By Brian Slipka-CEO of Sunbelt Business Advisors of Minnesota

Click here to read the original article published by Forbes

When considering the sale of a business, it can be hard to know what to expect. The journey of business transition is full of unforeseen obstacles and challenges. No deal goes off without a hitch, and any first-time business seller would have a hard time navigating the process.

A commonly asked question in the business transition industry is “How is your deal going? Has it died three times yet?” Such a question may seem pessimistic, but the reality is that the majority of business transition deals end up “falling through” at least three times before the deal is officially done. It is important to be prepared and know what to avoid when selling a business.

Here are five deal-killers to steer clear of when selling your business:

1. Negative Factors Uncovered In The Due Diligence Process

When considering an expensive purchase, every buyer does research. This does not change when it comes to purchasing a business. The buyer is looking for financial assurance and a successful future as owner of the company. If the buyer uncovers some sort of drop in profit or revenue, the deal could die.

2. Deal Fatigue

The longer negotiations go on, the more exhausted all involved parties become. If the process drags on, both the buyer and the seller are likely to become less enthusiastic and more stressed, leading to the eventual death of the deal.

How does one help prevent deal fatigue?

• Maintain consistent, clear communication.

• Establish a realistic timeline with milestones.

• Engage proactively with the buyer.

Having a structured plan in place will limit uncertainty and help prevent a deal from going stale.

3. Funding Issues

This is one of the more obvious and serious deal-killers. As business owners receive offers on their businesses, they or their advisors must ask some pointed questions.

Business sellers should ask the buyers to explain their “capital stack.”

How much of their own cash are they investing, and are these funds already secured? If the potential buyer is a private equity group, the buyer should have committed funds. However, some buyers position themselves as private equity but are actually going to try to raise the funds after they secure a signed letter of intent. This is obviously less attractive.

How much debt do they plan to secure, and from whom? Very few buyers use their own cash exclusively. Private equity groups and strategic buyers want to leverage their equity. Understanding how much debt they are seeking will provide important insight. If a business seller has multiple offers, a buyer seeking less leverage may be a better pick and more likely to close.

It is important for a business seller to establish clear expectations early in the process and to set deadlines for the buyer to provide proof that secured funding is in place.

4. Third-Party Barriers

Third parties typically do not care if a deal closes. Here are a few third parties that a business owner must think about when selling and questions that a potential buyer is likely to ask:

• Landlords: If a business is location-dependent, potential buyers will ask whether they can take control of the lease.

• Suppliers: Buyers will ask if there are easily transferable contracts in place with suppliers. They will also ask whether suppliers will continue any favorable pricing or exclusivity that might be in place.

• Customers: If a business has contracts, a buyer, knowing that customers are one of a company’s most important assets, will ask whether they are assignable. If a business doesn’t have contracts, a buyer will ask whether there is evidence to show that customers are likely to remain loyal to the company.

• Governmental authorities: Buyers will ask whether any state or federal-required licenses will transfer.

5. Failing To Define How Much Net Working Capital Is Included

Business sellers should not accept a letter of intent without understanding what they are likely to net from the sale. To understand net proceeds, business sellers must understand what is included and excluded from the sale.

Many transactions are cash-free/debt-free transactions. The seller will keep the cash accounts and pay off interest-bearing debt.

Some businesses may require a large amount of working capital. When this is the case, buyers will typically expect a portion of net working capital to be included in the price. Failing to define how much working capital is included has killed many deals. (Net working capital is typically accounts receivable, plus inventory, minus accounts payable.)

One can never be too prepared when looking to sell a business. Both buyers and sellers deserve peace of mind when going through such a demanding process. By avoiding these five common deal-killers, sellers can significantly improve their company’s chance of being sold and better ensure the right buyer is found.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

About Sunbelt Business Advisors of Minnesota

The Sunbelt Business Advisors Minneapolis office is the largest office in the Sunbelt network with a staff of over 50 advisors, associates, analysts, and business development representatives. In 2021 the firm was recognized by the International Business Brokers Association as the #1 firm in the country and the first firm in history to sweep all three first-in class awards. Sunbelt provides services to business owners interested in selling their businesses, assistance with merger and acquisition activities, complimentary business value assessments, and advice to business owners seeking to maximize their life’s work when they exit. The firm provides business brokerage and mergers & acquisitions services for companies with revenues from $500,000 to $150 million. More information is available at www.sunbeltmidwest.com (<Under $5 million revenue) and www.tnma.com ($5 – $150 million in revenue).