The buyer adores your company; it is exactly what he or she has been looking for. They have reviewed your financial statements and made an offer subject to several conditions. You’ve reviewed the offer and it appears to be acceptable, so what’s next? The deal’s contingencies indicate that the buyer or his or her advisors are concerned. This procedure may be referred to as due diligence in larger transactions. In a smaller business sale, however, the items of concern are usually spelled out rather than a general review of everything. This is because larger businesses or companies have a lot more areas of concern than the average small business.
The majority of contingencies involve the examination of financial statements and/or business tax returns. Others may involve lease issues, the seller remaining for a set period of time, or a very specific issue, such as repaving the parking lot if the landlord refuses or is not required to do so.
Unfortunately, some contingencies, such as a list of fixtures and equipment included in the sale, may be hiding others. On the surface, it appears simple, but the seller failed to mention that two pieces of equipment currently not in use require repair, or that the walnut desk in the office belongs to Grandfather Jones and is not included. Alternatively, while reviewing the lease, the buyer discovers that the landlord requires the business operate a minimum of 48 hours per week or that some other requirement or restriction applies that was not disclosed. Transactions have fallen through due to these and similar issues. Every transaction has “hair” on it because no business is perfect. It is critical that any adverse facts be disclosed to buyers as early in the process as appropriate. Buyers invest their time and money in evaluating business acquisition opportunities and it is disrespectful to hide or omit relevant facts.
Most contingency issues can be resolved before the business is put on the market. All of the following should be done by the seller:
Examine the condition of all furniture, fixtures, and equipment (FF&E). Remove any items that are not included in the sale or that are inoperable if not in use – or repair them.
Examine any contracts, such as the lease, any equipment leases, and any contracts that the buyer will assume or resign. Check that there are no “gotcha’s” in them. If there are any, make them known to a potential buyer right away, and make sure your business intermediary is aware of them as well.
Prepare to answer questions like:
- Is there anything concerning environmental issues, regulatory, or the law?
- Are vendor agreements in writing?
- How long are you willing to stay and work with a new buyer included in the purchase price?
- What percentage of your revenue is recurring revenue?
- Will the employees stick around?
- What are some potential disruptors in the industry?
- Why was last year the worst in recent memory (or best)?
The list could go on, but the point is preparation for sellers is key. You don’t want to discover a deficiency after an offer has been made – much less accepted. Buyers dislike unpleasant surprises and often asked themselves “If this wasn’t disclosed what other surprises are coming?”. A Certified Business Intermediary understands the process like the back of their hand and can be invaluable in preparing the business for market.