Buying a business can be an exciting and daunting venture. Exciting because of the potential future prospects that it can bring, and daunting because the hidden pitfalls in the transaction process can trap even the most experienced buyers.
That’s why it’s important to approach a possible acquisition with an objective and critical eye – which is easier said than done when you’ve already developed an emotional attachment to the transaction from the outset.
As someone who has provided legal advice on numerous business acquisitions, I’ve learned that knowing when to walk away is just as important as knowing when to move forward.
What should you do to make sure you’re negotiating a good deal?
Your first line of defence is having a comprehensive term sheet prepared at the start of a transaction to clearly outline the commercial terms of the deal. This document serves as a strategic roadmap, ensuring both parties are aligned from the outset.
Paying close attention to the financial health of the business is also vitally important. Excessive debt can sink a business (and an acquisition) at any time. Don’t fall into the trap of paying a premium only to inherit a mountain of financial obligations.
You should also make sure the business that you’re buying is up to date with all its compliance obligations. For example, have they lodged all their ASIC forms, are all their constituent documents validly signed?
Lastly, if the bidding process isn’t competitive and you’re the only buyer, think about whether you’re deluding yourself by offering to pay a premium for the business (when there’s no other direct competition).
What are some common danger signs that the deal is too good to be true?
As you go deeper into the transaction process, you may start to see red flags appear.
A purchase price that is significantly lower than comparable transactions may seem attractive, but it should immediately raise suspicion.
Similarly, be wary of sellers who are overly eager to complete the transaction. If they’re offering to pay your legal costs, cover the cost of the purchase through vendor finance, or promising exponential growth with minimal effort post-sale, this may be a sign that the deal is too good to be true.
You also shouldn’t ignore industry-specific risks. If there are impending government regulations that would affect business operations, an imminent economic downturn or prescribed changes in the competitive landscape, then you should consider pulling up the brakes on the transaction before it’s too late.
If any of the above red flags become evident to you – step back, do your own research, and lean on your professional advisors to help guide you through the seemingly dark tunnel.
The importance of walking away on good terms
Walking away isn’t a failure, it’s a strategic decision. The time and resources you’ve invested during the transaction process won’t be wasted just because you decided not to pursue a potentially catastrophic transaction – you don’t want to get into bed with the devil. If solutions can’t be found to address your concerns, it’s better to walk away than to buy a dud.
Communication is key when looking to walk away. If the deal isn’t meeting your expectations, be transparent with the seller. Don’t be afraid to voice your concerns throughout the transaction process.
Ultimately, trust your instincts. If something feels off, it probably is. A successful business acquisition requires more than just financial analysis, it demands intuition, patience, and the courage to say no when the deal doesn’t meet your standards.
