Don't Be a Deal Killer: 5 Things You Shouldn't Do When Buying or Selling a Business

July 28, 2021

"Don't be a drill killer"

This is a classic line from a past rugby coach. It was his belief that the greatest sin in practice was being a "drill killer". A drill killer is someone who acts in their own self-interest at the expense of the team.

Fast forward and I find myself repeating the same phrase, but in the context of small business transactions. But we ain't talking about practice, we're talking about deal killers.

What makes someone a deal killer?

Killing a deal is easier than you think and is usually not intentional. A deal killer is someone or something that kills a deal after an accepted offer.

After signing a Letter of Intent (LOI), most people don't waste thousands of dollars negotiating a deal they have no intention of completing. That said, s*** happens. The following is a list of things that can kill a deal:

  1. Hiring the wrong professionals
  2. Hiding information
  3. Poor communication
  4. Not being prepared
  5. Changing your expectations

Let's break each of these down further:

#1 Hiring the wrong professionals

"Do you have a lawyer?"

"Yes, I have a great lawyer I've been using for the past 20 years. They wrote my will, helped me incorporate my company, and they even got my jail sentence reduced to a misdemeanour."

🤦‍♂️

As much as we all love and appreciate our family lawyers/attorneys. Avoid hiring them when purchasing and/or selling a business. Lawyers specialize for a reason, which is why there's a big difference between patent law and maritime law.

When you hire the wrong lawyer they can make mistakes, which costs you money. Even worse, they may make a big fuss about irrelevant details, while overlooking something important.

When selling your business, hire an experienced transactional lawyer. They often classify themselves as corporate lawyers. How do you know who's good? Talk to other professionals (accountants, bankers, etc.) and ask for a referral.

#2 Hiding information

This shouldn't need an ethics class, but many sellers 'forget' to share vital information about their business. Such as a key employee leaving your company halfway through due diligence. While difficult to share, the buyer is going to find out sooner or later.

Practice transparency and rip the band-aid off.

#3 Poor communication

In the same vein as #2, poor communication is a one-way road to the deal graveyard. This applies to both buyers and sellers. Poor communication creates the following death spiral:

  1. The buyer and seller become confused about deal terms.
  2. This creates mistrust between the buyer and seller.
  3. From a place of mistrust, due diligence creates tension between the buyer and seller.
  4. This tension boils over as soon as there is any problem or speed bump to closing the deal (there always is).

To prevent this, we recommend buyers and sellers spend time with each other before signing an LOI. To prevent this, we recommend buyers and sellers spend time with each other before signing an LOI. It is amazing the difference having dinner together can make. This process helps each party understand where the other is coming from and leads to better communication.

#4 Not being prepared

To complete a successful transaction, everyone needs to stay prepared. Unfortunately, many buyers and sellers are unprepared, which delays (or kills) deals. The most common culprits:

Buyers

  • Not having a prepared due diligence list forces the buyer to extend the closing date.
  • The buyer waits too long to apply for financing, discovers financing isn't available, and does not have enough cash to complete the deal.
  • The buyer tries to save money by hesitating about involving deal professionals (accountants, lawyers, wealth managers, etc.) until the end of due diligence. Spoiler: this won't save you money.

Sellers

  • Super common: not having year-to-date (YTD) financial figures ready for buyers to review. For example, if we are 8 months into 2021, buyers will want to see the monthly financials from this year. This is in addition to last year's financials from your accountant.
  • The seller doesn't speak to an accountant about how much tax they will pay when they sell their business. Nobody likes a surprise tax bill, this is often enough for sellers to back out of a deal.

#5 Changing your expectations

In many deals, the expectations of the buyer/seller may change and cause the deal to die.

One example is when a business owner raises the asking price late in due diligence. On the flip-side, you have the buyer who gets cold feet and backs out of the deal.

These people usually don't provide the exact reason for backing out of the deal, but there is always a reason why. Selling and/or buying a business is an emotional decision, which can trigger illogical decisions.

To overcome this deal killer try resetting the conversation on why the person decided to move forward in the first place. The honeymoon phase of an accepted offer fades fast, bringing back those memories may help get the deal done.

Wrapping up - avoid these 5 things if you want to stay out of coaches bad books.

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