Unexpected Problems in a Business Sale : Managing :: American Express OPEN Forum

Unexpected Problems in a Business Sale : Managing :: American Express OPEN Forum

Jun 25, 2010

When you're in the middle of a business sale, you want every step to go smoothly. But it's not unheard of for something to cause problems part way through the process—and these aren't always issues you can prepare for. But that doesn't mean that you should let such issues derail the sale of your business.

Be Ready for New Problems

Every business sale is different and, depending on the personalities involved, each can have its own quirks and concerns. Andrew Cagnetta has war stories ranging from difficult sales to outright impossible sales.

"We had a seller who was an older gentleman. His wife also worked in their company as controller. The husband was my broker's main contact in the deal and was our source of deal information. The seller, however, did not wear the pants in the family. So often we would get no response or a negative response for items or information needed in due diligence. My broker came to me several times with a deadlock or refusal to supply information (one time a copy of an insurance policy). In deal-making, sometimes you have to reach deeper into the organization. In this case we had to several times.

"My broker would call me (I am the CEO of our intermediary firm), I would call my friend who was the son-in-law of the owners. The son-in-law would call his wife and explain the importance of supplying us information or making a certain decision. His wife would call her mother, and speak to her and plead as a daughter. She would relent and tell her husband it was OK to proceed. The seller would then call my agent to say he changed HIS mind. This process and deadlock breaking would eventually repeat itself many, many times. Every once in a while my buddy would refuse the request and table it for a day or two as he was overdrawn of his 'savings account' with his wife."

When the deal is worth your while, sometimes you have to get creative to resolve the unique issues you face during a particular sale. That can mean finding an intermediary whom the buyer trusts to discuss terms or it can mean working through a longer chain of connections.

Of course, problems are rarely limited to personality quirks. There can be financial concerns, logistical issues, and other factors dependent on your individual business or industry. If you're serious about selling, though, there's usually a way to manage those issues and come to an equitable agreement with a buyer. Approaching such situations with honesty and an assumption of good intentions on everyone's parts is usually the key to finding a middle ground on any problem that arises.

Take Steps to Minimize Problems

What may seem like an unexpected issue is a little less unexpected to a business broker like Matt Paradis, who has been through the processing of selling a small business many times. Most of the problems Paradis sees come down to the seller's bookkeeping methods: how accurate the books are and whether personal expenses are handled through the business. Making sure that all your business records are in good shape before a sale can make for smoother sailing.

In the end, though, Paradis offers one key piece of advice for reducing the problems you may see during the sales process. "Don't misrepresent—be honest, open and clear with the buyer during the initial meetings and discussions with the buyer. If a seller tells the buyer that the company runs itself, for example, and then the buyer starts digging during due diligence and finds out that the seller is the whole sales team and all the sales are tied to personal relationships, the sale will likely fall through. The seller should have been honest up front about the personal relationships and should have offered solutions as to how they would work together to transition those relationships with minimal effect to the business."

Honesty is the best option, especially when you're concerned that a problem may derail a sale. If you need to get things back on track, sitting down with a prospective buyer and discussing the matter can be the most direct route.

Prepare to Walk Away

Sometimes, your only option is to walk away from a potential sale if things become too problematic. Just as a buyer has to be prepared to walk away from a purchase if he sees too many issues, forcing a sale to work can translate to problems for the seller.

Paradis points out that walking away is the best option if there's a problem with the buyer's financing. "Typically, sellers in today's markets are expected to 'hold paper', which means they finance some portion of the sale themselves by receiving future payments plus interest from the buyer. If the buyer has serious credit history issues, the seller's risk of not getting the complete package price increases greatly."

Another issue is if a buyer tries to make major changes to the sales agreement after the due diligence period begins. Paradis explains the potential problem: "Understand, there is frequently some renegotiation based on discoveries during due diligence, but there will be situations where the buyer will start to over-exploit the issue and try to test the seller to see how desperate they are now that they have a buyer at the table. Small concessions and adjustments to the price and terms are acceptable, but I advise my clients to walk away when the buyer starts asking for wholesale changes to the agreement."

At the end of the day, it can come down to how you feel about the deal. If it seems like there are major problems that could easily translate into a situation in which the sale will cause you more trouble than the benefits it brings you are worth, walking away is often the best option.

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