How Business Deals Go Sideways

As a business broker in the Triangle, I serve as a matchmaker between buyers and sellers of Triangle small businesses for the consummation of business deal.  With a deal being the exchange of money for equity, there are a lot of things that have to work out right, and a lot of things can go wrong.

It’s natural to want to celebrate when the purchase agreement is signed, but a signed contract is basically just entering the “Red Zone” in NFL parlance; it’s anything but a touchdown.  There are many ways that deals can go sideways, and this is the stage where they normally do…

There are many steps to selling a business.

Let’s explore some of the top reasons why deals go sideways after a contract is signed between a buyer and seller…

4)Unplanned Events Occur

Business brokers love to swap stories of drastic circumstances resulting in lost deals and significant shifts in buyer motivation.  “Time Kills All Deals,” and deals take time, but time allows for events like fires, PR disasters, legal issues, and personal issues like a health issues to occur.  

Example:  Imagine the repercussions of an employee dying due to a workplace accident to a deal that’s under contract.  These things happen. All of a sudden the business to be sold could have a lawsuit clouding the closing.

A good business broker strikes while the iron is hot with deadlines for due diligence and management of the transaction by staying on top of deliverables owed from both parties to limit the time available for random acts of unkindness.

3) Due Diligence Disasters

Due Diligence in business buying is different than due diligence in buying a house.  Instead of lead paint and asbestos inspections, buyers get to validate that the business is great as you and your broker represented it in your the marketing materials.

Example:  A seller accidentally includes expenses from a separate business in the books of the business being examined for sale. This co-mingling of the books is an unpleasant surprise for the buyer who is looking for reasons not to write the seller a check.

A good business broker can help a seller avoid unpleasant surprises in due diligence with a thorough diagnostic of the financials and all aspects of the business being sold before the business goes to market.

2) Deal Fatigue Does Damage

Because deals take a long time (on average 7-9 months), business sellers/buyers can get impatient.  Sellers are ready to sell and have done a lot of work to prepare the business and answered a lot of tough questions.

Buyers are concerned they may be missing something and nervous about misplacing their money.

Both parties can suffer “deal fatigue” and end up picking the wrong battles to fight.  “Deal breakers” should only be obstacles that get in the way of the buyer and seller’s original objectives for the transaction.  But as deal fatigue sets in, deal breakers can get granular and petty…

A good business broker can help by shielding each party from the minutiae of deal making.  Some problems solve themselves, and expectations can be managed so that when the worse happens it’s not a surprise.

1) Financing Failures:  

Smart buyers rarely pay all cash for big deals, even when they have the resources.  But when banks and governmental agencies like the SBA are involved there are more stakeholders and more eyes on the deal. The seller’s financial performance are closely scrutinized through a rigid lense, as is the character and quality of the buyer.   (You say you had a bankruptcy in the past? That’s going to be relevant for this SBA application…)

Example: A seemingly well qualified buyer attempted to buy an SBA pre-qualified business got rejected for an SBA loan due to an undisclosed legal issue that was discovered in underwriting.  He was arrested for smoking marijuana twenty years earlier resulting in a criminal charge on his record that he failed to disclose on his SBA application. The underwriter of the SBA loan found the record, and for this reason he couldn’t get the loan.

A good business broker can proactively screen buyers, get in front of issues that can cause financing to fail, and have multiple financing options and financing professionals available when deals start to fall apart.

The bad news is this that these are just a sample of the reasons why deals go sideways.  The good news is that deals get done every day, and all of them have surprises that come up along the way.

Obstacles are made to be overcome. Quality businesses for sale are in demand in the Triangle market and with patience and proactivity they can be sold given enough time, patience, and the help of a quality business broker.

Want more tips? Check out this video on Mistakes To Avoid When Selling Your Business.