Red Flag Warnings

When selling a business, several things can go wrong. A number of these issues come with advance warnings: “red flags.” If sellers keep their eyes open for these warnings, it is possible to avoid bigger problems further along in the sale process.

Rarely does a “white knight” ride in and rescue a business with no questions asked. And if this were to happen, you should be asking, “Why?” Until a deal is officially inked, sellers need to evaluate every aspect of a transaction to make sure something isn’t happening that could ruin the deal.

Common Red Flags to Watch For

One example of a red flag is having a company express interest in your business, but not making it possible for you to directly contact key players, such as the president or CEO. This is a red flag because it indicates that the company’s interest level may not be as great as you had hoped.

Another of these warnings comes in the form of an individual buyer, with no experience in acquisitions or experience in your industry, who is seeking to buy your business. This could prove problematic because even if the inexperienced buyer is enthusiastic, as the deal progresses he or she may become nervous upon learning what the purchase would entail. In other words, the specifics and the reality of owning a business, or owning a business in your industry, could frighten off an inexperienced buyer.

Both examples above relate to early-stage red flags. But what about issues that pop up at later stages? Red flags can come at any stage of the selling process.

A good example of a middle-stage red flag is when a buyer is denied access to the seller’s financial statements, which is essential to verify that the buyer can actually make the acquisition. A final-stage red flag example is an apparent loss of momentum, as the buying and selling process can be a long one.

Business Sellers Need to Protect Their Assets

Sellers are usually very busy and don’t have time to waste. This is doubly true for business owner/operators, as the time they spend with a prospective buyer is time that could be invested in their business.

All too often, a business begins to run into trouble when it is placed on the market. If this trouble negatively impacts the bottom line, then the business can become more difficult to sell and the final sale price will likely be lower.

That’s why it is essential that sellers watch for the warnings and protect themselves from buyers who are not truly interested or are simply not a good fit. Working with a merger and acquisition advisor is an easy and highly effective way for sellers to protect themselves from buyers who are unsuitable. A broker helps to “weed out” unfit candidates.

While red flags are never good, having one pop up does not mean a deal has failed. Especially with the guidance of an experienced M&A advisor, many of these red flag challenges can be overcome.

If you, either as a buyer or seller, suspect that there is a problem with the process you are undertaking, then you should act. The problem will not go away without intervention. The single best way to deal with a red flag is to tackle it head on as soon as it appears.