Finding a buyer for your business is just the first step in a broker’s job. Your company’s sale can take many weeks, and there are seemingly infinite ways a deal can fall apart. An experienced broker can help you avoid pitfalls and keep the process moving. Here are four silent deal killers you might not see coming.
The buyer loses confidence. During the weeks of due diligence, a buyer will be looking carefully at the company’s financials. They’ll be looking at sources of revenue and sales trends (more on that later.) Even if a company is doing well, there may be red flags that can cause the buyer to reconsider. One issue that can kill a deal is finding the company is dependent on just one or two large customers. Most buyers won’t take the risk; the loss of a “too big to fail” customer could mean the end of the business.
The same goes if the company has informal, handshake arrangements with customers instead of contracts or written agreements. A change in ownership or sentiment could cause customers to walk away.
Sloppy bookkeeping can also cause concerns for buyers. Many business owners run personal and family expenses through the company (personal vehicles, cell phones, and electronic devices are common, although not advised.) A business broker will have methods for adjusting these expenses, so the buyer can clearly see the company’s financial performance, but there will always be questions about the details. If a seller doesn’t have clear answers or seems to be less than forthcoming, the buyer begins to worry that they aren’t getting all the information they need. Once trust becomes an issue, it’s easy for the deal to fall apart.
Financing isn’t feasible. A thorough business broker performs an important function to prequalify the business and the buyer for financing. The broker will ensure the company qualifies for SBA lending before putting it on the market. The business has to be financially healthy and have clear records that will allow a lender to assess its financial viability. The firm has to be profitable enough to pay the new owner a reasonable salary and service the debt it takes to buy the company.
Before getting too far along in a deal, brokers will also prequalify potential buyers with SBA lenders. An experienced broker will know what it takes to obtain a loan, assess the buyer’s collateral and other assets, and make sure the buyer has enough liquidity to make the payments on the loan. Interest rates are rising right now, and that means the pool of qualified buyers is shrinking. Someone who might have been able to make the purchase last year may not be able to qualify this year. A broker can reduce the risk of wasting the seller and buyer’s time on a deal that won’t get financed.
The landlord refuses to play nice. Many sellers don’t realize how much influence a landlord may have on their ability to sell their business. Depending on how the lease is written, they may not have an obligation to transfer the lease to a new tenant, choose not to offer options, or offer options with high rent escalations. They could decide they don’t deem the new buyer a suitable tenant for one reason or another or charge a hefty transfer fee. This is especially likely if the landlord doesn’t have confidence in the new owner or if the property’s value has increased since the lease was signed.
The Small Business Administration requires a ten-year window on a lease (since the loan is amortized over ten years) in order to approve a loan. You’ll need to have a lease in place or “options to renew” totaling at least ten years. If those options aren’t already in place, discussing this request with your landlord before you list your business for sale is worthwhile.
Check your lease for specific language about transfers and changes in ownership. Some lease agreements cause you to be in default if you sell the business without notifying the landlord first. You are almost certainly listed as a personal guarantor for the entire lease term, so even if you sell the business and transfer the lease, your personal assets could be at risk if the business defaults. Landlords rarely remove this clause since there’s no legal obligation for them to do so. An experienced broker will know what to look for in your lease and can help negotiate with a landlord.
Revenues are declining. It’s very common to see an owner take their foot off the gas soon after they decide to sell. They may be preoccupied with all the details of getting the business ready to sell. They may be dreaming about all the travel they’ll be doing when they retire. They may just be exhausted and ready to leave it all behind.
But losing focus is the worst thing an owner can do, even if you anticipate a quick sale. Buyers will want to look at up-to-date financials and analyze sales trends over the past year. (That’s especially true if the pandemic hurt your industry.) Declining sales will make a buyer think twice about proceeding. Even if the buyer’s still interested, he will almost always work on getting the company at a discount.
The process of selling your business involves numerous critical details that must be managed, and deadlines hit. Missing or mismanaging any of them could cost you significant money or kill the sale altogether. Engaging an experienced business broker allows you to stay focused on your business while they take care of the deal.
Bianca Evans
Bianca Evans is an experienced business broker based in Jacksonville, Florida. She is a top producer in her field and has made over 180 transactions since 2006. She is a Certified Business Intermediary (CBI), a Certified M&A Professional (CM & AP), a Board Certified Intermediary (BCI), and has her B.S. degree from the University of Florida.
In her 16 years of experience, she has sold businesses in manufacturing, wholesale/distribution, service, retail, restaurants, professional offices, and more.
She has earned the prestigious million-dollar-plus award among her many accomplishments for 14 consecutive years. She has sold the most (dollars) in North Florida for the past three years.
As part of her process to list a business for sale, she offers free business valuations.
She maintains her professional networks by participating in the International Business Brokers Association (IBBA) and the Business Brokers of Florida (BBF).
One interesting fact about Bianca is that she used to be a business owner herself! She has been on both sides of the transaction when she purchased and later sold that same business. She finds that perspective invaluable when relating to her clients and balancing the many details and emotions.
She is licensed in Georgia and Florida and speaks fluent German.
To reach Bianca, email: [email protected] or visit her website https://www.myfloridabusinessbroker.com/