This article is one of a series that offers insight and guidance into the process of buying selling or valuing a business. Whether you want to buy, sell, or appraise the valuation of a going-concern business, these articles provide specific guidance and references to help you accomplish your goal.
Why Do Business Purchase Deals Fall Apart?
by Tom West
In many cases, the buyer
and seller reach a tentative agreement on the sale of the business,
only to have it fall apart. There are reasons this happens, and,
once understood, many of the worst deal-smashers can be avoided.
Understanding is the key word. Both the buyer and the seller must
develop an awareness of what the sale involves--and such an awareness
should include facing potential problems before they swell into
floodwaters and "sink" the sale.
What keeps a sale from closing successfully?
In a survey of business brokers across the United States, similar
reasons were cited so often that a pattern of causality began to
emerge. The following is a compilation of situations and factors
affecting the sale of a business.
The Seller Fails To Reveal Problems: When
a seller is not up-front about problems of the business, this does
not mean the problems will go away. They are bound to turn up later,
usually sometime after a tentative agreement has been reached. The
buyer then gets cold feet--hardly anyone in this situation likes
surprises--and the deal promptly falls apart. Even though this may
seem a tall order, sellers must be as open about the minuses of
their business as they are about the pluses. Again and again, business
brokers surveyed said: "We can handle most problems . . . if
we know about them at the start of the selling process.
The Buyer Has Second Thoughts About the Price:
In some cases, the buyer agrees on a price, only to discover that
the business will not, in his or her opinion, support that price.
Whether this "discovery" is based on gut reaction or a
second look at the figures, it impacts seriously on the transaction
at hand. The deal is in serious jeopardy when the seller wants more
than the buyer feels the business is worth. It is of prime importance
that the business be fairly priced. Once that price has been established,
the documentation must support the seller's claims so that buyers
can see the "real" facts for themselves.
Both the Buyer and the Seller Grow Impatient:
During the course of the selling process, it's easy--in the
case of both parties--for impatience to set in. Buyers continue
to want increasing varieties and volumes of information, and sellers
grow weary of it all. Both sides need to understand that the closing
process takes time. However, it shouldn't take so much time that
the deal is endangered. It is important that both parties, if they
are using outside professionals, should use only those knowledgeable
in the business closing process. Most are not. A business broker
is aware of most of the competent outside professionals in a given
business area, and these should be given strong consideration in
putting together the "team." Seller and buyer may be inclined
to use an attorney or accountant with whom they are familiar, but
these people may not have the experience to bring the sale to a
The Buyer and the Seller Are Not (Never Were)
in Agreement: How does this situation happen? Unfortunately,
there are business sale transactions wherein the buyer and the seller
realize belatedly that they have not been in agreement all along--they
just thought they were. Cases of communications failure are often
fatal to the successful closing. A professional business broker
is skilled in making sure that both sides know exactly what the
deal entails, and can reduce the chance that such misunderstandings
The Seller Doesn't Really Want To Sell:
In all too many instances, the seller does not really want to sell
the business. The idea had sounded so good at the outset, but now
that things have come down to the wire, the fire to sell has all
but gone out. Selling a business has many emotional ramifications;
a business often represents the seller's life work. Therefore, it
is key that prospective sellers make a firm decision to sell prior
to going to market with the business. If there are doubts, these
should quelled or resolved. Some sellers enter the marketplace just
to test the waters; to see if they could get their "price,"
should they ever get really serious. This type of seller is the
bane of business brokers and buyers alike. Business brokers generally
can tell when they encounter the casual (as opposed to serious)
category of seller. However, an inexperienced buyer may not recognize
the difference until it's too late. Most business brokers will agree
that a willing seller is a good seller.
Or...the Buyer Doesn't Really Want To Buy:
What's true for the mixed-emotion seller can be turned right around
and applied to the buyer as well. Buyers can enter the sale process
full of excitement and optimism, and then begin to drag their feet
as they draw closer to the "altar." This is especially
true today, with many displaced corporate executives entering the
market. Buying and owning a business is still the American dream--and
for many it becomes a profitable reality. However, the entrepreneurial
reality also includes risk, a lot of hard work, and long intense
hours. Sometimes this is too much reality for a prospective buyer
And None of the Above: The situations detailed
above are the main reasons why deals fall apart. However, there
can be problems beyond anyone's control, such as Acts of God, and
unforeseen environmental problems. However, many potential deal-breakers
can be handled or dealt with prior to the marketing of the business,
to help ensure that the sale will close successfully.
A Final Note:
Remember these three components in working toward the success
of the business sale:
1.Good chemistry between the parties involved.
2.A mutual understanding of the agreement.
3.A mutual understanding of the emotions of both
buyer and seller.
4.The belief, on the part of both buyer
and seller, that they are involved in a good deal.
About the Author
||Mr. Tom West is the editor/publisher of The Business Broker, a monthly newsletter for the business brokerage field. He has written or co-written numerous books including the The Business Reference and Pricing Guide and The Resource Handbook for Business Brokers. He is a founder, past president, and former executive director of the International Business Brokers Association (IBBA). He is a frequent lecturer and seminar leader on all aspects of buying, selling, or appraising a business. Mr. West is probably the most knowledgeable individual in the country today concerning the issues of buying or selling small to mid-sized businesses.
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