With every business sale, there are inevitably some speed bumps and challenges along the way. I don’t think we’ve ever been through a closing process where absolutely nothing ever came up as something we needed to work through and find a solution for. So, both buyer and seller need to be prepared for those bumps. The key to overcoming them is to remain calm and flexible, so that we can help smooth out those kinks that do present themselves. Based on our years of closing business deals, there are some things that we can all do to minimize the likelihood of issues down the line, and we wanted to share them with you here.
A Solid Foundation Needs to Be in Place
At Green & Co. we always say that for every deal to make it to the closing table, both buyer and seller need to be “holding on tight” to the deal. Because if they are not, when we hit one of those inevitable bumps in the process, one or both parties could come flying off. So, from our business broker point of view, we want to make sure that the seller is truly motivated to sell their business, and that they are absolutely sure this is the path they want to take. Hopefully we’ve already determined that before the business has been listed for sale.
Then we need to make sure that we have properly screened the buyer, before there is even confidential business information shared with them. We want to know their motivation for purchasing this particular business, ensuring that they understand the business and what their role would be as the new owner, and verifying that they are financially capable of purchasing the business as well. If they will be using financing, they need to check in with an SBA lender to make sure there isn’t anything in their background that might prevent them from getting a loan. If all of those aspects are signaling a green light, then we have a solid chance to make a deal happen. That’s why we have to ask any buyer who inquires on a business all of these very specific questions. So buyers, please be prepared to answer them and kindly understand why we need to get so personal, right from the start.
Make Sure the Financials are Right
When we perform a recast and valuation of a business, we are working solely on the financial information presented to us by the seller, so it is of the upmost importance that we get all of the correct and up-to-date information. Sellers also need to make sure that their business broker understands the financials, as each business is very unique and complex in their accounting. Normally once a business broker has had a first pass at the financial recast, they will set up a meeting with the seller to discuss individual expenses, and verify that they have all of the numbers correct. We are trying to get to the most accurate owner benefit or seller’s discretionary earnings number, so then we can run the history of comparable sales to get the industry multiplier. That is then how we get to the price that the business is worth on the open market. We can’t get to that price without first having the correct owner benefit or seller’s discretionary earnings number. So, to us, that’s the most important number to get right, and then the valuation is much easier.
We want to make sure that the financials are as accurate as possible, because we will need to defend that valuation and purchase price to potential buyers, and they will do their “Due Diligence” once under contract, to make sure that the numbers they have been presented with are indeed correct. Due Diligence is where many deals fall apart. So, if we’ve done our job on the front-end to make sure that the financials presented are as accurate as possible, then the likelihood of something coming up which will negatively impact the value of the business will be much less. That’s why it’s so important for sellers to be 100% honest with their business brokers during the recast and valuation process, because we don’t want any surprises to come up during Due Diligence which might kill the deal.
Also, on most of our listings at Green & Co. we work with reputable SBA lenders to “pre-qualify” our listings before they even hit the market. The lenders will need to see all of the financials and they will essentially do their own valuation to determine if the debt coverage is adequate at the listing price we are offering. If we are able to get a “pre-qualification” letter from the bank on our listings, then that makes them much more attractive to buyers, and it also hopefully means that we will be able to get the deal done with a qualified buyer. Again, just another reason why making sure the financial picture is clear and accurate is so important to sealing the deal.
Play Nicely with Landlords and Lawyers
In the business brokerage industry, it is an extreme cliché that landlords and lawyers are “deal killers.” In our experience, it does happen, but it is definitely not the norm. The best way to deal with these two players in the game are to tread lightly and get them on your side.
With a landlord, the seller has the most experience with them, so they should hopefully know how to proceed. 100% of the time we are all relying on the seller to decide when the right time to engage the landlord is, and how we should approach them. Most often, the potential buyer isn’t introduced to the landlord until after Due Diligence has concluded. That way the seller isn’t ruffling their landlord’s feathers without knowing that the buyer is proceeding with the sale. In most cases the buyer will have a lease contingency in the purchase contract, so they are protected if they are unable to obtain a new satisfactory lease. However, the seller should be doing everything they can to help the buyer during this process, as they have the existing relationship with the landlord. The buyer can prepare for the application with the landlord by making sure their resume, business experience, and financials are in order. Of course, the buyer can always choose to move the business to a different location as well, so they could sort out a new lease with a different landlord if they choose. Conflicts can arise with difficult landlords, especially when there is an SBA loan involved. The SBA loan will require a lease with options for the length of the loan (which is normally 10 years), and this is something that can be a sticking point for certain landlords. Both buyer and seller just need to be aware that getting the new lease in place is a big hurdle, and not one that should be taken lightly or left for the last-minute.
Lawyers are a tricky topic to discuss. Of course, every buyer and seller has the right to consult with their attorney when going through a business sale. For the typical small business asset sale, we use standard asset purchase agreements. At least 50% of our deals never involve attorneys. However, for the ones that do, it’s important for both parties to remember that your attorneys are giving you their own opinion and legal interpretation, and it is your job to decide if you agree with it or not. In rare cases, we’ve seen attorneys absolutely kill deals based on their egos or they get into a big fight with the other side’s attorney and then they dig their heels in. At that point it’s really up to the buyer and seller to decide what they think about the situation, and to weigh everything out. Is your attorney pointing out logical things that would be deal breakers for you? Are they trying to change things that have already been agreed upon by all parties without good reason? Do they truly have your best interest at heart or are they trying to run up their tab? Everyone just has to stay calm and think rationally about everything, which is much easier said than done. Sometimes because parties are paying for legal advice, they feel like they have no choice but to follow the advice of their attorney, and that is completely up to the person. Just keep in mind that if lawyers come on too strong, they have the potential to kill the deal.
When Challenges Do Come Up
All parties to a business sale need work together as a team, and do as much as we can up front, to ensure the smoothest transaction possible. It is common for challenges to come up that we weren’t aware of or prepared for, and that’s ok. It’s a knee jerk reaction to respond emotionally, but if everyone can stay as calm as possible, most of the kinks in a deal are always ironed out. Give your business broker the time to gather all of the facts and sort out some different solutions to the issue at hand. Then decide which solution is most acceptable to you. Hopefully that woks for the other party as well, and we can put it behind us and move forward towards closing. There are always solutions and things we can do to work around the bumps in the road, and very rarely does a deal die because we can’t smooth something out. If everyone is holding on tight, we will make it to the closing table, and all parties will have achieved their goals.