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4 Common Reasons a Buyer Backs Out of the Sale of a Business – Post #35

Reasons a Buyer Backs Out of the Sale of a Business

We’ve reached the point in our Building a Sellable Business series where you’re ready to close on your business sale! Maybe, you’ve even scheduled the closing. You’ve got your signature pen in hand, and you’re ready to sign on the dotted line. But out of nowhere, plans change. While some changes can be good, most changes before the sale of your business negatively affect the closing of your business. Changes usually mean that the buyer has changed his mind. So let’s look at 4 common reasons a buyer backs out of the sale of a business. Then, let’s figure out how to handle those disruptions.

Last Minute Changes Can Be Bad

Perhaps one of the saddest last-minute changes I’ve read about transpired around the sinking of the Titanic. Right before the ship left its harbor, Second Officer David Blair was removed from the crew. Depending on which source you read, he may have taken a key to a locker that contained binoculars for the lookout, or he may have forgotten to tell others where he left the key to the box. Others claim that the remaining officers misunderstood each other’s directives about the binoculars. No matter what happened, sources agree that lookouts on the Titanic were not using binoculars the night the ship hit the iceberg.

If the lookouts used binoculars that night, could they have prevented the boat’s crash? Who knows. Irregardless, a last-minute disruption to the Titanic’s crew staffing caused confusion. That confusion led to disruptions in standard operating procedures. Those disruptions may or may not have prevented the sinking of the Titanic. (For more information about the sinking of the Titanic, visit Encyclopedia Titanica.)

Last Minute Changes Can Be Good

On the other hand, last minute changes can be good. On August 28, 1963, Martin Luther King, Jr. (one of my top heroes) delivered a speech in front of the Lincoln Memorial during the March on Washington at the height of the Civil Rights Movement. Sources say that when Dr. King was nearing the end of his speech, audience member and friend, Mahalia Jackson, shouted out, “Tell ’em about ‘The Dream,’ Martin!”

From that point on, Dr. King began to improvise and speak from his heart instead of from his prepared notes. As a result of this unexpected disruption, Dr. King went on to deliver what some call “one of the most iconic speeches in American history ” that became “one of the defining moments of the civil rights movement.”

4 Common Reasons a Buyer Backs Out of the Sale of a Business

With these life-changing disruptions as our backdrop, let’s talk about changes that can occur before the closing of your business sale. Though some positive changes can occur [i.e. buyers raise their offer], most changes that happen right before the sale cause disruptions. So, let’s look at the 4 types of disruptions that can prevent the closing of a business sale.

#1. Financing Falls Apart

Just like in real estate, buyers’ financing can fall apart. I’ve worked on many business sales where buyers had written approval from the bank. I’ve put deals together based on the buyers’ Letter of Intent and approval from the lender. Everything has been ready to go. Then, one small contingency in a lender’s underwriting changes everything.

Maybe the bank requires more or updated documentation. Parties can provide the necessary items, but they must delay the closing until the underwriter reviews and approves the new information.

Or worse, the lender might refuse to issue the final approval and release funds on the buyer’s loan because something didn’t meet their “sniff test.” If the buyer can’t get financing, he can’t purchase the business.

#2. Parties Become Disgruntled

Sometimes, buyers have nothing to do with the disruption of the business sale. While you might think disagreements arise most often between buyers and sellers, that hasn’t been my experience. More often, I’ve seen business sales dissolve over disagreements between partners, shareholders, members, or owners.

If you’re on the seller’s side and you have partners or shareholders, you must make sure each is working toward the same end goal. Let’s say that one of the partners has his own selling agenda or wants a different sales outcome. Then, sellers could end up on different pages at the end of the process. If co-sellers cannot reach their own internal agreements, they cannot move forward with a purchase agreement with the buyer.

#3. Third Parties Cause Delays

I’ve also seen disruptions arise due to parties unaffiliated with either buyers or sellers. Perhaps you must delay closing because you’re waiting on a landlord to validate and approve the new lessee (the buyer). Or maybe a supplier or vendor refuses to transfer a contract from seller to buyer. Many times, situations outside of buyers’ and sellers’ immediate control delay or disrupt closings.

#4. The Deal Dies

Worst of all, the deal could just die. Some buyers get right up to the purchasing table and get cold feet. I’ve even seen some sellers get cold feet and walk away from the closing. One seller, in particular, decided he didn’t like the buyer, and he walked away from the sale during the due diligence process.

Now many times, the seller is locked into the deal and cannot walk away. Legal documents and agreements bind them to the sale. However, buyers, at times, have the ability to walk away for one reason or the other.

I have even seen a buyer walk away from the business sale because he was diagnosed with a terminal illness after he issued his Letter of Intent.

Disaster Happened… What Can I Do Now?

You never know what could happen before the business sale closes. So what are we to do when we find ourselves facing unexpected disruptions?

  • Reduce the purchase price. – The most common things sellers do to keep the deal moving forward is to reduce the purchase price. Sometimes, bank underwriters will require sellers to lower the sales price to approve funds for the buyer. Other times, the buyer will demand recompense for major issues uncovered within the company during the due diligence process. To proceed with the sale, the seller will lower the purchase price as compensation.
  • Place a guarantee on the sale. – Sometimes, a seller is waiting on a major contract to fund or significant Accounts Receivables to come in. Many times, a seller will have to reduce the purchase price or add a seller guarantee to the deal to get to the closing table. Thus, if sales don’t hit the target everyone expects, then the seller guarantees a reduction in purchase price or a pay-back to the buyer later on.
  • Put a holdback in place. – In a holdback, parties take a portion of the purchase price and put it in an escrow account. If the company doesn’t receive anticipated funds, then the money goes back to the buyer, thus reducing the purchase price. However, if the company does receive the funds, the money is released to the seller.
  • Offer an earnout. – As we talked about in Post #29, this option allows the buyer to give the seller a fair market price for the company upon closing. But it provides a bonus or profit percentage to the seller if the business does well over a set amount of time. Thus, if the seller believes his company is worth more than the buyer is willing to give, both parties can get to the closing table.

Planning Wins Every Time

The key here is that you must remember that unexpected roadblocks do not always mean the deal is dead. Disruptions don’t always mean you have to go backward and start from scratch on a deal with a different buyer. Oftentimes, there are still ways to get the deal done and sell the business.

My point in today’s article is that planning wins every time. If we can plan our exit well enough in advance, then we can virtually eliminate some or most disruptions. With the technology available in today’s society, we should be able to avoid most surprises. But, sometimes things happen that are outside of our control. We must plan how to deal with those circumstances as well.

So friends, we’re getting close. In the next episode, we’re going to deal specifically with the closing and what to expect. Until then, remember that life is hard. Life is fun. Life is complicated. Business can be complicated. Money definitely doesn’t have to be. Let’s continue to make our lives, at least, financially simple.

building a business to sell link

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