David G Fisher, is a leader in construction management and business development. An experience of severe burn out and stress, after 40 years in construction management and ownership left him broken and un-capable to do his role. David then initiated strategies to dramatically enhance his skills and performance to conquer these obstacles.
When entrepreneurs decide to sell their businesses, it can be the culmination of years of hard work and dedication. However, business selling is challenging; many deals fall through before completion. Industry reports suggest that as many as 75% of offers to buy a business collapse at some point during the transaction. Understanding why most of these deals disintegrate can help sellers prepare better and enhance their chances of a successful sale.
Here are some interesting statistics on small businesses in Australia from Wiseman Accountants.
Why do 75% of offers collapse at some point?
Unrealistic valuations and expectations
Seller Overvaluation: Business owners often have an inflated sense of their company's value, which may not align with market realities. This discrepancy can lead to setting an asking price that needs to be lowered, deterring potential buyers.
Buyer Underestimation: Conversely, buyers may undervalue a business based on incomplete information or a lack of understanding of the business's potential, leading to lowball offers that offend the seller.
Due diligence discrepancies
Financial Inconsistencies: Buyers scrutinize the business's financial health during the due diligence. Trust erodes if they uncover discrepancies or irregularities in the books, and they may withdraw their offer.
Operational Issues: Discoveries of operational inefficiencies or the absence of critical processes can also alarm buyers, making them question the viability of the business post-acquisition.
Financing hurdles
Buyer Financing: Secure financing is crucial for completing a sale. If a buyer cannot obtain the necessary funds due to a change in market conditions or a lender's reassessment of risk, the deal can collapse
Seller Financing: In some cases, sellers may need to provide financing to complete the sale. If the terms cannot be agreed upon or the seller has reservations about the buyer's ability to make payments, the deal may fall apart.
Emotional and relational Dynamics
Seller’s Remorse: Selling a business can be an emotional process. Sometimes, sellers back out of deals due to a change of heart or fear of the future without their business.
Cultural Fit: Mismatches in company culture and vision for the business's future can lead to a breakdown in negotiations, as either party may feel that the acquisition will not be beneficial in the long term.
According to the Exit Planning Institute, 76 percent of business owners who sold their businesses profoundly regretted selling within a year.
Legal and regulatory issues
Regulatory Approvals: Certain industries require regulatory approvals for transactions. Delays or denials from regulatory bodies can lead to offers being withdrawn.
Legal Complexities: Legal disputes, such as those arising from intellectual property issues or contractual obligations, can also derail a sale.
External market factors
Economic Shifts: Changes in the economic environment, such as a downturn or increased market volatility, can affect a buyer's willingness or ability to proceed with a purchase.
Industry Trends: If the industry faces negative trends or future uncertainties, buyers may reconsider the value and timing of the acquisition.
Post-agreement negotiations
Asset vs. Share Sale: Disagreement on whether the transaction should be structured as an asset or share sale can lead to a stalemate. Each has different tax and liability implications for both parties.
Terms and Contingencies: Negotiations can break down when parties cannot agree on the terms of the sale, such as payment schedules, contingencies, or indemnities.
Preparing for a successful business sale
To mitigate the risk of an offer collapsing, sellers should:
Conduct a thorough valuation and set realistic expectations.
Prepare comprehensive and transparent documentation for due diligence.
Ensure their business is in good operational health.
Consider potential buyer financing issues and explore all options.
Be prepared for the emotional aspects of selling a business.
Engage professional advisors to navigate legal and regulatory challenges.
Stay informed about market conditions and industry trends.
This is a great read with a selling guide: Ready to Sell Your Business.
Selling a business is complex, but by understanding and preparing for these common pitfalls, sellers can increase their chances of a successful and profitable sale.
David G Fisher, Construction Owners Exit & Succession Consultant
David G Fisher, is a leader in construction management and business development. An experience of severe burn out and stress, after 40 years in construction management and ownership left him broken and un-capable to do his role. David then initiated strategies to dramatically enhance his skills and performance to conquer these obstacles. He has since dedicated his life to helping other construction owners unleash their true potential to get their businesses and themselves back on track. He is the CEO of Construction Consulting and Coaching; the premiere construction owners exit program. His mission: We don’t need to be prisoners in our own businesses.
