7 Reasons Why Small Business Deals Fall Through
There are plenty of reasons why a small business sale might not pan out the way the buyer or the seller intended.
In our experience facilitating hundreds of deals, here are some of the main reasons why and how you can guard against them.
1. Poor analysis by the buyer
A buyer should be rigorously evaluating business opportunities and their place in the market, particularly if you are new to that industry or sector. One useful tool is Porter’s Five Forces Framework, a way of understanding how well the business is likely to perform in its current and future operating environment.
The other is BuyAndSellABusiness.com CEO Nunzio Presta’s S.E.T. analysis, which is a way of understanding the Social, Economic, and Technological factors that could affect the business in the future.
2. Prioritizing value over viability
Dollars and cents are important, but by focusing on a business’ price tag buyers sometimes overlook fatal shortcomings, or come to think of them as manageable. A business must be self-sufficient, have a strong business model, and timing for turnover has to be right.
Even with a smooth transition there are bumps as workflows, personnel and the business’ culture shift. You want to make sure the foundation is solid.
3. Overpaying
Businesses, even small ones, are complicated animals. Overpaying for a business may leave you playing catch up, and the business’ cash flow experiences any disruptions, things can get very difficult very quickly.
You should be involving an appraiser to make sure you have a solid understanding of how much the business is worth.
4. Poor due diligence
There’s a lot of paperwork involved in buying a small business—at least there should be.
There are plenty of due-diligence checklists available (including one we’ve put together ourselves) but at the bare minimum you want to make sure the financial, legal, tax documents are accounted for and in order. Unpleasant surprises could drastically affect the viability of the business.
5. Deal structure terms
Failing to set up the deal with the right structure can quickly lead to the death of a deal. For example, sellers requiring unreasonable down payments or buyers requiring unreasonable earnouts, can create hesitation. Moreover, parties may request or decline reasonable and/or unreasonable transition terms.
6. Poor acquisition integration
Integrating new ownership with a small business isn’t a short process. A 100 day plan doesn’t mean that after a 100 days, you’re fully integrated with the business, but it will help you recognize where the hitches or holdups are that may develop into problems that compromise your business.
7. Poor understanding of the business’ culture
There are usually intangible factors that determine whether a new owner is the right fit. It takes time to learn and understand the values and personalities of the people who make a business tick.
A lot of new owners fail when they try to upend the existing culture to meet their own needs. Remember, it’s not just up to the business—its employees, clients, partners—to adapt to you as the owner. It’s a two-way street.
Opinions expressed here by contributors are their own.
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