9 Pitfalls that Can Derail a Business Sale

As a business owner, the idea of an acquisition or merger can be both exciting and daunting. While it can be a great way to expand your business or buy into a new one, the process of M&A is complex, and there are many potential pitfalls to avoid. Poor acquisitions can lead to the loss of owner equity and even the end of a business. Therefore, it’s crucial to approach these transactions with caution and careful planning. Unexpected issues can arise, which can harm the acquisition and potentially cause a buyer to reduce their offer or back out of the deal altogether. By taking the time to navigate the exit planning and M&A process carefully, business owners can increase their chances of success and ensure a bright future.

When planning your exit strategy, B2B CFO® recommends that you are diligent  to avoid these pitfalls that no acquiring company wants to experience:

1. Missing documents. In advance of an acquisition, you should prepare all the necessary paperwork and have it ready and available.  Creating the necessary documentation should be a top priority. The integrity of your financial documents is key to any acquiring company. These documents may include:

• Current balance sheet
• Cash flow statement
• Profit & loss statements for the current and past 2-3 years
• Business tax returns for the past 2-3 years
• Copy of the current lease
• Insurance policies
• Supplier and distributor contracts
• Employment agreements
• Offer to purchase agreement

2. Lack of audited financials. Your finances should be in order and your financial statements should be done in accordance with GAAP (generally accepted accounting principles). Prospective buyers are not impressed by sloppy financial reporting. Your financials are the last place that they want to find any surprises. Again, buttoned-up financials shouldn’t only be a goal when facing an exit; this is an important step to take as your business grows.
3. Misaligned ownership structure. A shareholder, as an owner of a corporation, has certain rights. These are distinct and different from those of an LLC, a corporation, and a holder of preferred stock. What is your ownership structure? If it suddenly isn’t clear who owns your company and/or who makes the decisions, this can be a serious problem.
4. Issues with intellectual property. If your company holds any patents or has other IP, there should be clarity—and documentation—around this. The IP that your company holds is a significant asset; without it, your company can look less appealing.
5. Mixing personal and business finances. A common mistake business owners make is not keeping personal and business funds separate. Prospective buyers want a clear understanding of your finances. When you blend your personal finances with your business, this creates confusion. Make sure that you separate your transactions and that your books reflect this clear separation.
6. Outstanding sales tax compliance issues.   If you have product or subscription sales or traveling sales personnel, you need to be well versed in your tax obligations to ensure compliance. If a potential buyer discovers outstanding sales tax issues when digging into your books, this could derail a sale.
7. Committed contracts.  You may have entered into long-term contracts with service providers or for real estate. However, when it comes time to sell your business, these commitments can become a major obstacle. Prospective buyers may be hesitant to take on the financial responsibility of your prior contracts, which can ultimately jeopardize the sale. It is important to be aware of these committed contracts and to have a plan in place to address them during the selling process. By proactively communicating with potential buyers and finding solutions for these commitments, you can increase the likelihood of a successful sale and a smooth transition for all parties involved.
8. Loss of existing talent.  When a company is acquired, the loss of existing talent can be a significant obstacle. Potential buyers are often attracted to a company’s talented employees, and the absence of key team members can be a risky proposition. To ensure the retention of your valuable employees during a company acquisition, work to establish effective equity plans that incentivize them to stay. Consider offering retention bonuses, stock options, or other forms of equity that align with the new company’s goals and vision. By providing your team members with a stake in the future success of the newly formed company, you can promote a sense of loyalty and commitment that will benefit both parties in the long run.
9. Failure to hire the right advisor.   Mergers and acquisitions can be complex and risky, and even the slightest mistake can lead to a significant decline in value. That’s why having the right experts and specialty teams in place is crucial to avoid devastating outcomes. According to industry experts, it’s best to build your advisory team two to three years before the target date of the sale or transfer. By doing so, business owners can leverage the skill and expertise of these professionals to identify obstacles and help with the transaction. At B2B CFO®, we understand the importance of having the right advisor in your corner during M&A activity. Our team of experienced professionals is ready to help you navigate the complexities of exit planning and ensure a successful outcome for your business.

These points are just a highlight of critical issues we see in our role as exit planning advisors. It’s not possible to fix everything at once. However, if a sale of your business is on the horizon, start the preparation process long before listing your business for sale.  Proper planning and transparency can prevent unnecessary surprises and provide you with a smooth and successful sale.  If you have questions and wish to learn more about our proven tools, processes, and talented Partners, email PeggyHead@b2bcfo.com.