Prepared by Andrew B. Coburn
As seen in Business Black Box
Q3 2014 Edition
There are a multitude of things that can kill the sale of a company, but there are a few serial killers that can obstruct the sale of even a “good” business. The typical scenario is an established, profitable business that has done well for years and is expected to continue to do well for the foreseeable future. It is a “good” business, so the owner expects that it will be easy to sell for what the owner considers to be a fair price. When the proposed sale does not work out as the owner planned, the following culprits are often to blame.
No significant growth potential. Even if your business if profitable, most buyers won’t be interested if they can’t grow its value beyond what they paid for it. A $500 million company or private equity fund will not get much benefit from buying a $2 million business with no growth potential, unless the business has some unique attraction such as a valuable patent. A $80 million company still may not be that attractive to buyers if the total market for its products and services is only $100 million.
Skeletons, real and imagined. Skeletons such as significant litigation obviously can scare off buyers, but there are weaknesses that can kill a deal even if they have not yet resulted in actual problems. Classic examples include weak financial reporting and lack of audited financials (which make the buyer unwilling to rely on seller’s information regarding the company’s performance); failure to ensure that company intellectual property is properly protected; and failure to ensure proper, and properly documented, compliance with environmental, import-export or other legal requirements.
“It’s all about me.” Buyers are always concerned if a potential target is heavily dependent on one or two individuals. If the individuals are critical merely for general management skills, a buyer may be comfortable that they can be replaced. If the individuals are critical for other reasons such as technical know-how or key customer relationships, that will be a bigger issue for buyers. In many cases this issue can be addressed (by a combination of employment agreements with non-compete restrictions and earn-out provisions making a portion of the purchase price contingent on future performance of the company), but it will still be a significant deal issue.
Not a game for amateurs. It is surprising the number of deals that fall through because a potential seller fails to use professional advisers (such as lawyers and valuation experts) experienced in mergers and acquisitions or fails to engage them early enough in the process. The sale of your company is not likely to succeed if you hire an inexperienced lawyer who advises you not to agree to provide any representations or warranties regarding the business. (Yes, this situation actually occurs.) You are also likely to have problems if you don’t engage your lawyer until two weeks before closing. If the lawyer discovers key issues that need to be addressed, your buyer is likely to be extremely upset when you then try to renegotiate the deal terms just before closing. Possibly the biggest deal killer in this category is unrealistic expectations regarding purchase price. If the market won’t pay what you expect for your company, don’t bother to start the sales process or adjust your expectations before you do.