When buyers are looking to make a purchase, the most important step they can take is to perform due diligence on both the business and the seller. And yet, many sellers don’t their due diligence on buyers.
Deals fail all the time. Sadly, this means that all parties lose a tremendous amount of time and effort. Additionally, sellers not only waste time, but often lose money due to business disruptions while working with a prospective buyer.
Let’s look at a few warning signs that might identify a troublesome buyer. The sooner you spot these red flags, the sooner you can avoid potential problems.
Sellers should ask several key questions of buyers:. The list includes:
-What, if any, other businesses have you considered to date?
-How much equity will you be committing?
-Do you have any experience with my kind of business?
Sellers should look for warning signs early on to avoid wasting considerable time. Listen to your gut instincts. If you feel that a prospective buyer isn’t serious and may only be window shopping (or if you feel that the buyer is looking for a far greater deal than you are willing to provide), then simply move on. When you cut your losses early on, this frees you up to focus on prospective buyers that are a better fit.
What if your intermediary informs you that there has been no communication from the prospective buyer after they received the memorandum? Simply stated, this lack of communication could mean that the prospective buyer has changed their mind, or was never that serious in the first place.
Another red flag you might see is when the process is turned over to a junior member of the prospective buyer’s management team. Another is when the prospect doesn’t provide details or information concerning their financial capability to successfully complete the deal. If any of these three red flags pop up, you should consider being proactive. You and your broker might want to reach out to the prospective buyer and ask to meet to discuss the situation.
Warning signs can also occur just prior to closing. Even after the letter of intent has been signed, problems may arise. An inexperienced attorney representing the buyer, one that simply doesn’t understand what is involved in a deal, can doom what could have otherwise been a good deal. The same is true for an over aggressive attorney. One potential remedy for this situation is for your own attorney to intervene and discuss the situation.
Spotting warning signs is about more than not wasting everyone’s time. When you can observe these indicators and act effectively to address them, it can help keep deals on track. Working with a business broker or M&A advisor is an excellent way to not only spot red flags, but also to know how to respond appropriately. The end result will be more successfully completed deals.