Why buyers back out of a business sale
Nearly every business broker can tell you stories about deal cancellations. Some were due to the parties, others to financing and still others to unforeseen situations. The reasons are enumerable but for the most part, why buyers back out of a business sale typically occur for one of four reasons:
- Financing fails
- The parties become disgruntled
- Third-party delays
- The deal just dies.
Let’s take a look at these four reasons of why buyers back out of a business sale that could prevent the sale of your business.
#1. Buyers back out of a business sale because financing falls apart
Buyers’ financing may fail which often causes buyers back out of a business sale. Many business transactions involve bank financing usually through Small Business Administration (SBA) loan program. SBA loans are an involved process and far more complicated than a real estate loan.
Lenders require quite a bit of information about the business, the borrower(s) and commercial real estate (if that is involved in the purchase) to approve business acquisition loans. The parties can submit the required items but must wait until the bank reviews the information and approves it. This might take months.
One small change in the underwriting of a lender can make all the difference. Underwriters may refuse to approve the buyer’s final loan and disburse funds because the item didn’t pass muster. The buyer cannot purchase the company if they are unable to obtain financing.
#2. Buyers back out of a business sale because parties become disgruntled
Despite the common belief that buyers and sellers are at odds most of the time, we have seen many business deals fall apart due to disagreements among owners, shareholders and members on both sides leading to buyers backing out of a business sale.
Partners and shareholders must assure that they are working together towards the same goal. If each partner has a different selling goal or strategy, this could lead to sellers ending up on completely different pages. Co-sellers who are unable to reach internal agreements with their buyers will not be able to move forward with any purchase agreement.
#3. Buyers back out of a business sale due to third-party delays
Buyers back out of a business sale because of disruptions caused by parties not affiliated with sellers or buyers. Delays in closing a business sale might occur while waiting for a landlord to approve and validate the new lessee. Perhaps a vendor or supplier refuses to give the contract to the buyer. Closings can be delayed or interrupted by situations beyond the control of sellers and buyers.
These might be issues that can be remediated but a buyer might back out of the deal if the delay is prolonged or their patience level is taxed.
#4. Buyers back out of a business sale because the deal loses momentum and crashes
The worst thing is that after all the time and effort put into deal-making is that the deal may just die. Buyers sometimes get too anxious and walk away from the table. Some sellers will simply walk out of the sale without a second thought. A seller decided that he did not like the buyer and quit the transaction during due diligence.
Many times the seller cannot leave the agreement. The seller is bound by legal documents and agreements. Buyers sometimes have the right to walk away from the sale for any reason. Some parties leave the deal due to personal tragedy or terminal illnesses.
What to do when buyers back out of a business sale
It’s impossible to predict what might happen after a business sale. What can we do in the face of unexpected interruptions?
Lower the purchase price.
To keep the deal going forward, sellers will often reduce the purchase price. Bank underwriters may require sellers to reduce the sale price in order to provide funds to the buyer. Sometimes, the buyer may demand compensation for any major problems discovered within the company in the course of due diligence. As compensation, the seller will reduce the price of the acquisition in order to proceed with the transaction.
You can place a guarantee for the sale.
If the seller waits for a significant contract to be funded or large Accounts Receivables, they may need to place a guarantee on the sale. To close the deal, sellers may need to lower the purchase price or include a seller guarantee. If sales do not reach the desired target, the seller will guarantee a decrease in price, or pay back to the buyer.
Set up a holdback.
A holdback is a way for parties to take part of the purchase price, and then put it into an escrow account. The money is returned to the buyer if the company does not receive the anticipated funds. This reduces the purchase price. If the company receives the funds, however, the money will be released to the buyer.
Unexpected roadblocks don’t always have to mean that the deal is over. The buyer’s withdrawal does not mean that you must start over with another buyer. There are often still options to close the deal and then sell the company.
Nonetheless, planning is always a winning strategy. Planning ahead can help eliminate most or all disruptions. Sometimes, however, things can happen beyond our control. These situations can also be unpredictable so we must prepare for them.
If the deal ends, prevent yourself from considering it a failure. Instead, consider the information and lessons learned to better secure the next deal.