, later-stage companies of all kinds, often taking controlling interests and sometimes buying the companies outright.  (The terms “private equity” and “buyouts” are often used interchangeably.)”

Source: Robert Weisman, in an article from The Boston Globe

The telephone rings, the caller receives a message welcoming them, then she is asked to dial the extension of the person she wants to talk to. Since she doesn’t know the extension, she has to wait and listen to the office directory; then presses the extension number only to discover that the person being called is not there.

Most Americans have called a credit card company, their bank or any other large company only to get lost in the maze with no way of talking to an actual person. Then there is the “hold music,” the commercial while you wait, with more “amusements” popping up all the time. Who knows what the future holds in telephone communication.

While it used to be that the telephone was a visitor’s first contact with your business, that tradition is changing. Now it is your Web site. Today’s busy buyer now goes to the Internet to look for whatever he or she is considering purchasing. It is even easier for potential clients or customers to find your telephone number from your Web site rather than the telephone book. They can even get directions to your place of business.

In business every call or Web site visitor is a potential customer or client. You can’t afford to lose even one. After all, if someone goes to the trouble of finding your telephone number or locating you on the Web, they must be at least half-serious.

Make sure your telephone system is as user-friendly as you can make it. If it isn’t, change it. One sale or new client will more than pay for this improvement.  What is the status of your Web site? Pay a little extra to insure that it is also user-friendly. Your Web site should provide interesting and useful information on your company, your products or services, your personnel (including contact information), and anything else that will make you look like the well-established professional that you are. The more user-friendly and informative the site, the more business you will get.

Understand that the first contact potential customers or clients have with your business is either the telephone or your Web site – and probably both.

The following appeared in a study, Financial Difficulties of Small Businesses and Reasons for Their Failure, prepared for the Small Business Administration (SBA). They are statements made by individuals whose business was in financial difficulty and subsequently failed. Their comments are listed under the stated reason for failure.

Tax Troubles

• IRS stepped in and took over the bank account.
• The IRS threatened to repossess [our] tools of trade if [we] did not pay the $20,000 back taxes immediately.
• When the IRS agent told us that they will put padlocks on our doors if we can’t come up with the money in one month.
• Pressure from IRS. The IRS is “merciless.”
• IRS was attempting to reach the non-debtors wife’s income (i.e., levy) for the tax liabilities, which all preceded her marriage to the debtor.
• The IRS changed the locks on the business, and the business had to declare bankruptcy in order for the owners to be able to even get into the building.

Personal Profiles

• Bank was not going to refinance her business because of divorce settlement.
• Inability to control blood glucose level, cholesterol, etc. due to stress of dealing with creditors.
• His wife has a nervous breakdown. He just knew they couldn’t handle their bills.
• The injury to his arm.
• She could not pay her medical bills. She had filed bankruptcy as soon as she couldn’t pay her bills, rather than get behind in payments.
• Creditors were hounding him to pay his wife’s credit card. He had not canceled the cards after the divorce. He returned his but never closed the accounts.
• “I had lost court case in trying to settle child support but lost. Was given 48 hours to settle $36,000 of debt which was impossible.”
• And, finally, some comments regarding those who suffered a calamity that pushed them into failure, and subsequent bankruptcy.
• The engine blew in the truck and they couldn’t afford to buy another one.
• His van was stolen and he could no longer transport the equipment necessary to carry on his business.
• The organization they were linked with sold out and was taken over by another organization that was hard to work with.
• The gas explosion.
• Death of foreman.
• The State came in and tore up the road.

Despite the above comments, the study also suggests that entrepreneurs are often not the callow amateurs they are portrayed as being, but business veterans who have the gumption to take the risks inherent in starting a new enterprise. They are people who are often prepared to shrug off the effects of a business failure and try again; a process made possible by the “fresh start” philosophy of U.S. bankruptcy laws. Failure does not always have to be viewed negatively. It can offer an opportunity for the entrepreneur to learn and gain from the experience in order to do a better job next time.