Why Most Business Transactions Fail

Selling a business doesn’t always mean happily-ever-after. Here are 3 of the most common things that go wrong

 
Written by Robert Gold

It’s a truth not often acknowledged that the sale of a business is not always the happily-ever-after tale it ought to be. In fact, in too many cases, both the seller and the buyer are left dissatisfied, unhappy and, sometimes, financially bereft.

It’s something Jordan Dolgin sees all the time. As principal of Toronto-based business law firm Dolgin Professional Corp., he’s been involved in many successful deals—but also many that have gone awry. Why do things go so wrong? “In some cases, it’s a failure to close the deal,” he says. “In other cases, the deal closes, but there’s a failure to get the benefits the parties wanted. Failure can come in different ways.”

In this week’s PROFIT BusinessCast, Dolgin shares three of the biggest reasons why business deals fall through, either before the ink is signed or after:

1. The participants are unprepared

Often, neither the buyer nor the seller are fully prepared for the finer points of a transaction. And that can create major problems, according to Dolgin. “Lots of deals will have working capital adjustments,” he explains. “Buyers will pay full value, and will want the sellers to leave behind enough working capital to finance the business. A lot of smaller clients have ‘notice to reader’ financials, and have no idea what GAAP would do with those. By not running through some scenarios before closing, they almost close blindly. After closing, when they have an audit of those closing numbers, and they get put through a working capital reconciliation, often the sellers can lose a big chunk of the purchase price. Then you get into major disputes.” It’s incumbent on sellers, he adds, to make sure they really understand what the deal will do to the numbers.

2. The seller can’t adjust to life on a payroll

Many acquisitions of entrepreneurial companies include clauses that require the CEO—who, in most cases, was the driving force behind the firm’s success—to sign a contract to work for the acquiring firm. Sometimes these contracts are very short; sometimes they can last years. Whatever the term, they often are disastrous for all involved. Why? “A lot of entrepreneurs make horrible employees. That’s why they’re entrepreneurs,” says Dolgin. “They’re totally ill-prepared for life as an employee.” This can manifest in many negative things, including angry outbursts and poor performance that can sometimes sabotage the deal, depending on the conditions.

3. Emotions get in the way

This is especially true of inter-generational transfers of family businesses. Success in this area depends on many things, says Dolgin. “Number one is the personality and the competence of the kids. If they’ve been out of school for a while and have been working on the business for many years, it can work very well. In some families the kids end up in the business, but they’re really not contributing. They’re not qualified to run the business. Those tend to fail.”

For more of Dolgin’s thoughts, check out this week’s BusinessCast, which you can listen to by clicking the button above or download by clicking on the iTunes logo below:

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Originally appeared on PROFITguide.com

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