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. Yet, it is important to note that a large percentage of sellers fail to do 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 during the process of working with a prospective buyer.
Let’s dive in and look at a few warning signs that you should look for when dealing with a buyer. The sooner you spot these red flags, the sooner you can avoid potential problems.
There are several key questions that sellers should ask. 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?
It is important to look for warning signs early on, as this is the way that sellers can avoid wasting considerable time. It should also be noted that sellers shouldn’t be afraid to listen to their 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 can free 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 his or her 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. In other cases, the prospect may fail to 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, there is still room for problems to arise. An inexperienced attorney representing the buyer, one that simply doesn’t understand what is involved in a deal, can spell doom for 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.
Damon Neth is a Professional EOS Implementer of the Entrepreneurial Operating System®. He co-authored a best-selling book entitled X-Formation: Transforming Business Through Interim Executive Leadership. He also has founded five companies and acquired four other companies. Additionally, Damon Neth is an accomplished entrepreneur and a leading EOS® business coach.
EOS® is a powerful set of business tools that provide a framework that empowers companies to create a clear vision throughout their entire organization, and in the process, boost the health of the company as a whole. This article discusses EOS® and how it could potentially transform your organization.
What is EOS® All About?
EOS® is based on the book Traction: Getting a Grip on Your Business, which is written by Gino Wickman. The effectiveness of EOS® is underscored by the fact that EOS® is currently utilized by over 10,000 companies around the globe.
EOS® is a powerful set of tools that, as Neth explained, “are being used by businesses every single day to grow, transform and capitalize on opportunity and deal with problems. These tools provide strategic advantages and strategic tools that many organizations implement to become better, to beat their competition, to become stronger.”
How Can EOS® Benefit Your Company?
Through EOS®, it is possible to establish a clear vision for your organization. Neth points out that cultivating this vision is about finding clarity of purpose so that every team member is pulling in the same direction. When used from the top to the bottom of a company, the tools provided by EOS® can have a transformative effect. Discipline and accountability are key focal points of EOS®, as it is through discipline and accountability that the health of companies can be enhanced greatly.
At the core of EOS® is the concept that everyone should share the same company vision. That means that there must be good, consistent and steady communication. In order to facilitate this level of communication and understanding, it is necessary to have a transparent system in order to remove barriers, blockers and impurities. When properly utilized, EOS® creates an opportunity through which everyone can not only identify their own issues, but also find ways to solve those issues.
The most important asset that any company has is its people. As a result, it is absolutely essential to not only find the right people, but also to guide those people as efficiently and effectively as possible. As Neth explained, “You’ve got to be clear and transparent with people about what you need and about what success ultimately looks like. You want to make certain that everyone in the organization understands their job.”
In a world that is becoming increasingly complex, the role of the generalist is quickly being eroded. In its place, we discover that people’s roles within companies are, by necessity, becoming more and more specific. All of this points to the increasing importance of clarifying people’s roles within companies, and what is expected of them. Gray areas need to be eliminated as they impair team members’ understanding of their duties and responsibilities.
Communication is Key
Everyone in the organization should understand not only the role of their respective department, but also their role within that department and the organization as a whole. Once again, the key to success boils down to good communication and clarity of purpose and roles within the organization. Everyone must be rowing in the same direction, and it is through weekly measurables that true progress can take place.