September 26, 2024
In many instances, buyers and sellers initially reach a tentative agreement on the sale of a business, only for the deal to unravel later on.
There are several reasons why this happens, and once these are identified, many of the most common deal-breakers can be avoided. The key factor is understanding—both parties need to be fully aware of what the sale entails, including potential problems that could arise before they escalate and derail the transaction.
What prevents a sale from closing successfully? A survey of business brokers across the U.S. revealed recurring factors that consistently undermine deals. Below is a summary of the most common situations that hinder the sale of a business:
The Seller Fails to Disclose Problems.
When a seller conceals issues within the business, it doesn’t mean those problems disappear. They almost always surface later, often after a tentative agreement is reached, causing the buyer to back out. Buyers, especially, dislike surprises, and this can quickly lead to the deal collapsing. Sellers must be as transparent about the business's shortcomings as they are about its strengths. Business brokers often remark, "We can handle most problems if we’re informed from the outset."
The Buyer Questions the Price.
In some cases, the buyer initially agrees on a price, only to later feel that the business doesn’t justify that value. Whether this doubt arises from a gut feeling or a closer look at the financials, it can jeopardize the transaction. When the seller’s expectations exceed the buyer’s valuation, the deal is in peril. Therefore, it’s crucial that the business is fairly priced and that the seller's claims are well-supported by accurate documentation.
Both Parties Become Impatient.
During the sales process, it’s common for both the buyer and the seller to grow impatient. Buyers frequently request more information, while sellers may tire of the extended back-and-forth. Both parties must understand that closing a deal takes time, but it shouldn't drag on to the point where the transaction is endangered. Using experienced professionals familiar with business sales is essential for keeping the process on track. Business brokers often know which professionals are well-suited to facilitate smooth closings, whereas sellers and buyers may be tempted to rely on less-experienced attorneys or accountants, which can be detrimental.
The Buyer and Seller Were Never Truly Aligned.
Miscommunication can lead to both parties believing they are on the same page, only to realize later that they weren’t. A failure in communication is often fatal to the success of a deal. A skilled business broker ensures that both parties clearly understand the terms of the transaction, reducing the risk of misunderstandings.
The Seller Is Reluctant to Sell.
In many cases, sellers enter the sales process without being fully committed to selling. As the deal progresses, their initial enthusiasm wanes, and they become hesitant to part with their business. Emotional attachments are often at play, as a business can represent the culmination of the seller’s life’s work. It’s essential that sellers make a firm decision to sell before listing the business, and any doubts should be addressed early on.
Some sellers only enter the market to "test the waters," looking to see if they could get their asking price. These sellers frustrate both buyers and brokers alike. While experienced brokers can often identify these sellers, inexperienced buyers may not realize they’re dealing with someone who isn’t serious until it's too late.
The Buyer Is Hesitant to Buy.
Just as some sellers may have mixed feelings, buyers can also become uncertain as the transaction progresses. Buyers may enter the process with enthusiasm, only to have second thoughts when faced with the reality of business ownership. While buying a business is often part of the American dream, it comes with significant risk and requires hard work and long hours. For some buyers, the reality of entrepreneurship becomes overwhelming.
Other Uncontrollable Factors.
While the situations above are the most common reasons deals fall apart, there are also factors beyond anyone’s control, such as unforeseen environmental issues or acts of God. However, many potential deal-breakers can be anticipated and addressed early on to improve the likelihood of a successful sale.
A Final Note:
To increase the chances of a successful business sale, remember these key elements:
