Buying a business or an investment property is an exciting time. You think you have found the perfect investment and you start negotiating, at some point you come to an agreement and you sign a Letter of Intent (LOI)or a Contract for Purchase and Sale (CPS). Now the work begins.
Buyers Cold Feet: The buyer goes through a rigorous process of due diligence that might include looking at financials, inspections into the business or property, appraisals, talking with bankers, accountants and lawyers who will all have a different opinion of the deal you have just made. After the initial adrenaline rush wears off, the reality of the deal sets in and during the due diligence process, the buyers may decide that it's not a perfect deal. It never is! So after some sleepless nights, the buyer backs out, basing their decision on the legal or financial advice that they have received from their trusted advisors.
Poor Business Record Keeping: There is nothing that makes a buyer more nervous than unsubstantiated numbers and poorly created financial statements. When sellers make claims about their business, these claims need to be backed up by certainty. If you are thinking of selling your business in the next few years, ensure that you have systems in place to track your financials and record aspects of the business that are going to be important to buyers including but not limited to safety, compliance, government regulations, taxes, and HR.
Seller Remorse: A seller goes through a similar process of enjoying the excitement of the deal and then a different sense of future reality sets in. There is considerable work to provide all the documents and opening up the books to the prospective buyer. The process can be painful and burdensome. There is a time during that time when the seller looks at the cash flow of the business they have created and recognize that the future might not be so flush with money.
While the thought of retiring might seem to be a good idea at the time when putting the business up for sale, in some cases depending on the age and financial situation of the seller, the reality of the lifestyle change required might be stupefying. Additionally, if a business is growing, there can be the realization that if the owner sticks with it for a couple more years, the business will continue to grow in valuation. While it is typically more difficult for sellers to get out of a deal, missed deadlines, and proposed changes to the contract give sellers the opportunity to move forward with their new found goals.
Sellers Are Already Checked out! A business might look good from the outside but tear back the cover and find out that the seller has already moved on mentally or physically and is leaving the business to operate by chance, can be a deal breaker. If you are selling a business, ensure the next buyer that the business is viable by keeping it firing on all cylinders.
Financing Challenges: Depending on the banking climate, financing can be a challenge for business investments. It can be especially difficult when buying a business as often vendor financing is required to make a deal happen. That being said, vendor financing can be tricky and like financial institutions most sellers don’t want unsecured loans because of the risk they pose. Many times financing challenges can be realized if buyers are undercapitalized. Having clarity about your ability to raise money for the purchase, and your relationship with bankers should be done prior to negotiating.
The Wrong Lawyer: I have heard stories about lawyers who have killed or almost killed deals because they haven’t understood them. A lawyer's job is to help you avoid risk and possible future ruin because of an error in judgment. That being said, most lawyers haven’t run businesses or bought or sold investment properties. Finding the right lawyer that you can trust to keep your best interests in mind while understanding the reasonable risks you are taking in buying a business is paramount. The right lawyer will help you make wise decisions while the wrong lawyer might end up costing you money and lost opportunities.
Unforeseen Challenges: While these may be the most common reasons that business deals often fail, you can add in a variety of unforeseen personal or business challenges facing both buyers and sellers and the complexity of closing a business deal becomes compounded. While seasoned buyers know to expect the unexpected, it can be a hard pill to swallow if your deal is suddenly off the rails.
Buying an investment can be challenging and by understanding some of the reasons that business deals fall apart can prepare you for the rocky road from deal to close. Being creative and flexible will help most people as they go through the process and work towards a brighter future.
Dave Fuller, MBA, is a Commercial Realtor specializing in investments and the author of several business books. Questions or comments email dave@businessrealtor.ca.
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