OnwardLesson 5.5
Deal breakers worth spotting early
Most businesses you look at will not be the one. Finding that out early saves time and money.
The short version
- Most businesses you look at will not be the one. Finding that out early saves time and money.
- Some problems end a look on their own. Others only matter if several appear together.
- Check the big risks before you pay for due diligence: earnings, customers, the owner's role, the lease and the financing.
- A deal breaker for one buyer may be fine for another. Know yours.
- Walking away early is a good result, not a failure.
Why look for them early
Due diligence costs real money: attorneys, accountants, a quality of earnings report and lender fees. Most of the biggest problems can be spotted from the CIM, a few questions and a visit. Spot them before you sign a letter of intent.
Common deal breakers
Earnings that do not hold up. The tax returns show much less than the CIM, or the add-backs cannot be proved.
Earnings that are falling, with no clear reason or plan to reverse it.
One customer too many. A single customer brings in a large share of revenue, with no contract or a contract that cannot transfer.
The owner is the business. Customers, pricing and key skills all depend on the owner, and there is no one else.
A lease that does not work. Little time left, no renewal option or a landlord who will not approve a new owner.
A license that cannot transfer. The business depends on a license or permit you cannot get.
A price the financing will not support. The earnings cannot cover the loan payments at the asking price, and the seller will not move.
Legal or regulatory trouble. Pending lawsuits, tax liens, environmental problems or unpaid payroll taxes.
Unreported income. A seller who says much of the income is in cash and not on the tax returns. A lender cannot count it, and neither should you.
One problem, or several
Some problems can be solved: a seller note to share risk, a longer handover, a new lease. A single solvable problem is a negotiation. Several together are a pattern.
Write your own list
Before you look at your next business, write down the three or four things that would end a look for you. Check for them first.
Take this to your own people
The questions for this topic, for your attorney, your accountant or your lender.
- For your CPA: "From what we have seen so far, what would stop you from recommending this deal?" Listen for: specific concerns, ranked.
- For a lender: "Is there anything in this business that would keep you from financing it?" Listen for: an early read, before you spend money on due diligence.
Members can mark lessons read and pick up where they left off. Onward is in a private preview: request early access.