How Fear can Kill A Good Deal
There are many issues that can kill a business deal, but a regular issue that can make a buyer run away more than any thing else is fear – either fear of the unknown or fear that the buyer will make a mistake. And a recent discussion I had with a past client provided a good reminder of how fear of the unknown can play a big role in killing a business deal.
My client had recently looked into buying an attractive, well established local business. The business had experienced fantastic growth, was highly profitable and strong customer loyalty. Whilst the business needed some investment in new IT equipment, the asking price was in the range that the buyer was prepared to pay.
They had started negotiations and very quickly reached verbal agreement and suggested that a formal contract of sale should be drawn up. It all sounded very positive and looked like a “done deal”.
But then my client asked a few basic questions about the financial statements, how the owner drew a wage and the ownership of some of the assets of the business. The answers either didn’t make sense or raised some questions in the buyer’s mind that all was not as it appeared. He started to ask around about the business and whilst he never uncovered hard evidence of anything under-handed, there were more questions than answers.
He approached the owner with his concerns and the response was alarming – the vendor suggested my client was either willing to buy the business or not, and should not waste his time “kicking tyres”. Needless to say, my client walked away from the deal, simply because he was not confident about what he was buying. He was uncertain about certain financial aspects that made him cautious about how financially secure the investment would be.
It is worth pointing out that fear and risk are associated – or at least perceived risk. The more someone fears something, the higher the perceived risk. In business, risk represents the likelihood that future cash flows will not occur as expected. So any fear a buyer has about a business, really means they are uncertain about what the vendor is saying about the future cash flows of the business.
Whilst the price of a business is often seen by business owners as the key stumbling block in getting a deal over the line, it is not the only factor that kills a deal. In fact, often price is often the easy aspect of the deal. If the price is in line with a buyer’s expectations and capacity to pay, then other issues will determine if the deal is successful.
Below are 7 key lessons for vendors and buyers about fear and risk:
Don’t assume that each party has the same understanding of the risk of the business, nor have the same acceptance of the risk.
Eliminating fear is about making the other party confident that plans are in place to manage unexpected events. Vendors should have a clear business plan that explains the risks of the business, the expected likelihood of those risks occurring and what is in place to manage them if they happen.
Having documentation in place that is clear and unambiguous is the easiest way to eliminate the fear for the buyer.
Fear and risk can either reduce the price the buyer is prepared to pay or kill the deal completely. So it pays to be prepared when you put your business on the market.
When buying a business, ask the key question – “what can impact the certainty of future cash flows and what is in place to manage the risks?”
When you are looking to buy a business, make sure you have a “due diligence” checklist of things to ask the vendor.
Don’t accept verbal explanations to your questions about the performance or operations of the business. Make sure you get explanations in writing – you may rely on them later when things go unexpectedly wrong.
If you are about to buy a business, then talk to us about the risks you may need to consider. Maxell Consulting would be happy to discuss what to look for and what questions to ask the vendor.
Contacts us now to discuss your business risks and what you can do to manage them and make a potential buyer feel comfortable with your business.