don't let these 5 common issues derail the sale of your small business.

It might seem like all of your hard enough is just about to pay off. After a long period getting a business on the market you’ve finally gotten a decent offer from a buyer, you have a deposit, documents are being prepared and settlement dates are being discussed.

What could possibly go wrong? 

A whole lot of things actually. And, based on my experience and that of other business sale colleagues it happens a lot.

The closer you get to the end of the process of selling your small business the more likely you are to encounter unexpected problems that can derail the sale. 

And if the last remaining buyer gets cold feet (and with all the earlier potential buyers long gone) it is really hard to “dust yourself off” and restart the entire sale process with more costs and more precious time.

The key is to ensure you only deal with genuine buyers who have;

1. A proven and legitimate reason to buy your business,

2. Demonstrated financial capacity to fund the purchase,  

3. Been well advised themselves.

This is your best chance of getting across the line.

Following a few of the more common ones and advice on how to best manage or prevent them. Before they become a major issue there are usually some tell-tale signs – so keep your eyes and ears open for. Left unaddressed they will cause your deal to fall over.

Expanding Due Diligence.

What started as a pretty straightforward process of checking your financials becomes a “fishing expedition” with endless requests for more and more detailed information about every aspect of the business financials – current and future, customers, suppliers, technical etc. 

It can be driven by very different motives ranging from genuine uncertainty, right through to simply accumulating more billable hours for less scrupulous advisors to the buyer.

Typically the Due Diligence clause in many offer documents is very standardised. The key to avoiding or at least minimising this issue is to spend more time upfront defining exactly what due diligence you think is fair & reasonable. If an offer comes in that wants to significantly widen the definition of Due Diligence then think carefully about what this means for you. In the really big deals done by the large investment banks negotiation of the terms of Due Diligence is one of the most critical activities.   

Manufactured finance decline.

Any offer that is subject to the approval of bank financing should put you on alert. It’s hard to get finance for small business acquisitions so you need to assess whether the buyer has a realistic chance before going too far down the track with an offer and due diligence. To get comfortable ask the buyer how far they have already progressed their loan application and what the proposed terms of the deal will be e.g. are they offering any security.

If they are only borrowing say 40% of the purchase price and they have non-business assets to secure the debt then it may be realistic. If on the other hand the buyer needs 100% finance with no security and is just assuming that they will able to borrow the money then don’t waste time with them.

As with a lot of things you need to pay careful attention to the wording of their “subject to finance” clause in their offer. If it’s really broad then they could use it as a “free kick” to get out of the contract at a later stage, just in case they change their mind. 

The best way to tighten this up is to make the subject to finance clause very specific so that it includes how much money they are borrowing, which bank or banks they are approaching and what security they are proposing to offer the bank

Second guessing yourself.

At a time of high stress you get some unprompted advice from a well-meaning family member of friend which causes you to rethink what you want to do. Fuelled by emotions, that you will no doubt be feeling at that stage when you have an offer on your business, you can start to question your original objectives, second guess yourself and generally wonder “am I doing the right thing”. This is all perfectly normal.

On any given day and driven by the uncertainty about life after business your view of the offer you have on the table can change.

By the time you have an offer to buy your business the chances are that more of your nearest & dearest will know. Most of them will be excited for you and genuinely interested in the outcome. But whether they have the all-round commercial experience and understanding to offer worthwhile advice is another question all together.

Where possible I recommend that you keep your business sale as private as possible until the process is done & dusted. Write down your objectives and plans for life after business. Not only does this help with the exit planning process but it becomes a great document to refer back to, in times of stress and uncertainty, and to discuss with the trusted advisors and nearest and dearest you have  carefully chosen.

Renegotiating deal terms.

Unless you get your key deal terms tightly defined and written down in a document, regardless of how much you might “trust” the potential buyer, there is always a high risk that there will be requests or demands for changes to key deal terms. Essentially you need to capture everything you agree – verbally and in writing. This can take the form of a Heads of Agreement (which may be legally binding) for the pre due diligence stage and a Formal Contract (which will be legally binding) for finalising the sale. 

Using a well drafted Heads of Agreement is a great way to minimise the risk of changes to key commercial terms before you have invested a lot time, emotion and money in a formal due diligence process. 

If you don’t understand something then don’t agree or sign off on it.

Staff threaten to walk.

Whether you have decided to advise staff early or late in the sale process or, not at all, is a matter for your judgement.

But staff getting wind of the sale and threatening to walk out unless they receive an additional financial incentive e.g. bonus is a common occurrence.

For many businesses there will be staff who are extra important to the future success of the business, and especially to the prospective new owner. If they feel put-out for whatever reason those key staff can all of a sudden realise their value to the business. They can use that influence and power to hinder or actually stop you getting the deal “across the line”.

Be prepared that some staff may request other incentives in order for them to go along with the sale. Whatever this might cost financially needs to be factored in when thinking about what net value you expect to get on sale of the business. 

If you want to discuss what to do next with your business contact me directly via https://www.kerrcapital.com.au/contact-us