BEWARE: Deal Killers Can Suck the Life Out of a Successful Business Exit

Karl EdmundsBy Karl Edmunds – Director, SDR Ventures

At a high level, starting and executing the process for the successful sale of a business seems rather simple. How hard can it be? Set a value and find a buyer, right?

While many business owners declare that they are prepared for the classic technical and emotional dramas of a business exit, the reality that many owners don’t want to face is the unplanned last minute failure of the sale and/or the consequences that unplanned events can have on the business.

These unplanned events are often issues that could (and should) be addressed prior to moving forward with the sale, but are routinely neglected or dismissed as unimportant until they show up in the 11th hour.

Deal KillersFor example, as a business owner, are you prepared and have a plan for the day you need to take your eyes off the daily grind of running the business and engage a professional advisor to focus on the sale of your business? Are you prepared for the potential of key employees finding out about the planned sale and getting spooked – or possibly leaving?

And beyond these and other types of preparatory planning safeguards, one must also recognize that the trends in the market and the internal trends of your business must align constructively to drive a successful sale. If you jump into the market too soon or wait too long, the sale could be jeopardized.

One of the best ways to begin the process, and avoid problems and potential deal killers, is to take the time to gain clarity about what you honestly intend to do with the business.

What type of sale do you have in mind? Do you want to sell to a family member or a key employee? Do you want to target a strategic buyer, business owner or investor? Or, when you are ready do you simply intend to liquidate your assets and close the door? Getting clear about your exit objectives is a critical first step and driver of all subsequent decisions in the business exit process.

Next, and despite the reality that every business exit process is truly unique and never fully predictable, there are some common factors that can open the door to failure of the entire process if they are not addressed properly. These critical elements or triggers should be recognized and prepared for to avoid, or at least reduce the odds of, a complete failure of the sale.

Consider some of the top deal killers…

  1. The realities of Business Valuations: As a business owner, you may be able to justify a price in your mind that perfectly fits your personal expectations — or you may be speaking to someone who has proposed a sale price that is appealing to your ego but not aligned with the realities of the market. Keep in mind the true value of your business is only what the market dictates at any particular point in time. Proposing a high price point while casting market realities aside leads to frustration more often than a successful sale.
    Also, it is critical to demonstrate that the value of the business is not centered solely in the owner. Too much dependence on the owner for the future success of the enterprise may dramatically reduce the selling price or, ultimately, could kill the deal. Reducing dependence on the owner usually takes time, so start thinking now if this issue exists.
  2. The Seller’s Business Story Must Begin and End in a Believable Way: Every deal has a life span. Throughout the entire sale process, the attention and believability of the seller and the seller’s advisors are critical. For example, as the seller, be careful not to overshoot your business performance forecasts. If you offer clear metrics and use KPIs (Key Performance Indicators) suggesting that a 20% growth rate is expected and then you miss it during the selling process, or if the performance of the business begins to erode to the surprise of the seller, previously negotiated terms and pricing could be in jeopardy. When you prepare a forecast, give yourself reasonable margin for error and always try to err on the side of over delivering results.
  3. Handling Organizational Drama: As the seller, work with your professional deal advisors to clarify whom among your employees will be allowed to interact with potential buyer personnel. Once these key people are identified, then go through an educational process about how to communicate and discuss the company, its history, market, competitors and performance. Hearing radically different stories from key people within the firm can diminish the believability of the seller’s sale narrative.
  4. Framing Corporate Needs & Opportunities: Beyond the preparations of all key people to communicate the corporate portrayal, it is important to honestly establish agreement and understanding about how to explain the company’s weaknesses and operational needs. Painting a picture of perfection with no corporate flaws is not believable, and having different personnel presenting unplanned and conflicting descriptions of the business and its needs can also damage the sales process and potentially kill the deal.
  5. Winning the Diligence Details: Taking the time to not only present a coherent overview of the industry and the company’s individual business value but also being able to communicate the details with confidence and authority are critical. As they say, never present a question that you are not already thoroughly prepared to answer well. Before you go to market, a good deal advisor will help you address common due diligence problems, operational issues and organization dynamics so that you can minimize any surprises that could kill the deal unexpectedly. Trying to hide, defer discussions or misrepresent key business issues at any time in the sales process are absolute “no no’s” that will hurt or kill the deal – and justifiably so. So be prepared and ready to honestly put those items on the table early in the process.
  6. Prepare for the Hard Decisions to Avoid Delays: Sellers should be prepared, flexible and ready to make some hard decisions during the sale process. Lack of appropriate planning and preparation will inevitably cause delays which can be deadly. Every deal has a life cycle. When the process moves along and sustains the buyer’s enthusiasm, good results usually follow. But when the deal gets bogged down in unplanned diligence issues, or delays occur from either side of the table, steps should be taken quickly to regain the momentum of the process. Be sure that your trusted deal advisors, accountants and attorneys have direct and solid experience in handling complex transactions, can manage the negative emotions that often occur and have the discipline to avoid expending time and attention on transaction details that can derail the process and provide little value.
  7. Don’t Be Caught With Unforeseen Liabilities: Finally, sellers must have clarity and solid documentation dealing with all aspects of business tax and other potential liabilities. Nothing can kill a deal faster than having the diligence process reveal unplanned or undisclosed issues/liabilities related, for example, to sales & use taxes, payroll taxes and unpaid state income taxes, or possible tax liabilities connected to international operations. Not being prepared for these potential tax and other liabilities, or other related diligence details, can force a higher than expected amount of escrowed funds to be set aside for all of these types of issues.

The seven points outlined in this article are often some of the highest emotional elements of the entire business exit process. And this emotional tension can trigger responses that are not constructive to the overall objectives of the sale.

Thinking through each dimension of the selling process, careful coaching of key employees, thoughtful implementation of incentives to ensure key people remain in the business and detailed planning and document preparation are some of the most proven methods for reducing the likelihood of a bad outcome.


About the Author:

Karl Edmunds
Karl Edmunds is a recognized business leader with over 30 years of business experience in banking, consulting and exit planning for business owners. Before joining the team as an SDR Director, Karl was a Principal of a national supply chain/distribution management consulting firm targeting the food, beverage and consumer goods industry and successfully sold the business.