M&A Deal Killer Miniseries #2: Unresolved Issues
Discovering issues during due diligence creates distrust and can crush a deal.
It’s every buyer’s worst nightmare. They believe they’ve found the perfect business, financing has been approved and they’re weeks into due diligence when “surprise!” some unresolved issue has been discovered. This late in the game, it can be tough for the buyer to back out of the deal, causing future litigation issues for you or unfortunately, forcing you to start the M&A process all over again. For buyers, discovering a major issue when seeking out a business can be a deal-breaker, which is incredibly frustrating to business owners who have worked hard to build a successful business and may just have a normal problem that has not been fully resolved yet. As a business owner myself, I understand how tempting it can be to put off resolving tedious issues but as you inch closer to selling your business, the time to address these items is prior to listing, not after.
First, we should probably cover what constitutes a “major issue” that could potentially scare away buyers. Issues we have seen in past include litigation, tax issues/lien, unresolved worker’s comp claims, outstanding customer warranty claims, regulatory OSHA actions, county notice of non-compliance, past due AP, unresolved AP collection claim or vendor lien, and/or AR collection issues. While resolving any of these tasks may feel very daunting, rest assured that you are not alone. Most businesses have open issues such as these at any given time, but with the right strategy and support team, you should be able to resolve these prior to listing your business. After all of the years of hard work that you have invested into your business, you deserve a seamless and profitable sale, and it would be devastating to lose that opportunity due to something that could have been easily fixed. If you think you might have a problem in your business or if you aren’t really sure how to address it, we have outlined a game plan below to help you resolve the issue and prevent future problems from arising.
What are the risks of not handling unresolved issues prior to the sale of my business?
The first step to fixing a major problem is understanding how it could impact your business. Waiting to tackle an issue until you are already deep in the M&A process is not only unethical and bad business practice, but could also derail the deal and deter future buyers from moving forward. Some of the above issues could severely impact your business in these ways:
- If the deal actually goes through and the buyer discovers it later, you could be setting yourself up for some serious litigation issues down the road.
- If you are stalling on resolving a regulatory issue, further action may be taken against your business, worsening the problem.
- AP issues could result in damaged vendor relations or being sent to collections.
- AR issues involving collections cause strain with clients and rarely collect the full amount.
- Outstanding liens or judgement on assets and property that could be lost while you still own the business or on personal assets and property you want to retain after the sale to include proceeds from the transaction.
How can I identify a problem within my firm?
Now that you understand the potential impact an unresolved issue could have on your firm and an M&A transaction, you can begin to look for the cracks in your business and access solutions. To begin with identifying any potential problems, we recommend taking these steps:
- Start by analyzing any pending issues that you are already aware of, including vendor, client and employee issues.
- Meet with your leadership team in each department to discuss any potential circumstances or notices received.
- Search state records for liens filed against your company and for UCC filings on your company. Repeat this process on a quarterly basis to resolve any findings that are not accurate and or resolved to request they be removed from the state database.
I’ve identified some issues – what steps can I take to resolve them?
The immediate response is to contact the vendor, customer or agency managing the claim and let them know you have received their communications and you are working to address. Better yet, if you can provide some action steps and a timeline in regards to resolving the issue, the agency will probably be more understanding. Once you have contacted the necessary parties, here are some examples of next steps:
- Build an advisory team to help you tackle the issue. Legal counsel, CPAs and insurance providers are dependable sources that can provide you will recommended next steps and prevention methods.
- Address any found items on a monthly basis as part of your financial and operational review. Get ahead of the problem by finding the source that causes the issue. In most cases it is found that education, training and even communication can resolve most issues if dealt with as soon as it is found to be a concern.
- Litigation comes from lack of communication and attention with the disgruntled party. If the party understands you are working to right the wrong, usually that can stop the momentum of litigation.
- Regulatory issues generally arise from a lack of education as to what each agency is monitoring and holding the business accountable for. Organize a weekly report for your management team that explains what agencies will be potentially monitoring and any agency’s findings and education on how to improve.
- Make sure you are communicating the improvements on unresolved issues to any agency, vendor or client on a consistent basis.
- A buyer will find value in an organized system within the business that stays in tune with these issues and that strives to stay ahead of future situations.
How can I prevent future issues?
Great news – if you have reached this step it’s either because you have no serious issues pending or you have already made a plan to address current ones. That’s great! Keep in mind that all businesses have issues, it’s just really important to address them prior to selling to avoid scaring off banks and buyers in the heat of due diligence. Once you have resolved current issues, it is wise to develop a preventative plan for the future using the tips below:
- Having a standing monthly meeting with the leaders of each of your company’s departments to ensure any potential issues are caught and handled early on.
- Communicating with your team on industry and company practices to reduce the frequency of major issues and also, how to properly address them.
- Create and implement an actual handbook or guide explaining how to resolve issues based on each department’s potential risks.
When addressing big problems within your business, you will find most of the issues stem from a lack of knowledge related to communication, regulatory agencies and financial management – not due to a lack of industry knowledge or general education among your team. Oftentimes as business owners, informing our employees on the financial goals and strategy of the business is not enough. To eradicate the issues, you must source dependable information related to the major issues. Introduce those sources to your management team and allow them to familiarize themselves on a regular basis and as a part of their job, they must provide knowledge to the company’s management team. Then the team understands what to look for and when to involve certain team members and ownership. This practice will build a desirable management team that can resolve current issues and mitigate future risk. It is a known fact within the business transaction community that a buyer will pay more for business when the business owner has educated their team on what types of potential issues to look for and how to resolve issues in advance of becoming costly. Generally, when a buyer discovers an issue at closing, that’s not what breaks the deal – the fear that other secrets exist is what breaks the deal. Discovering issues during due diligence creates distrust and when the buyer does not feel that the seller or employees are able to understand major underlying risks of the business, they begin to question the investment and doubt the management team’s ability to maintain the profitability and value of the business once the seller exits. As a business owner, it’s important that you are planning for the future and being aware of potential deal killers will only help you in the long run.