Selling a business is rarely as simple as finding a buyer, agreeing on a price, and signing the paperwork. For many business owners, the biggest surprises in an M&A transaction happen during due diligence. A buyer may be excited about the company, the valuation may look attractive, and the Letter of Intent may be signed, but then previously overlooked issues begin to surface. Some problems are manageable. Others can reduce the purchase price, delay the transaction, change the deal structure, or cause a buyer to walk away altogether.
The good news? Many of the most common deal breakers can be identified and addressed before a business goes to market.
What Is a Deal Breaker?
A deal breaker is an issue significant enough to materially change a buyer's willingness to complete a transaction. Not every red flag will kill a deal. In fact, experienced buyers understand that no privately held business is perfect. The question is often less about whether an issue exists and more about:
- How significant is it?
- How long has it existed?
- Can it be corrected?
- Has management been transparent about it?
- What does it mean for the company's future performance?
A problem that is disclosed early and accompanied by a reasonable solution can often be handled. A problem that a buyer discovers unexpectedly during due diligence is much more difficult.
The Biggest Deal Breaker May Be a Lack of Preparation
Owners don't intentionally create deal problems. They are busy running their businesses. Financial reporting gets put off. Important contracts aren't reviewed. One employee becomes indispensable. The owner continues handling every major customer relationship. Personal expenses run through the business because that's how things have always been done. None of these things necessarily prevent a sale. The problem is waiting until after a buyer discovers them to address them. That is why exit planning should begin well before an owner is ready to sell.
Ideally, owners should begin preparing one to three years before a transaction. That gives them time to improve financial reporting, strengthen management, diversify customers, resolve legal issues, improve operations, and address other areas that could affect valuation. It also changes the conversation. Instead of reacting to a buyer's concerns, the owner can proactively demonstrate how those risks have been addressed.
The best time to identify a deal breaker is before it becomes one. A buyer will conduct extensive diligence. They will examine the financials, customers, employees, contracts, operations, legal matters, and countless other aspects of the business. The goal isn't to make the business perfect. It's to understand where the risks are, determine which ones can be fixed, and develop a strategy for presenting the business in the strongest possible light. For business owners considering a sale, that preparation can mean the difference between simply finding a buyer and running a competitive process with confidence.
The earlier you prepare, the more options you have.
If you're considering selling your business in the next one to three years, now is the time to identify the potential red flags—not when a buyer is already sitting across the table.
Business Acquisition & Merger Associates (www.buysellyourbusiness.com), a Charlotte, NC advisory firm, assists business owners in growth recapitalizations, business transfers to financial or strategic buyers, and management buyouts. BAMA also helps companies grow by providing buy-side sourcing services that identify potential add-on acquisitions to expand geographic footprint or add strategic products and capabilities.