Most Common Deal Killers When Selling Your Business

Jacob Orosz headshot
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

Did you ever get to the top of the diving board only to “chicken out”?

That feeling of trepidation is not unlike what many buyers of small businesses experience, which often causes deals to fall through at the 11th hour, sometimes after months and months of information-gathering and other due diligence.

In this article, we take a look at wary buyers and other potential deal-killers, along with how to minimize their impact or prevent them altogether.

Let’s start with the most common deal-killer of them all…

Deal Killer #1: Inaccurate Financial Statements

The number one deal killer when selling your business is inaccurate financial statements.

While inaccuracies in financial statements can stem from hundreds of sources, the antidote is simple. Make sure your financial statements are accurate and up-to-date. And be sure to have the necessary backup material to support your financials (bank statements, receipts, invoices).

The best option is to retain a third-party accountant or CPA to review your financial statements. Tell the accountant you are planning to sell your business and you would like them to perform pre-sale financial due diligence. Alternatively, you can inform your current accountant that you are selling your business and ask them to perform presale financial due diligence.

Deal Killer #2: Landlord and/or Lease

If your location is instrumental to the success of your business, the landlord can kill the deal with a snap of their fingers, so treat this relationship with finesse and tact.

The simplest way to prevent this problem is to gain the landlord’s cooperation as early as possible in the process.

Follow these simple steps:

  • Let the landlord know early on in the process that you are selling.
  • Ask the landlord what is important to them in terms of a new tenant.
  • Confirm with the landlord that there will be no material changes to the lease terms.
  • Position the new tenant to fit the landlord’s needs.

Deal Killer #3: Buyer Fear

One of the most common deal killers when selling a small business is fear on the buyer’s part.

Note: This refers to small businesses in which the buyer is an individual, as opposed to a private equity group, competitor, or other company.

Many buyers of small businesses have never owned a small business. When purchasing a business, they must part with a significant portion of their net worth. This net worth may have taken decades to accumulate.

Starting a business is scary enough if you have never done so, even if you are only bootstrapping your business. Imagine if you need to write a check that represents over half of your net worth and nearly all of your liquidity.

If the buyer is obtaining a Small Business Administration (SBA) loan, the spouse must normally be on the loan as a guarantor. Additionally, the bank may ask to collateralize additional assets, such as the buyer’s personal residence. Some buyers use their life savings or retirement funds to fund the purchase of a business. Others borrow money from friends and family.

What Happens if the Buyer Fails?

The end result is never pretty. We recently sold a business that unfortunately struggled. Within one year, the business was closed, and the buyer had lost all of his retirement funds. The buyer was so distraught that his situation turned into a deep depression that took him nearly a year to recover from. On top of this, he lost over $500,000 and destroyed his chances of a happy retirement. This is not a decision to be taken lightly, and many buyers become paralyzed when it comes time to make the leap.

Regardless, buying a business is one of the most important decisions one will make in life, and buyer fear causes more deals to die than all other reasons combined.

Why Does Any of this Matter?

It’s simple. When selling your business, it’s important to recognize the presence of fear that your buyer may experience and be prepared to manage it. If you don’t, you may find yourself wasting months with a buyer only to have them pull the plug on you at the last minute or disappear altogether.

This is a regular occurrence when selling a small business. It’s common for buyers to go through the motions, but there is often a tornado of trepidation under the surface. An expert can usually sense any uneasiness in a buyer, but most sellers are blind to any signs of apprehension.

A buyer may send the seller an endless number of document requests in an effort to pacify themselves. A seller may miss the warning signs and continue to feed the buyer’s fears by sending them unrelated documents. Then, one day, the buyer pulls the plug and tells the seller the deal is off. In these situations, rarely does the buyer communicate directly with the seller regarding their fear. Rather, they conceal their dread of having to make the decision by drowning the seller in document requests, stall tactics, and other excuses.

In some cases, we have heard of this going on for well over six months. Yes, a buyer might drag along a seller for six months because they lack the courage to make the leap. When a buyer doesn’t have the strength to discuss their fears with the seller directly, and the seller doesn’t recognize it, no one wins. The seller, who was strung along for six months, wasn’t happy with the delayed closing or the countless document requests and other excuses, but they acquiesced because they didn’t want to lose the buyer and start all over from square one.

Tips for Managing the Buyer’s Fear

How can you prevent buyer fear from killing your deal? Here are some common-sense strategies:

  • Exclusivity. Avoid granting the buyer exclusivity, if possible. If you must grant exclusivity, then only do so for short periods, such as 30 days at a time. These time frames can always be mutually extended if the need arises.
  • Marketing. Keeping the business on the market during the entire process will keep the buyer on their toes. The buyer should know that other buyers are continuing to look at the business. If they back out or stall, you can quickly move on to another buyer.
  • Earnest Money. Ask for an earnest money deposit, typically 5% of the purchase price.
  • Hoops. Make the buyer jump through hoops. For example, we don’t work with any buyers who refuse to sign a non-disclosure agreement or who won’t complete buyer qualification forms. If the buyer expresses reluctance to jump through a hoop, move on.
  • Milestones. Include hard deadlines in the offer or letter of intent (LOI), such as completion of due diligence, or a deadline for drafting the purchase agreement, or obtaining a commitment letter for financing. If you have granted exclusivity, the buyer should lose that exclusivity if they fail to meet a deadline.
  • Reassurance. If you sense fear, confront it directly. Sit down with the buyer and have a frank talk. Try to be patient and understanding. Remember — this will be one of the most important decisions of their life. Offer the buyer reassurance, but be clear that buying a business involves risk, and there is absolutely nothing that can be done to eliminate risk. Reassure the buyer that you will be available if they run into any problems even after the transition period is complete.
  • Due Diligence. Evaluate the buyer’s document requests during due diligence. They should be sensible and logical. Once due diligence is over, ask the buyer to sign off on its completion. Then, once due diligence is over, it’s over. The buyer should not continue to perform due diligence once they have signed off on completion.
  • Commitment. Get the buyer to spend money — the more, the better. The more money the buyer spends on professional advisors, such as attorneys and accountants, the more serious the buyer is. Look for other signs of commitment.

So, while you may not be able to totally avoid buyer fear, risk, and the potential of a sale falling through, there are signs you can watch for and steps you can take to help alleviate these dangers.