Confessions of an Entrepreneur: What Happens When the Sale of Your Business Doesn’t Go Through?
April 13, 2021 | By Mark Zweig
While start-ups and funding seem to dominate the media related to entrepreneurship, an important part of the process is the eventual exit strategy the founders will employ to harvest the fruits of their efforts employed to start and grow a businesses.
It is generally accepted that unless going public is an option, value will be highest in an external sale of the business. Having been through an external sale of my business and being involved in buying many others myself and with clients, I thought it might be interesting to review what happens when you, as a business owner or owners, embark on an external sale and the deal falls apart in the 11th hour.
That happened to us in 2001 when we had a buyer for the business we owned at that time known as Zweig White, Inc.
We had been approached by a non-profit organization that served our same client base. After accepting their letter of intent to sell 80% of our business for $10 million, we embarked on the due diligence and purchase and sale negotiation.
A sale looked eminent. I was already planning on what I would do post-sale and how I’d use the money, and in advance of the close bought a new Mustang GT convertible for myself that I thought I could eventually give my then-early teen daughter for her first car.
But due to external environmental factors and a change in strategy, the organization fired their head of development, killed all of their acquisition plans and abruptly pulled out of the process.
I can’t tell you what a blow that was. I was in the middle of a painful divorce from my first wife that gave me sole custody of my two daughters and would end a nearly 20-year marriage. I felt like I needed to get out of a business that required constant travel, so I could take care of my girls. And I was tired of the stress.
I know my other partners were disappointed as well. This sale would have paid each of us about three times what our stock was worth on an internal sale. Our plan all along had been to build up and sell.
We had just finished our 13th year of business, had been profitable every year, and had consistently grown by 30% or more annually for our entire history. It was the absolute perfect time to sell, as our market value was at a high point.
But none of that mattered.
Our buyers backed out and we had to go back to work. In the end, we had to hire investment bankers and work another three years before we finally closed a deal to sell our firm – for less than our original deal would have brought us.
The point of all this painful detail is that our experience wasn’t unique. Many business owners plan for years to have an external sale of their business and it falls apart in the 11th hour. If they are pretty far down the timeline for selling their company, it can leave the company in disarray and them in a state of depression and limbo.
Not a good place to be when you have a business to run.
For those business owners who do plan to have an eventual external sale of their businesses, or those who just had a deal fall apart, here is my best advice and some questions you need to answer:
- Be prepared for the deal to not go down.
- If your sale did fall apart, are you sure it cannot be resuscitated?
- Honestly answer the question of why the sale fell apart.
- Do your key people know about the sale falling apart? How about the rest of your employees?
- Did word get out of a pending sale to your clients/customers and competitors?
- How can you generate new options? Selling a business takes time.
- How are you going to keep everyone on board until the next time?
Far more of these deals go bad than go through. You have to expect to not close or you will be disappointed. Many neophytes to the sale process don’t know that.
Sometimes a deal that goes bad can be brought back to life. Why did the buyer pull out? Is it something happening in the buyer’s organization that could change? Or is there someone in their organization who got spooked for some reason and killed the deal? What is that reason? Who do you need to talk to? Maybe you can address it and overcome the problem.
Financial issues? Bad accounting? Pending litigation? No second-tier leadership? Loss of a key client or customer? There could be any number of problems that killed your deal. You need to know and, if possible, address the problem or problems or those same issues will likely surface the next time you go to sell the company.
If so, you need to immediately explain what happened and why you were selling the business. Alleviate their fears about a possible acquisition and changes that could affect their work lives or job security. Do not ignore or minimize the importance of coming clean quickly.
If so, you need to communicate with your clients fast and reassure them nothing is going to affect your performance or ability to deliver.
Nine to 12 months is completely normal. If you really want to sell, you may need to hire a qualified firm to find new buyers. That could cost you a few bucks. The risk of not working on finding new buyers is a loss of key people or customers, and along with that revenue, and that could negatively impact your value.
You may need to either dangle, or even outright offer, specific retention bonuses if people stay a certain amount of time. You maybe also need to do it post-sale to keep your people on board long enough to get through any warranty period or to get paid all of your note payments.
I could go on here but won’t. I will close by saying if you are serious about selling your business, you need to not only be realistic about the time it will take and your odds for success but also do a whole host of other things.
Buyers want growing businesses that are profitable. You should have a history of audited or at least reviewed financials. You need a strong second tier management. You don’t want too much of your business to be coming from one or a few clients or customers, as the client concentration risk will hurt your value. You need to be ready to stick around for a period of time post-sale as a buyer will insist on it. You will also need to be ready to sign a non-compete that will keep you out of the same business you are in for a few years post-sale. And you will probably have to finance a good chunk of the sale price, as most buyers will insist on it.