If you have clients who own companies with pre-tax profit of $1 million or more, it’s likely those business could be sold to a third party.
This is common nowadays since there are many more buyers than sellers in the market. Yet sometimes, seemingly good companies don’t make it to sale closing. Here are the primary reasons some business transactions fail:
1. Lack of a Management Team
Some entrepreneurs pride themselves on the fact their companies can’t run without them. They keep the major customer contacts and supplier relationships to themselves. Operational logistics and other key aspects of the business aren’t documented. As a result, the primary source of the firm’s success walks out the door as soon as the deal closes. Having a management team capable of continuing the business uninterrupted will improve sale prospects.
2. Poor Recordkeeping
Due diligence can uncover shortcomings in a company’s recordkeeping. These might include out-of-date customer contracts and regulatory reporting, vague and incomplete marketing or production information, and inaccurate inventory tracking. Without thorough and accurate records, purchasers won’t know what they’re buying and will be reluctant to close the deal.
3. Misrepresentation of Facts
Some people put a positive spin on information at the expense of accuracy. The first time a buyer discovers something factually incorrect, suspicions start. If more inaccuracies are revealed, things get worse. Even if the exaggerations don’t add up to much, many buyers will walk away for fear there is a larger surprise hidden in the shadows.
4. Unaddressed Weaknesses
Confront a strategic weakness head on. For example, you may not have an HR manager, but realize you have a bunch of personnel headaches you have yet to deal with. While you may not be able to correct the issue before the sale, letting the prospective owner know the problem in advance can turn it into an opportunity – perhaps the acquirer has a fully integrated HR department that could pick up the slack. Regardless, trying to hide the issue raises suspicions.
If your company’s being sued or you are pursuing a suit against another entity, and either lawsuit could materially impact your business, there isn’t much chance you’ll be able to sell until everything’s sorted.
6. Environmental Red Flags
If there’s any environmental contamination on your business property, the chance of selling is greatly diminished. You must complete environmental testing and, if necessary, remediation before a deal can be done. For minor cleanup issues, a Phase 1 environmental audit (which inspects and reviews past uses of the land) and disclosure of the problem is probably enough. However, many deals have broken down over these concerns.
7. Personal Expenses
“Normalizations” is the polite term used to reference expenses that won’t recur under new ownership. It’s often a euphemism for personal expenses put through a business to minimize taxes, such as salaried spouses and children who provide little or no services to the company. Normalizations come in many forms. I once asked an owner of a consumer products business about the “marine equipment” item on the income statement. Turns out it was expenses related to a yacht he used for corporate entertaining — not something that generally passes muster with Revenue Canada as an eligible business expense. Someone who plans to sell a company in the next year or two should eliminate or minimize normalizations on the income statement and stop running personal expenses through the business. Doing this will increase the value and price the business eventually sells for, since earnings will be higher and most valuations are based on a multiple of earnings. It will also reduce the number of embarrassing conversations about dubious accounting practices.
8. Deal Fatigue
This often occurs when a vendor is uncertain about selling. When a prospective buyer asks for basic financial and operational information and the documentation comes back late or incomplete, the buyer gets discouraged. The condition is also sparked when a seller makes unreasonable demands regarding the structure, timing or any number of other deal-related issues. The most painful negotiators bring up the same points repeatedly even after they were already agreed, which soon causes the prospective buyer to walk. Therefore, advise owners to be completely ready to sell their businesses before they start the process.
9. Tax Problems
If you owe outstanding tax claims or are negotiating a tax matter with Revenue Canada, you might be able to provide an indemnification for the claim if it’s not a material amount. If the sum is significant, prospective purchasers might prefer to wait until the matter is settled.
In conclusion, the vendor’s goal should be to deliver a going concern to the buyer with a minimum of interruption. The goal is to make the transition seamless. This will improve the likelihood of completing the sale of the business.