Many small business owners dream of selling their company for a huge profit. After many years of hard work, they finally found the right buyer to acquire their company. After negotiating business terms, they signed the letter of intent (LOI). Now comes the tough part: collecting all the due diligence information and having the lawyers on both sides negotiate a final purchase agreement.
Here are the three ways that sink the sale of any company:
1. Pressure from external parties. This can be from overly aggressive lawyers arguing over largely irrelevant legal terms on the purchase agreement. One lawyer in a deal I was involved wanted to know what the seller’s responsibility would be if “the sun exploded”. Remember, in the sale of most small businesses, the only terms that really matter are the upfront sale price, sale payment schedule, representations and warranties. Many times, the seller’s accountant insists on charging added fees to give financial statements to the perspective buyer. One accountant even wanted a lump sum “research fee” for the client to collect all their historical records. It is common for the landlord to approve the transfer of any leases. They sometimes charge a steep “transfer fee” for their approval. Regulatory agencies with licensing requirements can also mean a delay of months. The remedy: Make sure that to have a lawyer that is familiar with small sale transactions. Collect all the information from the accountant up front for due diligence. Seek outside regulatory agency approval far in advance of the completion of any transaction.
2. Inconsistent financial numbers or other changing “facts”. All financial statements tell the company’s story. If during due diligence, this story changes, and then it will raise questions from the buyer. Weaker numbers (specifically profitability) that differ from those provided in the LOI will always result in a price reduction. Additionally, changing “facts” may get the buyer nervous. This can be in the form of profiles of customer concentrations, revenue trends or employee status. The remedy: The small business owner always needs to know what story they are telling with every fact disclosed and explain any difference in the narrative.
3. Sellers or Buyers changing their mind. This happens very often. The seller decides that they don’t want to sell their company. The reason they give now is the sale is not enough money. More than likely, they are afraid what they will do with their time a day after the sale. The buyer sometimes has a change of heart on how the new business will fit into their company or “what they thought was true now isn’t”. The remedy: As a seller, the small business owner must determine what they will do the day after the sale of the company before they decide to sell it.
Barry Moltz helps small businesses get unstuck. His new book, “How to Get Unstuck: 25 Ways to Get Your Business Growing Again” is available in March. Barry can be found at www.barrymoltz.comTags: Accounting, Finance, Growth, Legal, Startup