As a business broker in Florida, I often encounter some factors that cause me terrible frustration when negotiating the mandate for the sale of a business. In this brief article I have summarized in 8 factors the elements that cloud the future of sales and frequently distance us from our desired goal:
1. Deficient Financial Statements: The presentation of poor financial statements not only raises questions about the financial health of the business, but also complicates the calculation of free cash flow. This lack of clarity in the numbers makes it difficult to accurately estimate the sales price at which the business could be launched on the market. Opacity in financials can deter potential buyers, prolonging sales time and negatively affecting the overall perception of the business.
2. Overvaluation: Setting an unrealistic valuation for the business not only scares away potential buyers, but also represents a significant challenge for the broker promoting the sale. Finding a buyer willing to pay a premium for the acquisition of a company usually takes much longer, and is not always achieved. In comparison, the sales process is significantly speeded up when working with a valuation aligned to the market value. The discrepancy in price expectations can unnecessarily prolong negotiations, affecting the efficiency of the process and the proactive disposition of buyers.
3. The Orchestra Man: Overreliance on the owner for daily operations can be a significant obstacle. If the seller is the face of the business and his absence affects the company's market position, this adds a level of complexity to the transaction. The need to ensure operational continuity without the constant presence of the owner becomes a strategic challenge.
4. Key employees: Likewise, if the business relies heavily on a few key employees, buyers may be concerned about continuity of operations after the sale. In the Due Diligence process, it is crucial to verify the willingness of key employees to remain with the new management. In this sense, considering the signing of individual employment contracts with key employees can provide additional security and maintain operational stability after the sale.
5. The Kodak effect: The presence of outdated business processes could seriously compromise the future of the company, especially in a market prone to obsolescence, as illustrated by emblematic cases such as Kodak and Blockbuster. Mitigating these operational risks becomes crucial to maintain the attractiveness of the business and facilitate the sales process.
6. Hidden Liabilities: Undisclosed debts can jeopardize the transaction, generating distrust in buyers and affecting the viability of the sale. Such is the frequent case of Small Business Administration (SBA) loans granted during the Pandemic that are not disclosed by some business sellers during Due Diligence. In many cases, sellers may be surprised to discover that, under the terms of the loan, the entire company's assets are pledged as collateral. It is essential to clarify to the seller that it is not possible to separate the company from this commitment and that, therefore, they must cancel this debt with the SBA by the day of closing of the sale of their company.
7. Customer Concentration: Reliance on a small number of customers can limit buyer interest and complicate the negotiation of favorable terms. Exaggerated dependence on one or a few clients represents a significant risk for the company. It is vital to highlight that a diversified client portfolio strengthens the stability of the business and improves its attractiveness to buyers.
8. Unfriendly Landlord: Encountering difficulties or delays when negotiating with your landlord can be especially frustrating. Restrictive clauses in terms of term, causes of eviction and disproportionate annual increases can negatively impact buyers' perception of the long-term stability of the business. It is not unusual to see buyers who have successfully navigated Due Diligence crash into the wall of intolerance of some unfriendly landlord.
The presence of these factors not only complicates the sales process, but can also affect the perception of the broker's professional image. Therefore, it is imperative that each broker develops the ability to discern those sales mandates that present significant challenges and that indicate their low viability in the market.
Proactively reject these mandates «with lead in the wing» not only optimizes the efficiency of the broker, but also saves valuable time for both the seller and the potential buyer. With a selective approach, the broker can focus on genuine opportunities and build strong relationships in the sales process, ensuring positive results for all parties involved.
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Author: Alfredo Gonzalez (alfredo@negociosenflorida.com)
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