70% of Failed Business Sales Happen During Due Diligence: Here’s How to Avoid This When Selling Your Business

70% of Failed Business Sales Happen During Due Diligence: Here’s How to Avoid This When Selling Your Business

If you own a business, chances are you’ve considered selling it—whether in the distant future or sometime soon. Unfortunately, many business owners hit a wall and decide to sell without proper planning. While it may not be an impulsive decision, the lack of preparation often leads to difficulties in selling or accepting a lower price than desired.

The good news? Proper exit planning can prevent these challenges.

As a business broker, I work closely with clients for several months, sometimes over a year. Early in my career, I took on any listing, but I quickly realized that many business owners weren’t adequately prepared for a sale. This lack of preparation often disrupted the sales process and reduced the value they could achieve.

Over time, I’ve made it my mission to create as much content as possible about preparing for an exit. Not only does it help future clients, but it also spares business owners the heartbreak of seeing decades of hard work undervalued. Without preparation, some sellers are forced to:

• Accept lower offers.

• Become employees of their own business to earn payouts.

• Tie their sale profits to the performance of a now larger institution.

It’s tough to see someone hoping to retire, buy a home down south, or spend more time fishing with their kids unable to close a deal because of poor preparation. Sadly, this happens far more often than people realize.

Exit Planning Is the Best Thing You Can Do for a Successful Sale

Having an exit plan and thoroughly preparing your business will not only make the sale process smoother but also ensure your future goals post-sale are achievable.

This isn’t just my experience. According to Axial, 66% of investment bankers report that fewer than one-fourth of sellers are properly prepared before hiring them.

While lack of preparation can complicate the sale or lower the price, there’s another critical factor: due diligence. In fact, 70% of failed exits occur during due diligence, according to Axial.

Let’s break this down before diving into how you can avoid these pitfalls.

Why Deals Fall Apart During Due Diligence

Here’s a breakdown of why deals fail and what these issues mean:

1. 37.5% of Deals Fail Due to a Quality of Earnings (QoE) Discrepancy: A QoE is a detailed financial analysis conducted by the buyer. Discrepancies often arise from:

• Inconsistent adjustments for one-time or non-recurring items.

• Misclassified expenses.

• Revenue recognition issues.

• Unrealistic projections.

• Differences in accounting practices.

2. 35% Fail Due to Non-QoE Diligence Findings: These issues often involve operational, legal, or financial risks, such as:

• Tax liabilities or compliance issues.

• High employee turnover or customer concentration.

• Short-term vendor contracts.

• Declining customer satisfaction.

• Market risks or uninsured assets.

3. 12% Fail Because the Seller Backs Out: Sellers may back out due to cold feet, disliking a buyer’s offer, or concerns about the buyer’s vision for the business.

4. 10% Fail Due to Miscellaneous Reasons: These can range from unforeseen market conditions to deal-specific challenges.

5. 5% Fail Because the Buyer Couldn't Secure Financing: This is a frequent hurdle, especially for smaller buyers.

8 Common Mistakes That Kill Deals (and How to Avoid Them)

1. Unorganized Financial Records: Ensure your profit and loss statements, balance sheets, tax returns, and cash flow statements are clean and accurate.

2. Lack of an Exit Plan: Plan ahead with these considerations:

• Maintain a positive financial trend for at least three years.

• Reduce customer concentration to less than 25%.

• Ensure the business isn’t overly reliant on you as the owner.

3. Guardedness During Due Diligence: Be transparent and cooperative during the process. Withholding information or being vague will raise red flags for buyers.

4. Unfamiliarity with Financials: Understand your business’s financials inside and out. Rely on your broker, CPA, or controller for guidance if needed.

5. Neglecting Business Performance During the Sale Process: Don’t let performance slip while preparing for a sale. Buyers expect consistent or growing performance throughout the process.

6. Running a Narrow Sale Process: Consider a wide range of buyers, deal structures, and exit strategies. Flexibility often leads to better outcomes.

7. Not Defining the Ideal Outcome: Clearly outline your financial, personal, and timeline goals with your broker to ensure alignment.

8. Letting Emotions Get in the Way: Emotions can cloud judgment. Lean on your advisory team and base decisions on facts, not feelings.

In Conclusion

Taking the time to prepare your business for a sale can significantly improve your chances of achieving a higher sale price and a smoother transaction. Proper planning ensures you’re positioned for both financial success and personal fulfillment post-sale.

If you need assistance preparing for your exit, reach out to us at Kelliher Acquisitions. Our team would love to help you position your business for the highest possible exit price while securing the nonfinancial goals you have in mind.