If you have contingencies in the deal, this means that the buyer has some concerns. The buyer loves your business; he has reviewed your financial statements and has made an offer contingent on several items. You’ve reviewed the offer and it looks good. What’s next?
In larger deals, this process is called due diligence. In the smaller business sales, the items of concern are usually spelled out as opposed to a general review of everything. This is because the larger businesses have a lot more areas of concern than the typical smaller business.
Most contingencies concern the review of financial statements and business tax returns. Others may involve lease issues, the seller staying on for a period of time, or a very specific issue such as repaving the parking lot.
Some contingencies may be hiding other ones such as a list of fixtures and equipment included in the sale. For example, the seller forgot that two pieces of equipment currently not in use need repair. The seller forgot to disclose that the walnut desk in the office belongs to a family member and is not included in the sale. While reviewing the lease, the buyer discovers that the landlord requires that the business must close by 9:00 pm and was not disclosed. Deals have fallen apart over similar issues.
Most contingency problems can be resolved prior to the business being placed on the market. The seller should do all of the following:
Check The Status Of FF&E
Check the status of all furniture, fixtures and equipment. Remove any that are not included in the sale or are inoperable if not in use; or make repairs.
Review any contract such as the lease, any equipment leases, and contracts that will be assumed by the buyer. Make sure that there are no problems in them. If there are, disclose them to a potential buyer out front. Also, be sure your business intermediary is also aware of them.
Be Prepared To Answer Questions
Be prepared to answer questions such as:
- Are there any environmental, governmental or legal issues?
- How long will you be willing to stay and work with the new buyer – at no cost?
- Will the employees stay?
- Why was last year the worst one in years?
- Why was last year the best one in years?
The list could go on, but sellers need to be prepared. Buyers don’t like surprises. The team at EBIT Associates knows the process like a book and can be invaluable in preparing your business for the market. Download our FREE Seller’s Guide to help you get started.