Common Reasons Business Sale Transactions Fail

A business sale can fail for many reasons, but early planning – integrated with your personal financial plan – can help you avoid the most common pitfalls.

A successful outcome to the sale of your private business could be transformative for you and your family. But it is not uncommon for transactions to fall through, sometimes after months of negotiations and significant time commitments from the owner and management team.  

Thankfully, the risk of a failed transaction can be substantially reduced by recognizing common pitfalls and addressing them with early planning. Based on our experience, below are nine of the more common reasons transactions fail and advice for avoiding them. 

Common Reasons Transactions Fail

  • Family conflict arises over whether or not to sell the business, the terms of the sale or the role of family members in the business after it is sold.

  • The business has no formal management succession plan for identifying and grooming employees to assume leadership positions in the future.

  • You lose employees who are critical to helping with the business sale process or overseeing day-to-day business operations.

  • The buyer questions the business’ financial controls, reporting or forecasting, and as a result, the buyer lowers the price it is willing to pay for the business.

  • You lose a key customer; or your sales are concentrated in a few key customers, and the buyer is not willing to assume the risk of losing those customers.

  • The buyer discovers other issues with the business during the due diligence process (e.g., environmental liabilities or litigation) that cause the buyer to walk away from the deal.

  • You do not have the management resources and external advisors to adequately prepare your business for the transaction process.

  • You did not realize the extent to which the transaction would distract you and your management team from running the day-to-day business.

  • You did not anticipate the transaction’s tax implications and impact on your ability to maintain your current lifestyle and achieve your long-term financial goals.

How to Avoid Common Pitfalls

As you prepare for the transition of your business – whether this year or sometime in the future – consider the following advice for three main areas of planning:    

The business

It is important to prepare your business and management team as early as possible prior to commencing a formal sale process. Consider conducting “due diligence” on your own business as if you were a potential buyer evaluating your business. Preparation will be time consuming but will allow you to anticipate buyer questions and issues and identify employees who will be critical to managing the business sale process.

You should also identify successors to groom for key management positions and consider enhancing or establishing certain protections (e.g., employment agreements and retention bonuses) to help ensure that senior and high-performing employees are protected financially if the business is sold. 

You and your family

It is not uncommon for business owners to become distracted with running their business and overseeing the sale process, and as a result, underestimate the importance of planning for the transaction’s impact on their family and personal wealth plan. To avoid this issue, work with your family and advisors to develop the following: 

  •  Family governance guidelines that help address how family members participate in, receive information about and provide input on the business. Doing so will help avoid or diffuse any potential family conflict that might arise as a result of selling your business.

  • An understanding of how your business fits into your overall wealth plan, and how selling your business will impact your lifestyle spending needs and long-term financial goals. Consider alternatives to selling your business and how they might impact your financial profile differently.

  • An awareness of the income taxes that will be owed as a result of the business sale and an updated estate plan that seeks to minimize any gift and estate tax consequences of the sale.

The transaction

It is important to have a general understanding of the private business sale process in order to anticipate the time commitment that the process will require of you and your management team. Review the various ways a business sale process might be structured (e.g., a broad auction, limited auction or exploratory discussions), as well as the types of advisors on a typical transaction “deal team” and the role that each will play in the transaction.

The above pre-transaction planning can significantly reduce the risk of a failed business sale, but it takes time and coordination across multiple advisors. For help streamlining this process and developing a plan that integrates the goals you have for your business and family, consider speaking to one of our advisors.

BUSINESS OWNER

Prepare to Sell Your Business

Our advisors can help with pre-transaction planning.

The Northern Trust Institute

Proven Advice for Moments that Matter

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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