IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family businesses. The following blog article has been provided by Wendy Leibowitz of Wendy’s Real Estate (https://wendysrealestate.com/):
Key Factors That Can Delay Or Derail A Business Sale During Due Diligence
TV shows like “Shark Tank” have dramatic moments throughout all the episodes, such as whether an entrepreneur has truly come up with a product or service that could get a wealthy person to invest. They show happy moments where there’s an agreement for them to work together. That fairy tale could turn into a nightmare afterwards, though.
There are also some “Behind the Scenes” episodes of these shows, and they point out that a lot of these deals can fall through for a variety of reasons. A lot of business sales can also have this happen without the involvement of any famous businesspeople. While the staff at Good People Recruiting are familiar with these scenarios, they too have to be careful when it comes to potential sales.
Primary Deal-Killers
When people are assessing why a sale was delayed or conducting a post-mortem after it was killed, there are some common signs. They might not be obvious at first glance, but when due diligence (which means there’s a much closer look at the inner workings and finances of the company that was for sale) is done, they become even more glaringly obvious.
- Financial Discrepancies – Just like the entrepreneurs who appear on “Shark Tank,” some companies might be, let’s just say, overly optimistic about their finances (although some might think “fraud”). They might be saying what they can to get their foot in the door, but the numbers won’t match, especially when it comes to Quality of Earnings reviews. That alone can cause any potential buyer to immediately back out.
- Customer & Vendor Concentrations – Does a company have a customer or vendor that accounts for more than 20-30% of revenue? If that revenue disappears, that would be disastrous for the potential buyer. If that’s the case, the buyer might then ask for a lower valuation.
- Legal & Compliance Red Flags – Any buyer wants to make sure that they aren’t going to be walking into a minefield. Things like litigation, labor issues (like misclassified subcontractors and missing workforce agreements), tax debts, or environmental violations will likely kill the deal, but it depends on their severity. If it looks like it could be resolved in a reasonable amount of time and not cost too much, it could just be a detour, not a dead end.
- Key Person Dependency – A lot of companies have critical people that they can’t afford to lose. What if one of those people is the founder? A potential buyer could add a requirement that the founder stay with the company for a certain amount of time after the sale to make sure that the ship still sails smoothly for a time until the new owner fully understands the vision.
- IP Issues – The buyer wants to make sure that they aren’t going to be getting expired patents or whether they own whatever code the company makes. If they lose either of these, that could shred whatever competitive advantage they might have been angling for.
- Turnover – Will the buyer be getting a staff that helped make the company so enticing, or will there be a lot of turnover? If it’s the second one, then they have to ask themselves whether they want to spend time hiring new staff. If not, bye-bye sale.
- Lease/Landlord Issues – People who rent apartments or houses want to make sure that they’ll have favorable lease conditions and landlords who will be there for them. The same goes for these buyers: Are they going to see a sudden huge hike in lease and an indifferent management company? If they sense that, they could bolt.
Other Factors
The above are the main ones that can either end or slow down a sale. But there are other things that can come into play. These can fall more into the emotional side
- Slow Response Times – It’s one thing to be thorough with due diligence, since it’s important to make sure no potential issues arise. Seller could get annoyed if it feels like that due diligence is being conducted by a sloth. They also have to worry about external disruptions, such as financing issues or market shifts, rearing their ugly heads and causing the deal to be delayed or killed.
- Deal Fatigue – Waiting can also create deal fatigue, since the closing process is on a time crunch as it is, so feeling the pressure can also make either party just throw their hands up and end the deal. Patience is a virtue, but it can only extend so far.
- Cultural Issues – Yes, the dreaded buzzword can end a deal. Does the buyer like the current leadership style? Would it make things chaotic? If they feel like it would cause more harm than good, then they could pull the plug and look elsewhere.
Basically, the due diligence is to make sure that the buyer will be able to adjust to whatever issues it uncovers. If they don’t like what they see, whether it’s from a financial, operational, or even emotional standpoint, then they might end it to avoid regrets down the road. That can prevent a lot of heartache.
Companies, no matter how well-run they are, are likely to have flaws. It’s up to the buyer to determine if those cracks in the foundation could be managed or if they could cause things to crumble down later. Due diligence can help or hinder that.
If you have questions relating to the content of this article, Wendy Leibowitz of Wendy’s Real Estate would welcome the opportunity to answer them. Ms. Leibowitz can be reached at [email protected].
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.