Selling or buying a business is time consuming, emotional and stressful, and having a deal fall through can be demoralizing. But the reality is that only a fraction of potential business acquisitions actually close. Many deals never really get off the ground. Even deals that make it to the letter of intent (LOI) phase often don’t close. When it comes to selling or buying, you really need to find out if the other party is serious and likely to perform. But, how do you know? It’s not as if it’s written on their foreheads.
Fortunately, there are tell-tale signs that you may be dealing with a person who is impractical, flighty, unreliable, inconsistent, indecisive, deceitful or will flake out before closing day. If you’re worried that you might be dealing with a flaky buyer or seller, look for these signs.
1. The buyer or seller is untrustworthy.
Before buying or selling, learn to do research on the buyer or the seller. It is still your asset before they buy it, and it will be your asset when you buy it from them, so it is best that you do some checking on the character of the individual, company or private equity group you are dealing with. Look up past deals they have done and check references.
2. The buyer seems to have financial problems.
When a buyer is financially weak, there’s a strong chance that buyer won’t make it to closing. Buyers should show proof of funds for a down payment in order to make an offer on a potential purchase, and in some cases get prequalified for a loan. Try to avoid entering into an exclusive LOI without proof of funds. If a buyer won’t agree to provide proof of funds early on, or stalls for any reason, simply walk away.
3. The buyer or seller is slow to act.
When a seller or buyer drags his feet in providing disclosures or other diligence it could mean lack of interest or something to hide. If they are serious about buying or selling, rest assured they’ll be quick to act and respond with clear and accurate information or a thoughtful reply. If you’re hearing a lot of “I don’t know,” “maybe,” or “I’ll let you know,” they are not ready for a transaction. Or if you message them “can you meet me at XYZ at 5:30 pm?” And they reply with “I gotta see”, or “I work today”, and they don’t reply with a follow up time and place they can meet you, chalk this one up to the birds. They’re not serious about doing the deal.
4. Lack of transparency.
If a buyer or seller seems to be less forthcoming, it doesn’t mean the deal will fall through, but it isn’t a good sign. If there’s anything less than full transparency, there’s generally a reason. A lack of transparency has a lot of gray areas, it could mean that they can’t really provide all the information that you have asked for and are just trying to buy time till they can get it. Nonetheless, a lack of transparency is a sure sign of a flake buyer or seller.
5. The seller, buyer or agent becomes less responsive.
One of the biggest signs a sale is going to fall through is if there’s a noticeable change in the communication from a once cooperative party. We all live busy lives and are can’t always check our texts and phones every hour, BUT, when it comes to doing business deals, time is often a deal killer. So, when a buyer or seller takes days to reply to simple requests, you are probably wasting your time. Still, don’t assume that the seller or buyer is no longer interested. A text or email message can be missed or misinterpreted, and calling or meeting with the other party is imperative. Nonetheless, avoid anyone that is taking longer than necessary to reply.
6. Low enthusiasm for the deal.
Enthusiasm is a sign that they want the transaction to close. If you sense that the other party is just going through the motions and isn’t all that excited to be selling his or her business or jazzed about buying, it’s a warning sign. There’s a fair chance that your deal will fall apart. Perhaps the prospective buyer has found a different business that they are excited about. Whatever the reason, you’ll definitely want to address it right away
Another sign that a purchase is going to fall apart is when one partner on the buy side loves the business, but their partner is more hesitant. When it’s a joint venture, all partners should be equally excited to sell or buy, it shouldn’t be one-sided.
Flakes often flash clear warning signs through their lack of transparency, indecision, inaction and lack of preparation. But it is easy to miss or look past these warning signs if you haven’t been through this process numerous times. The surest way to avoid flaky buyers or sellers and increase your chances of a successful deal is to hire a business broker, M&A advisor, investment banker or transaction intermediary. These professionals spend a lot of time watching for these signs, and make appropriate recommendations and take appropriate actions when they occur.
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Bob Bates, CPA, CVA is a senior valuation analyst in Exit Strategies Group’s San Jose California office. For more information on the use of earnings and cash flow measures used in business valuation, or to discuss a current business valuation need, Email Bob at firstname.lastname@example.org or call him at 408-769-4404.