Why Buyers Walk Away…

Life is Good!  You made the decision to sell your business, have a buyer that has signed an Offer to Purchase, and you are deep into the Due Diligence period.  The escrow check has been deposited with your lawyer and you have set a closing date that is 45 days away.  You can already picture the traveling that you have been promising your spouse that you would do once the business is sold. Everything is going great…and then the Buyer walks away from the deal.  What happened?

When selling a business, there are several underlying factors that can support, or undermine, a deal from happening.  These can exist on the Buyer’s, or Seller’s side and most can be avoided or mitigated by doing proper preparation before a business is listed, engaging the right M&A Advisor, and successfully completing the steps that follow signing an Offer to Purchase.  Let’s explore some of the top reasons a Buyer will walk away.

The Numbers Don’t Support the Price – When selling a business, it is critical that the price is both realistic and defendable.  If you just “throw a big number out there” you may end up with a Buyer on the line but end up wasting time (that leisure traveling is moving further away) as a Buyer will quickly do their own math and figure out that the business is overvalued. This will either happen before getting an Offer to Purchase or during Due Diligence.  Having a proper, accredited, business valuation done through a M&A Advisory firm will not only set a realistic price and demonstrate the ROI, but it will also build the case on WHY that price is realistic to a Buyer. 

Poor or Inconsistent Financials – In this situation, “Poor” does not mean the profitability of the business. Instead, it means that the financial reporting is in poor shape, or the numbers are inconsistent.  We have all heard that “the numbers tell the story” when looking at a business or opportunity.  As an example, if costs are coded to one area in one year, and another area in the next year, or even coded to the wrong year, it makes it very difficult for a potential Buyer to perform Due Diligence which can result in a lack of confidence in the business and the Buyer walking away.  Consistency is key in financial reporting and while a good M&A Advisory firm can help normalize this in a valuation or during the marketing of the business, having a good accounting firm is a great way to prepare for an eventual sale down the road.

Business is Sliding into Neglect – You’re selling the business, right?  You can avoid making some investments in the business and put a little more in your pocket now.  You can also put off making some decisions or managing the business that you might have made a few years back because a new owner can make them, right?  Wrong, wrong, and wrong!  When you are in the process of selling a business, you need to run the business as if you’re NOT selling it.  This may sound a bit crazy, but when you are selling a business, managing, and growing the business is still key to demonstrating to a prospective Buyer that the business is solid and well run.  Avoiding normal investments like replacing old equipment or doing building repairs will be noticed by a Buyer and also by your employees – who should not know anything until the deal is 100% certain to transact. When partnering with an experienced M&A Advisory firm, they should be the ones focusing on selling the business while you are focusing on running the business.

Seller Is Being Difficult – Maybe you woke up this morning and are having remorse on selling the business.  Or, you just won a contract that will be super profitable over the next few years. Or, you are getting tired of answering questions posed by the Buyer. Or, or, or……whatever the reason, this change in mental mindset can result in being not as responsive or openly communicating with the Buyer as you should be and perceived as “being difficult to deal with”.  The Buyer will imagine that if you are being difficult now, before the deal has closed, it will be even worse during the transition period.  Remember, they are the customer and giving you a lot of money for the right to buy your business.  As such, they are entitled to responsive and forthright communications.  While a good M&A Advisory firm should run interference on you being barraged for information, you need to be 100% committed to selling the business before you decide to have it listed.  It is better to wait on deciding to sell the business than having Seller’s remorse.

Financing Falls Apart – You have the perfect Buyer and have really “clicked” with them.  But then you hear that they have not been able to successfully complete bank financing.  What could have happened?  There are several things that could have gone wrong and are listed above – business is overpriced for the cash flow it generates, the financials are inconsistent and can’t satisfy the loan review process or…the Seller was never properly qualified to begin with.  Having a Seller financially qualified BEFORE they are given all your information is paramount to successfully closing the deal.  If they are not properly qualified before you sign an Offer to Purchase with them, you have essentially taken yourself off the market while Due Diligence is occurring and the Bank is processing the loan.  This can be for a few or several months and during this time, no other Buyers are being engaged, which is a tremendous loss of time and opportunity.  By choosing the right M&A Advisor, they will financially prequalify the Buyer and have them under a NDA before any confidential information is shared with them.

As you can see, there are various reasons why a Buyer will walk away.  Some you can do on your own – consistent historical financials and effectively running the business during the sale process and others can be addressed by engaging the right M&A Advisory firm to guide you through what may be the biggest decision in your business career.  A. Neumann & Associates has just celebrated our 20^th year of successfully helping business owners value and sell their businesses. Whether you are thinking of selling your business in the next few years, or even 10 years from now, a Confidential conversation about the selling process sooner than later may be beneficial so you can really hit the road traveling when you successfully sell your business.