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5 Reasons Deals Fall Apart During Due Diligence

Erik Sullivan

Seller Articles Seller FAQ

So, you’ve found a buyer and you’re officially under contract… time to pop the champagne, right?

If only it were that easy. 

Going under contract and into due diligence is just the beginning. 

There are many potential pitfalls you may encounter on your way to the closing table.

A key employee could leave.

You could lose your largest customer.

Or, the buyer could get cold feet and walk away.

Trust me, over the last twenty years we’ve seen it all... 

You can’t control everything during the sale of your business, but we’ve identified some actionable steps you can take to make sure your deal goes as smoothly as possible.

Let’s dive right in. 

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The Top 5 Reasons

1. Bad financial recordkeeping
2. Negative changes in business performance
3. Change of heart
4. Unforeseen or undisclosed facts
5. Inability to secure financing

Keep in mind there are more reasons deals fall apart. A major financial market crash could derail your deal, or a catastrophic fire could burn down your building (knock on wood… fire-treated preferably).

The following list is not exhaustive, but it features many of the common reasons that are also avoidable with the right preparation.

1. Bad Financial Recordkeeping

The quality and accuracy of your financial records will make or break your deal. The good news is, this is completely within your control. 

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Companies with organized and clean financial records are more valuable. It’s not sexy, but it’s the truth. Hiring a quality accountant and CPA is worth every penny.

Benefits of organized financials

Many business owners need assistance in this area, and if they don’t get their financials straight, it can cause major issues down the road. Buyers regularly turn away businesses with disorganized or inaccurate financials. 

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If you feel your finances are not in order, get a skilled accountant on your team as soon as possible. It may also help to implement an up to date accounting software or some type of enterprise resource planning (ERP) system. This will allow you and others to have an accurate financial picture of your company's operations.

2. Negative Changes in Business Performance

Your most important job during the sale is to keep the business performance healthy. If you go under contract and take your foot off the gas pedal, you may jeopardize the entire deal.

Put yourself in the buyer’s shoes - would you feel comfortable if the business you’re buying begins performing poorly right before you’re supposed to take over?

And even if you can get the buyer comfortable, what about their lender? Most deals require financing of some sort, and the lender is going to be concerned about the buyer’s ability to pay back their loan. 

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That’s why we always recommend working with a broker or merger and acquisition (M&A) advisor. You need to stay focused on running your business during the sale.

This issue can be difficult to avoid when listing your business independently. Selling a business is hard work, so keep that in mind if you decide not to hire a professional.

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Don't wait until you're burned out completely to sell your business. The process takes 6 to 11 months on average, so you need to keep some gas in the tank to make it across the finish line.

3. You Change Your Mind About Selling 

One of the most important parts of selling your business is being emotionally ready

Your business has been your life - sometimes for better or worse - and selling it changes everything. 

Before you sign a listing agreement, think about why you want to sell and what you plan to do after. There needs to be a very compelling reason for your sale, and we recommend having something to look forward to.

As much as we may want to believe a business is just a business, we know it’s not. It’s what you do. It’s who you see. It’s part of your identity. Stepping away from it requires careful thought and consideration.  

You don’t want to start down the path, then change your mind in the ninth hour. At that point, it may be too late to stop the sale from going through.

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Ask yourself the following questions before you decide to sell: 1) Why do I want to sell? 2) What will I do after selling my company? 3) Am I positive my kids/family members don't want to run the business? Once you have considered these questions, you will be able to be more confident about your choice to sell.

4. The Buyer Decides to Leave During Due Diligence

This one is pretty obvious. If a buyer is going to walk away, it generally happens during due diligence

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That said, it can usually be avoided if your M&A advisor properly screens the buyer, negotiates the deal, and controls the process. 

The best way to head off losing a buyer in due diligence is to be transparent in your initial discussions about the business and make sure you have the right fit at the outset. 

Anything you feel will be uncovered during due diligence is better to address ahead of time. This way, your advisor gets to control how it’s presented, rather than doing damage control once it’s uncovered. 

Finally, we always recommend negotiating as many terms of the deal as possible prior to accepting an offer and beginning due diligence. Most LOI's contain an exclusion clause that effectively takes your business off the market for a period of time. Learn more about what a letter of intent (LOI) is and what your LOI should cover.

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These items could still be re-negotiated during due diligence depending on what the buyer uncovers - It's critical to prepare for due diligence before selling to reduce the number of issues that may arise.

5. Your Buyer is Unable to Secure Financing

This issue is most commonly seen with individual buyers trying to receive financing through the SBA 7(a) loan process.

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SBA 7(a) loans are processed by many banks around the country. When reviewing a loan opportunity, the bank’s underwriter must be satisfied with both the quality of your company and the ability of the buyer. 

If either does not meet their standards, they won’t do the loan. 

For businesses, profitability the quality of financial recordkeeping are the two biggest factors impacting whether a bank will be interested in financing your loan. 

For individuals, the lender needs to feel comfortable that the buyer can run your business. They will evaluate a buyer's prior work experience and how it relates to your business. The lender will also evaluate the buyer's credit, and the amount of liquid capital they have.

Experienced brokers will generally be able to tell whether a company and/or a buyer will be a good candidate for the SBA 7(a) loan process. Make sure your broker is familiar with SBA 7(a) loans, and what the financial and experiential requirements are.

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Learn what the SBA 7(a) process requires from both the buyer and the seller to be approved.

Successfully Sell Your Business With an M&A Advisor

Listen, we know you’re probably not ready to sell today. That’s OK.

BUT, if you’re even two or three years out from selling, you need to speak with an M&A Advisor today.

Selling a business takes time and considerable planning. Waiting until the last minute might prove more destructive than you expect. 

Plus, the more preparation you do, the easier the sale will be and the more value you’re going to receive at the closing table. 

So what are you waiting for? Stop planning to exit-plan and get started with a free business consultation today. 

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MidStreet Tip: If you feel your finances are not in order, get a skilled accountant on your team as soon as possible. It may also help to implement an up to date accounting software or some type of enterprise resource planning (ERP) system. This will allow you and others to have an accurate financial picture of your company’s operations. 

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Business owners often prepare their financial statements for tax reasons, so a broker or appraiser will recast the financials to give prospective buyers a better understanding of the company’s cash flow.