The best way to ensure a smooth business sale is to anticipate potential business deal breakers or deal killers and address them before it is time to close the deal. Our 5-part M&A Deal Killers series digs into the top business deal breakers in business sales and how you can identify, prevent, and resolve them. Today’s focus is Deal Killer #2: Unresolved Issues.
Deal Killer #2: Unresolved Issues
It’s every buyer’s worst nightmare. They believe they’ve found the perfect business; financing has been approved; they’re weeks into due diligence, and “Surprise!” an unresolved issue is discovered. Discovering issues during due diligence creates distrust and can quickly kill a deal.
Discovering unresolved issues so late in the game can make it tough for the buyer to back out of the deal, causing future litigation issues; or it may even force 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. And for business owners, it is incredibly frustrating to work hard to build a successful business and then see a deal derailed by a normal problem that simply hasn’t been fully resolved.
As a business owner myself, I understand how tempting it can be to put off resolving tedious issues, but as you inch closer to the idea of selling your business, the time to address these items is prior to listing, not after.
What Kind of Issues Might Scare Away Buyers?
First, let’s cover what constitutes a “major issue” that could potentially scare away buyers. We’ve seen the following issues in the past:
- Tax issues/liens
- 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
- AR collection issues
While resolving any of these tasks may feel daunting, rest assured that you are not alone. Most businesses have open issues like 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 the years of hard work that you have invested in your business, you deserve a seamless and profitable sale. It would be devastating to lose that opportunity due to something that could have easily been fixed.
If you think you might have a problem in your business, or if you aren’t really sure how to address it, review the strategy below to help resolve issues and prevent future problems from arising.
1. Risks of Not Handling Unresolved Issues Before Trying to Sell
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 it could also derail the deal and deter future buyers from moving forward. The issues listed above could severely impact your business in these ways:
- If the deal still goes through despite the unresolved issue, you could face serious litigation issues down the road if the buyer discovers said issue after closing.
- 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 potentially being sent to collections.
- AR issues involving collections cause strain with clients, and they rarely collect the full amount.
- Outstanding liens or judgments on assets and property could result in you losing the assets or property while you still own the business; likewise, the same could happen with personal assets and property you want to retain after the sale, including proceeds from the transaction.
2. How to Identify a Problem Within Your Business
Now that you understand the potential impact an unresolved issue could have on your business and the process of an M&A transaction, you can begin to look for the cracks in your business and access solutions. To begin identifying any potential problems, we recommend taking these steps:
- Analyze 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 or resolved, and request they be removed from the state database.
3. How to Resolve Issues Within Your Business
First, contact the vendor, customer, or agency managing the claim and let them know you have received their communications and are working to address the issue. Note that the agency will probably be more understanding if you can provide some action steps and a timeline in regard to the issue’s resolution.
Once you have contacted the necessary parties, here are examples of possible 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 with 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 caused the issue. Many business owners find that education, training, and communication can resolve most issues if dealt with as soon as they are found to be a concern.
- Litigation comes from a lack of communication with and attention to 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 may potentially be monitored by an agency, as well as 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 strives to stay ahead of future problems that may arise.
4. How to Prevent Future Issues
Great news – if you’ve 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 essential 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:
- Hold 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.
- Communicate with your team about industry and company practices in order to reduce the frequency of major issues, as well as how to properly address issues that do arise.
- 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.
Often as business owners, informing our employees about the financial goals and strategy of the business is not enough. To eradicate 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. Then, the team understands what to look for and when to involve certain team members and ownership. This practice will build a dependable 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 a business when the business owner has educated their team on the 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 the 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.
Deal Killer Series Part 1: Client Concentrations
Deal Killer Series Part 3: Human Capital Concentration
Deal Killer Series Part 4: Over Valuing Assets and Inventory
Deal Killer Series Part 5: Inaccurate or Poor Bookkeeping