The number one reason businesses don’t sell is unrealistic value expectations. That’s according to the Market Pulse report, a quarterly M&A survey by Pepperdine University’s Graziadio School of Business and Management, International Business Brokers Association (IBBA), and M&A Source.
Unrealistic seller expectations have been the leading reason deals fail to close since we started the study in 2013. We’ve since tweaked the question to capture new information. What else causes deals to fall through? Here’s what advisors said:
The buyer got cold feet (12 percent of deal failures): This issue is more of a concern in the Main Street market where individual buyers are typically looking to buy a business for the first time. If you are selling a business have multiple buyers at the table, look twice before you take the highest offer.
Along with dollars and deal structure, talk to your advisor about which buyer is most likely to close. Who has the wherewithal, the confidence, and the skill set to buy a business?
Poor books and recordkeeping (11 percent): When you’re first in business and have a lending partner, you typically have to keep your books pretty tight. But established business owners tend to get a little relaxed about the bookkeeping when no one is holding them accountable.
When it’s time to sell, the buyer and their lender will want to see the last three years of financials. If things don’t tie out, or you’re constantly reclassifying expenses, or you’re not putting sales in the right month, all those things will lessen the credibility of your business.
Couldn’t agree on terms (10 percent): Many sellers think, “As long as we can agree on a price, everything else will fall into place.” But the price is only one piece of a complicated jigsaw puzzle. There are many other terms a buyer and seller have to agree on, including financing structure, seller non-compete, working capital, and baskets and caps included in the reps and warranties.
Make sure you’re working with an experienced M&A attorney who is a deal maker, not a deal breaker. An overzealous or inexperienced lawyer can tank a deal by demanding unrealistic terms.
Seller got cold feet (9 percent): This is an area we spend a lot of time on at Cornerstone. Before we start an engagement, we try to make sure the seller is emotionally ready.
Sellers have likened selling their business to getting a divorce or giving a kid up for adoption. It’s can be gut-wrenching if you’re not prepared and in the right state of mind.
As part of our process, we ask sellers to build a bucket list or a plan for what’s next. Basically, we want to be sure they’re running toward something, not just running away from their business, because they are burnt-out (#2 reason many sell their business).
Financing fell apart (9 percent): In today’s market, lending is pretty aggressive. If you have a buyer who is financially qualified, and you know who the right lenders are, there should be little reason why a deal can’t get financed.
If I had to speculate, I’d say this has to do with high values and seller-financing. It’s a seller’s market right now, and it may be that sellers are negotiating more cash at close than what a bank is willing to do. Obviously, you want to get as much cash at close as possible, but you have to remain reasonable and flexible in the deal structure.
No offers submitted (6 percent): Even in a strong market, not every business is salable. Alternately, it could be your business was salable, but you picked an investment banker who took on too many deals and didn’t have time to market your business before your contract expired.
Before engaging an advisor, find out who will be representing your business and how many other clients they’re working with. You want someone who will do more than throw it up on a few websites and wait for calls to come in.
While there are many reasons a sale doesn’t get across the finish line, several of the leading hurdles are in your control. Be realistic about what the market will bear, organize your financials, be flexible about terms and seller financing, and do the hard work of mentally preparing yourself for a sale.
Your advisor will help you navigate these issues and guide you to the sale you’ve spent your entire career working toward.
Learn more about how to successfully sell your business, visit Helping You Sell Your Business