Ten Common Business Transaction Pitfalls

A business sale transaction may fail for a variety of reasons. The following common transaction pitfalls underscore how important pre-transaction planning is in order to ensure a smooth transaction process and a successful outcome.

1. Lack of internal resources to adequately prepare for the transaction

• Develop a formal pre-transaction planning checklist that outlines important steps you and your management team will need to take to prepare your business for sale
• Organize an internal “deal team" for the transaction that includes key management, and ensure that everyone on the deal team understands their role in the process and has sufficient coverage as needed for their day-to-day responsibilities

2. Loss of employees who are key to the transaction process and/or key to ongoing business operations

• Identify employees who are critical to the transaction process or your day-to-day business operations, motivate these employees to stay in the business during and after the transaction (e.g., with formal employment agreements, retention bonuses, equity participation), and develop a formal succession plan you can use in the event that they leave

3. Managing the sale process distracts your employees from running the business and leads you to consider calling off the deal to prevent further damage

• Prior to commencing the sale process, work with your advisors to develop a detailed, step-by-step transaction timeline, establish ground rules regarding the roles and responsibilities of each internal deal-team member, and create a schedule of periodic update calls with key team members and advisors

4. You begin to have second thoughts and wonder if you should not sell your business after all

• Work with your advisors early on to identify and evaluate the key macroeconomic, business-specific, financial, family and personal factors you should consider when deciding whether or not to sell your business

5. “Red flags" or last-minute surprises during due diligence cause the buyer to walk away from the deal (for example, environmental liabilities, unprotected intellectual property or unresolved legal proceedings)

• Work with your internal management team to identify any potential red flags in your business long before the sale process begins and ensure that for each red flag, you either have eliminated or reduced the impact, or have a good explanation for why it exists

6.You are unable to come to agreement with the buyer on key terms in the transaction agreement (e.g., purchase price adjustments, covenants, indemnification)

• Prior to negotiating the purchase agreement, work with legal counsel to familiarize yourself with the key business and legal points in a typical private business purchase agreement so that during the negotiation you have a better understanding of which negotiating points are important to you versus which points you may be willing to concede

7. Buyer is unable to secure sufficient debt financing to fund the acquisition

• Consider the strength of the debt markets and the availability of financing before you embark on a sale process
• Work with your legal counsel to ensure there are sufficient legal protections in the transaction agreement in the event that the buyer's financing falls through

8. You and the buyer are unable to agree on a sale price, or the buyer believes your financial projections are inaccurate or indefensible

• Work with your financial advisor to understand how much you would need to sell your business for in order to achieve your long-term personal financial goals
• Ensure that you provide the buyer with at least three to five years of historical audited financial statements and that you have developed three to five years of financial projections that are supported by detailed financial assumptions you can defend with confidence

9. The transaction process drags out too long and the transaction dies as a result of “deal fatigue" or loss of deal momentum

• Ensure that you and your advisors develop and implement an organized, formal sales process with key dates and milestones

• When assembling your deal team, choose an investment bank and legal counsel with significant experience managing a sale process and are adept at utilizing tactics and negotiating strategies that help to maintain deal momentum

10. You are surprised by the tax impact of the transaction or the future tax consequences that the transaction will have on your lifestyle and legacy

• Work with your financial advisor early on to implement wealth transfer and estate planning strategies to mitigate the potential tax impact of the transaction
• Work with your business advisors (CPA, law firm, investment bank) to develop a tax-efficient transaction structure