We recently met with a business owner who had just tried to sell his business to a private equity firm. The seller invested substantial time and money in the process, only for the private equity firm’s board to reverse its decision and walk away from the deal. The seller was left scrambling to find another buyer and ended up pulling his business off the market. This situation highlights the importance of thoroughly vetting potential buyers and considering alternative exit strategies to avoid wasting time and resources. Let’s take a look at how to prevent this from happening to you.
While receiving an offer can be exciting, rushing into a deal with the wrong buyer can lead to failure, financial loss, or an unsatisfactory transition for employees and customers. Business owners should evaluate potential buyers carefully to help ensure a smooth and successful transaction.
The Risks of a Failed Sale Attempt
Going to market is an expensive and time-consuming process. Sellers often work with brokers or investment bankers, CPAs, attorneys, and exit planners—accumulating substantial costs before a deal closes. If the sale falls through, most of that money is wasted. Worse, repeated unsuccessful attempts to sell can tarnish a business’s reputation, making it more difficult to attract serious buyers in the future.
Common Reasons Deals Fail
- Buyer Due Diligence Issues: Buyers may uncover financial, legal, or operational red flags during due diligence that cause them to walk away.
- Financing Challenges: Even well-intentioned buyers may struggle to secure funding, particularly in shifting economic conditions.
- Misalignment on Valuation: If sellers and buyers have significantly different expectations on business value, negotiations can break down.
- External Market Factors: Unexpected events like economic downturns, regulatory changes, or geopolitical disruptions can impact deal momentum.
How to Prevent Deal Failure
- Start Early: Begin preparing at least 1–2 years before going to market.
- Conduct Internal Due Diligence: Address red flags in your finances and operations before buyers find them.
- Align on Valuation: Work with an advisor to estimate a realistic, data-driven value for your business.
- Vet Buyers Thoroughly: Understand who they are, what they’ve bought before, and how they operate post-acquisition. Assess their financial stability, references, and strategic intentions before engaging in negotiations. Ask to speak with companies that they have previously acquired.
- Negotiate Deal Terms Thoughtfully: Ensure clear, enforceable terms in letters of intent and purchase agreements to reduce uncertainty. Work with experienced experts to help you navigate the entire process.
- Have a Backup Plan and Consider Alternative Exit Strategies: Explore multiple exit options (e.g., selling to insiders, ESOPs, partial sales) before going to market. Selling to an outsider is not always the best option. Internal sales—such as selling to key employees or existing partners—can be a way to recycle the value of the business, avoid disruption and maintain legacy.
Key Factors in Selecting a Buyer
Not all buyers are created equal. The highest bid is not always the best option. Sellers should consider:
- Strategic Fit: Does the buyer have a clear plan for integrating the business? Will they preserve the company’s culture and workforce, or is drastic change likely? Do they bring resources to the table that will benefit the business?
- Track Record: Has the buyer successfully acquired and integrated other businesses? Have those companies thrived post-acquisition?
- Financial Stability: Does the buyer have the financial resources to complete the purchase, or is there a risk of the deal falling through due to funding issues?
Final Thoughts
Despite best efforts, not every deal closes. But many failed deals are preventable. By understanding the pitfalls that can derail a sale and taking proactive steps to mitigate them, sellers can significantly improve their chances for a successful transaction. Selecting the right buyer is just as important as preparing your business for sale. By evaluating buyers for strategic fit, financial stability, and track record, business owners can minimize their risks during the selling process and post-sale transition.