How to navigate the intricacies of a business deal from start to finish
Buying a business or an investment property is an exciting time. You think you have found the perfect investment and you start negotiating. At some point, you come to an agreement and sign a Letter of Intent (LOI) or a Contract for Purchase and Sale (CPS).
Now the real work begins. Here are some of the reasons a business deal can still fall apart.
Buyer Cold Feet: The buyer goes through a rigorous process of due diligence that might include looking at financials, inspections of the business or property, appraisals, and talking with bankers, accountants and lawyers who will all have different opinions of the deal you have just made.
After the initial adrenaline rush wears off, the reality of the deal sets in, and during the due diligence process, the buyers may decide that it’s not a perfect deal. It never is! So after some sleepless nights, the buyer backs out, basing their decision on the legal or financial advice they received from their trusted advisors.
Poor Business Record Keeping: Nothing unsettles a buyer more than unsupported figures and poorly constructed financial statements. Claims sellers make about their business must be substantiated. If you’re contemplating selling your business, it’s imperative to have systems in place for tracking financials and documenting crucial aspects such as safety, compliance, government regulations, taxes, and human resources, all of which hold significance for potential buyers.
Seller Remorse: A seller goes through a similar process of cold feet: they enjoy the excitement of the deal, but then a different sense of future reality sets in. Gathering all the requisite documents and opening the books to prospective buyers can be laborious and burdensome. At some point, sellers may evaluate the cash flow of the business they’ve built and realize that the future might not be as bright without it. To address this concern, they often seek guidance on how to do cash flow forecasting to make informed decisions regarding their financial stability and growth prospects.
Although retiring might seem like a good idea when putting the business up for sale, in some instances, such as the seller’s age and financial situation, the reality of the lifestyle change required can be daunting. Moreover, if the business is experiencing growth, there’s the realization that sticking with it for a few more years could lead to increased valuation. While it is typically more difficult for sellers to get out of a deal, missed deadlines and proposed contract changes allow sellers to move forward with their newfound goals.
Sellers Are Already Checked Out! A business might look good from the outside but delving deeper could reveal that the seller has mentally or physically disengaged, leaving the business to operate haphazardly. This scenario can be a deal-breaker. If you’re selling a business, assuring the prospective buyer of its viability by maintaining its optimal functioning is crucial.
Financing Challenges: Depending on the banking climate, obtaining financing for business investments can pose challenges. This is particularly true when buying a business, as vendor financing is often required to facilitate a deal. Vendor financing can be tricky, and much like financial institutions, most sellers are averse to unsecured loans due to the risks they pose. Often, financing difficulties stem from undercapitalization on the part of buyers. Clarifying your ability to raise money for the purchase and your relationship with bankers should be done before negotiating.
The Wrong Lawyer: I have heard stories about lawyers who have killed or almost killed deals because they haven’t understood them. A lawyer’s job is to help you avoid risk and possible future ruin because of an error in judgment. That said, most lawyers haven’t run businesses or bought or sold investment properties. Finding the right lawyer you can trust to keep your best interests in mind while understanding the reasonable risks you take in buying a business is paramount. The right lawyer will help you make wise decisions, while the wrong lawyer might end up costing you money and lost opportunities.
Unforeseen Challenges: While these may be the most common reasons that business deals often fail, you can add in a variety of unforeseen personal or business challenges that can further complicate the process for both buyers and sellers. While seasoned buyers know to expect the unexpected, it can be a hard pill to swallow if your deal is suddenly off the rails.
Buying an investment can be challenging, but understanding some of the reasons that business deals fall apart can prepare you for the rocky road ahead. Creativity and flexibility will help most people as they go through the process and work towards a brighter future.
Dave Fuller is a Commercial and Business Realtor as well as an award-winning business coach and business author.
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