Reasons a Business Does Not Sell

Selling a business or selling a practice is not a science. There definitely is an amount of art to it but unfortunately it does also come with at least an ounce of luck. Part of the reason it comes with an ounce of luck is because there are so many players involved. It seems simple enough having just a buyer and a seller. If they are motivated and everything is disclosed then it should be easy to close the sale. Having just worked a transaction for 8 months and having the deal come to a halt, there’s much more to it.

If you are thinking of selling your business or medical practice, here are ten reasons that can kill the transaction and prevent you from closing the sale.

1. Failing to see the sale from the buyers perspective

The sale of any business or practice starts with the seller. If a buyer makes an unbelievable offer but the seller doesn’t wish to sell, it’s not going to happen. Equally, if the owner of a business or practice does wish to sell, the challenge is to find a buyer that is willing to pay a price the seller will accept and come to an agreement on all the terms and conditions. Even though it is typical for the seller to be the last to sign the documents to close the sale, a buyer is only willing to do so if the transaction makes complete sense to them. That is, in going forward, they will be managing the risk and responsibilities and for the seller to close the sale, they must present all the information the buyer requests or they will not move forward with the close of the sale. For example, when closing the sale of a medical practice it is critical to a buyer to ensure all the insurance contracts, government agreements such as Medicare or Medicaid etc transfer to the buyer as well as the necessary credentials and affiliations with hospitals etc.

2. Being unprepared for the buyer’s due diligence

There are many steps to sell a business. The easier steps are putting all the details of the business together, marketing to attract buyers and negotiating the deal be it to a Letter of Intent or Purchase Agreement. The hard part then comes when the buyer wants to verify the representations of the seller which they do by hiring a professional such as a CPA and/or attorney to comb through the financial statements and important legal documents.

If the seller is slow to provide the documents the buyer is requesting it creates a level of nervousness that not only does the buyer not need but can lead them to second guess themselves and decide they don’t need the hassles and can go and do something else.

Just as the motto of the Scouts is “Be prepared”, that should be the same motto for the owner when selling their business. It’s also most appropriate for the seller to ask the buyer to provide a list of documents the buyer wishes to see.

3. Inadequate financial statements

It is almost impossible to sell a business or practice with an inadequate set of financial statements. A quality set of financial statements show a quality business. These documents flow from bank statements to journals to Profit & Loss Statements and Balance Sheet to tax returns.

Not only are these documents important to the buyer but they are also important to their professionals as well as a third-party lender if the buyer needs to get a loan to close the sale.

A seller should also try to keep the financial statements current as a business can change quickly and make it hard for a buyer to have confidence if the records are out of date.

4. Failing to keep the business performing

Selling a business is an emotional event for a seller. To keep a business going and successful takes drive and effort. When the drive wanes so too can the performance of the business. A little while back I was dealing with the sale of a medical practice and the two partners, after working together for over 40 years decided it was time for them to slow down and sell the practice. Unfortunately at the time of deciding to sell the practice they decided it was time to take vacations and spend time with family; all of which meant the performance of the practice started to decline.

If you own a business and its time to sell, plan to sell while the business is strong; not when it’s going down or in a flat part of the economic cycle.

5. Buyer discovers a major, undisclosed negative issue

Just as taking too much time to close the sale can lead to the deal falling apart, so too can an unwelcome surprise. What a seller represents to a buyer is critical as the buyer wants to verify those representations or as President Reagan was known to have said, “Trust, but verify.”

Keep all surprises to a minimum. If something unexpected comes up, disclose it as quickly and accurately as possible. A motivated buyer would sooner deal with the reality of a situation than finding out later that something had been kept from them.

6. Over negotiating

There are different methods to negotiate the purchase of a business. If it’s a large transaction and the buyer is experienced they may prefer to offer an IOI or Indication Of Interest. A second method is to present a Letter Of Intent. The Letter Of Intent can be binding or non-binding. The third method is an actual Purchase Agreement that the buyer typically presents or through their attorney.

If the buyer chooses to offer an Indication of Interest or a Letter Of Interest, the temptation can be to be in a continuous set of negotiations as each new and update piece of information arises.  This can be a very wearing and tiring approach for all parties and should be avoided at all costs.  Good negotiations are done with all information fully disclosed and in good faith; from parties that understand the process.

I’m currently negotiating the sale of a medical clinic. The buyer is a qualified practitioner to buy the practice but he is using his son, who is a commercial real estate agent to lead the negotiations. Unfortunately a Commercial Real Estate Agent comes from a skill set of selling real estate; not a business or medical practice. The techniques including valuations in buying a medical practice are totally different than commercial real estate and in this instance, has led to the seller rejecting the buyers offer simply because the buyer didn’t understand how to value the practice and present a reasonable offer.

7. Help from the wrong professional

Third party professionals such as attorneys, CPA’s and lenders are often key to help close the sale of a business. In a recent transaction I worked that ended up not closing I had to work with a seller and her son (who was extremely involved in the transaction), her CPA and attorney both of which were very poorly engaged in the transaction and one of the reasons in the end it failed. In addition I had to work with the buyer and his two consultants, his CPA in his home town which was not in California, his California based CPA and attorney, the escrow company, a landlord and a third party lender.

If you bring in third party professionals to help in your transaction, make sure they have the right skill set and experience in dealing with the sale of a business. If this is not part of their skill set, look for another professional that has that experience as it can make or break the deal.

8. Forgetting there are other key players in the deal

The sale of a business always has the two key players of the buyer and seller. However, the deal can come to a quick halt if other key players are not identified and treated correctly.

If a business has employees the seller typically does not want these to know a business is for sale in case something happens at the last minute that prevents the sale from closing. I’m currently selling a business and there is a buyer with an interest that is a direct competitor of the seller. The seller does not want to meet or disclose any details to what could be a buyer of his business for fear the buyer will not close the sale and then approach his employees to hire them. The buyer has agreed to sign a Confidentiality Agreement to not directly approach the employees but this risk is too great for the seller. Making sure key employees in a business are well looked after before and after the sale of a business can make a difference in its success.

Another critical party to manage correctly in a deal is the landlord. I recently exchanged messages with a business owner that wanted to sell their business. They had signed a 10 year lease and it was now about to expire. With their lease expiring they decided to take the opportunity to sell their business.  As a result they approached the landlord to get his agreement to enter into a new lease with a new buyer. Unfortunately the landlord said to the business sellers that he was not interested in having a new tenant and so now the business will close and the sellers will entirely miss out on any proceeds from selling their business.

Key players can make or break a deal. It can be difficult to know how much to share with them but it can be a big mistake not to take into account their ability to prevent a deal from closing.

9. Keeping all parties informed

As I am a business broker by profession, it’s my opinion that a good business broker can make all the difference between the sale of a business happening; or not.

A good business broker knows they have to keep all parties informed and updated in the transaction. This requires a lot of time and energy and more often than not, is not seen by the buyer or seller but simply has to be done. In one transaction I was recently working I had to update the seller (a mother and son), the buyer (a party of three as it included two consultants), the seller’s attorney, the buyer’s attorney, the buyer’s two CPA’s, the landlord, the SBA lender and the escrow company.

A good business broker also understands it’s not their opinion about whether a buyer or seller should be told something they don’t want to hear but rather it’s more important to be honest and open so each party can make their own fully informed decision.

10. Failing to come together

Last but not least and in some respects, most important of all, after the buyer and seller have negotiated hard, now reached agreement on all the deal points and due diligence is complete, it’s time for both parties to come together so they can ensure each other’s success.

At the end of the day, for the business to transition successfully from the seller to the buyer there has to be goodwill and not adversity. Goodwill is the intangible in a transaction that can make the difference between success and failure.

This article was originally created by Andrew Rogerson of Rogerson Business Services. For the original article please click here.

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