Skeletons In The Closet
Many Sellers I encounter have "clouds on title"; issues that need to be resolved before an actual sale of their business.
For Buyer's sometimes these issues are NOT addressed and has to be uncovered during due diligence.
These are hidden problems that many businesses have and which may be motivating the seller to unload. You'll have to be sort of a detective to find these, but I'll list a few here so you get the idea of what to look for:
- credit problems with banks and/or suppliers
- personal affairs of the seller that may affect the ability to sell the business (e.g., divorce)
- historic downward business trends in the seller's particular industry
- downward business trends for this business in particular
- recent bad publicity, bad reports at the Better Business Bureau, etc.
- expiring patents or licenses
- changing franchise terms that will increase operating expenses for the business
- an impending or actual zoning change that will make business expansion difficult or impossible
- major new competition (such as a new shopping center or a new mega store in the area) being planned
- increasing difficulty or expense in getting raw materials, products, or services
- the potential non-renewal of a major sales account
- significant increases in rent to be expected (if the business space is leased)
- unapproved existing variances in violation of zoning regulations
- leases that are non-assignable or non-renewable
- legal claims, encumbrances, and liens against the business
- pending litigation against the business
- state and/or federal law violations that will require a major expense to correct
- poor management of capital assets
- obsolete machinery, overvalued inventory
- partner and/or shareholder who may not concur with the seller's desire to sell
- unpaid taxes (income, sales, FICA)
- product obsolescence
- potential major increase in product liability insurance
- potential labor union or other employee related problems
- inability of a buyer to replace a "superman" seller who has a unique capability for running the business
- non-compliance with environmental and/or safety requirements
- recent suspension of a liquor license for regulation violations
- need to hire a policeman to handle rowdy customers at certain times
- Environmental issues in certain industries.
SO WHAT SHOULD YOU DO?
As a Seller be upfront and honest. Try to clear up any issues that will act as impediments to the Sale. Do not believe that it is "Buyer Beware". Most lawsuits over business sales/purchases are over issues that should have been divulged to the Buyer.
As a Buyer, be thorough in your due diligence. Any issues you uncover can be used as a negotiating ploy even if you are in escrow and have agreed to a certain price.
"More Than A Business Broker"
Gary McAuley
Financing * Acquisitions * Mergers
Exit Strategies * Evaluations
www.sun-west.biz
gary@sun-west.biz
