When buyers are looking to make a purchase, the most important step they can take is to perform due diligence on both the business and the seller. Yet, it is important to note that a large percentage of sellers fail to do their due diligence on buyers.
Deals fail all the time. Sadly, this means that all parties lose a tremendous amount of time and effort. Additionally, sellers not only waste time, but often lose money due to business disruptions during the process of working with a prospective buyer.
Let’s dive in and look at a few warning signs that you should look for when dealing with a buyer. The sooner you spot these red flags, the sooner you can avoid potential problems.
There are several key questions that sellers should ask. The list includes:
-What, if any, other businesses have you considered to date?
-How much equity will you be committing?
-Do you have any experience with my kind of business?
It is important to look for warning signs early on, as this is the way that sellers can avoid wasting considerable time. It should also be noted that sellers shouldn’t be afraid to listen to their gut instincts. If you feel that a prospective buyer isn’t serious and may only be window shopping (or if you feel that the buyer is looking for a far greater deal than you are willing to provide), then simply move on. When you cut your losses early on, this can free you up to focus on prospective buyers that are a better fit.
What if your intermediary informs you that there has been no communication from the prospective buyer after they received the memorandum? Simply stated, this lack of communication could mean that the prospective buyer has changed his or her mind, or was never that serious in the first place.
Another red flag you might see is when the process is turned over to a junior member of the prospective buyer’s management team. In other cases, the prospect may fail to provide details or information concerning their financial capability to successfully complete the deal. If any of these three red flags pop up, you should consider being proactive. You and your broker might want to reach out to the prospective buyer and ask to meet to discuss the situation.
Warning signs can also occur just prior to closing. Even after the letter of intent has been signed, there is still room for problems to arise. An inexperienced attorney representing the buyer, one that simply doesn’t understand what is involved in a deal, can spell doom for what could have otherwise been a good deal. The same is true for an over aggressive attorney. One potential remedy for this situation is for your own attorney to intervene and discuss the situation.
Spotting warning signs is about more than not wasting everyone’s time. When you can observe these indicators and act effectively to address them, it can help keep deals on track. Working with a business broker or M&A advisor is an excellent way to not only spot red flags, but also to know how to respond appropriately. The end result will be more successfully completed deals.
Damon Neth is a Professional EOS Implementer of the Entrepreneurial Operating System®. He co-authored a best-selling book entitled X-Formation: Transforming Business Through Interim Executive Leadership. He also has founded five companies and acquired four other companies. Additionally, Damon Neth is an accomplished entrepreneur and a leading EOS® business coach.
EOS® is a powerful set of business tools that provide a framework that empowers companies to create a clear vision throughout their entire organization, and in the process, boost the health of the company as a whole. This article discusses EOS® and how it could potentially transform your organization.
What is EOS® All About?
EOS® is based on the book Traction: Getting a Grip on Your Business, which is written by Gino Wickman. The effectiveness of EOS® is underscored by the fact that EOS® is currently utilized by over 10,000 companies around the globe.
EOS® is a powerful set of tools that, as Neth explained, “are being used by businesses every single day to grow, transform and capitalize on opportunity and deal with problems. These tools provide strategic advantages and strategic tools that many organizations implement to become better, to beat their competition, to become stronger.”
How Can EOS® Benefit Your Company?
Through EOS®, it is possible to establish a clear vision for your organization. Neth points out that cultivating this vision is about finding clarity of purpose so that every team member is pulling in the same direction. When used from the top to the bottom of a company, the tools provided by EOS® can have a transformative effect. Discipline and accountability are key focal points of EOS®, as it is through discipline and accountability that the health of companies can be enhanced greatly.
At the core of EOS® is the concept that everyone should share the same company vision. That means that there must be good, consistent and steady communication. In order to facilitate this level of communication and understanding, it is necessary to have a transparent system in order to remove barriers, blockers and impurities. When properly utilized, EOS® creates an opportunity through which everyone can not only identify their own issues, but also find ways to solve those issues.
The most important asset that any company has is its people. As a result, it is absolutely essential to not only find the right people, but also to guide those people as efficiently and effectively as possible. As Neth explained, “You’ve got to be clear and transparent with people about what you need and about what success ultimately looks like. You want to make certain that everyone in the organization understands their job.”
In a world that is becoming increasingly complex, the role of the generalist is quickly being eroded. In its place, we discover that people’s roles within companies are, by necessity, becoming more and more specific. All of this points to the increasing importance of clarifying people’s roles within companies, and what is expected of them. Gray areas need to be eliminated as they impair team members’ understanding of their duties and responsibilities.
Communication is Key
Everyone in the organization should understand not only the role of their respective department, but also their role within that department and the organization as a whole. Once again, the key to success boils down to good communication and clarity of purpose and roles within the organization. Everyone must be rowing in the same direction, and it is through weekly measurables that true progress can take place.
What kinds of insights about selling a business might come from experts at private equity firms? This article includes advice for sellers from industry veteran Lamar Stanley. Stanley is a Director at Gen Cap America, which is a lower middle market private equity firm in Nashville, Tennessee. Since 1988, Gen Cap America (GCA) has made 60+ investments across seven committed private equity funds.
Before joining GCA, Stanley was with the Nashville based private-equity strategy group, Diversified Trust Company. Stanley holds a B.A. degree from The University of the South and an M.B.A. from The University of Chicago.
Understanding Small Business
Over the decades, Stanley has amassed a considerable amount of knowledge and expertise. He points out that it is easy for people to lose sight of the fact that many so-called “overnight successes” are actually the result of ten or twenty years of hard, thankless work. It is through these years of laser-like focus that entrepreneurs are able to bootstrap their business. Additionally, these business owners need to not only have a vision, but also the insight to bring on great people to help build their business.
The Benefit of a Deal Attorney
Stanley feels that working with a deal attorney can make a tremendous amount of difference, as it can increase the chances of a successful transaction taking place. Deal attorneys understand the deal process, which can make all the difference when it comes to streamlining the process.
“Deal fatigue” can derail what would otherwise be a good deal. This term applies to how deals can sometimes drag on for months. Working with an experienced deal attorney can help expedite the entire deal process. In turn, it can help to avoid the dangers typically associated with deal fatigue.
Preparing in Advance for a Sale
Stanley believes that it is critical for a business owner to think about selling as soon as possible. Ideally, a business owner should be thinking about selling when they start their business. He realizes that most business owners can’t hope to prepare for selling as soon as they create the business. But the point is clear, the sooner they begin the process the better. Business brokers and M&A advisors can best serve business owners by helping them understand that they shouldn’t wait until a month or week before they are ready to sell their business to get their respective houses in order.
There are so many important factors involved in getting a business ready to sell. They range from customer concentration and diversifying suppliers to preparing financial statements and working capital estimates well in advance.
In particular, Stanley points to the danger of business owners having to deal with preparing their business for sale while continuing to operate the business during the sales period. What must be avoided is for business owners to essentially have two jobs at the same time, as this increases the odds of deals falling apart from deal fatigue. The sooner a business broker is involved in the process, the better.
More than likely, selling your business is one of the biggest decisions of your life. Unless you own a business, it is impossible to understand just how all-encompassing of a process it can be. With that stated, it is important for business owners to step back and seriously reflect on whether or not they are truly ready to sell. The psychological aspects of selling are not trivial. Various aspects must be taken into consideration before initiating the process to sell.
There are many reasons why it is vital to step back and think about whether or not you are really ready to sell your business. Far too many business owners believe they are ready to sell, only to discover (much too late) that an executed sale is not optimal for their plans.
Selling When There is No Other Choice
Selling a business because there is no other choice, such as situations concerning failing health, personal issues or problems with a business partner, isn’t a true choice at all. In this situation, the psychology of selling is essentially irrelevant, as you have one option, namely, to sell.
The Case of Burnout
In other cases, owners eventually hit a brick wall and have no choice but to consider selling. As burnout sets in, owners may feel that the time is right to “hang up their hat” and put their business up for sale. However, as the process evolves, even those experiencing some level of burnout can discover that they are not emotionally or psychologically ready to sell. In many cases, people make this realization only once it is too late.
Take the Time for Self-Reflection
Quite often, a company becomes interwoven into a business owner’s sense of self, sense of place in the world and even, to an extent, sense of self-worth and identity. When business owners are unaware of this fact, it can be something of a shock to their system to begin the sales process. Many people simply are unaware of the strong hold that their business has on them.
Owners need to invest some time in self-reflection and ask four key questions: Do I really want to sell? If the answer is yes, then why do I want to sell? Will I regret selling once my business is sold? What will I do after I have sold my business? Answering these questions involves far more than evaluating your business. They also involve diving into emotional issues that could be central to your future.
Are You Really Ready to Sell?
One of the best ways of determining whether you are ready to sell, and preparing your business for that potential sale, is to work with a business broker or M&A advisor. Business brokers are experts at helping business owners deal with every aspect of the process of selling a business. They can act as experienced guides that can use that experience and expertise to help you determine if you are truly ready to sell.
If it turns out that you are indeed ready to sell, a brokerage professional can help you prepare so that you can achieve the best price possible once your business hits the market.
There are many reasons why small companies are put up for sale. Some of the more common reasons can actually have little to do with the company’s general performance. For example, many small business owners discover that they need to sell for health reasons or personal concerns, such as divorce or partnership issues. While a business downturn or fear of a larger competitor looming on the horizon might prompt many business owners to sell, economic drivers are not the only issue. Owners may want and need to sell, but often it isn’t always that simple.
Many business owners are looking to retire, but are unpleasantly surprised to learn that they simply can’t afford to do so. Still yet, many business owners don’t truly want to retire or sell, but instead they just want more freedom in their lives. The day-to-day responsibilities of owning and operating a small business can take their toll. Many business owners are looking to make a change and would love to be free of this burden. This class of owner has already “checked out” mentally, and this can have profound negative consequences for their businesses.
When an owner wants out but discovers that he or she simply can’t afford to sell or retire, it will come as no surprise that there is usually an accompanying drop off in enthusiasm. Ultimately, the vast majority of owners will start to lose focus. Often, we find that they stop investing the capital necessary to continue the growth of the business, which can trigger other events, such as the loss of key staff members and/or customers. Losing a top customer to a major competitor can further accelerate the downward spiral. The failure of the business to maintain its footing and competitive advantage can lead to a more aggressive posture by existing competitors or even encourage a new competitor to move into the market.
In time, the owner may come face-to-face with the harsh realization that they have no choice but to sell if they are to salvage any of the business’s value. The best way for a business owner to safeguard against this situation is to sell when his or her business is doing well, as this helps to ensure an optimal price.
Working with a business broker, even years before one is interested in selling, is one of the single smartest moves any business owner can make. The time to think about selling your business is now, as no small business owner knows what life or the market will bring.