Depending upon whether you are in the search process or whether you’ve progressed beyond that stage, there are various red flags which will give an indication that the business in question might not be the one to progress. For example:
- The sellers won’t release the Info Memorandum (IM)
- It’s proving too difficult or taking too long to get relevant financial information from the sellers/their accountants
- There is a high staff turnover
- The sellers can’t identify where the future development potential might lie
- The owners can’t convey any “uniqueness” or “what is special” about the business
- There are too many potential buyers in the frame, including trade acquirers or private equity
- There are unusual “add backs” listed in the IM document which can’t be justified
- You get a sense that the sellers are looking for an inflated price, which could cause you an issue with debt funders who have stringent lending criteria
- You get a sense that the sellers are looking for over 70% of the asking price at completion
- Subsequent to Heads of Terms (HOTs) being signed, the sellers indicate that they are looking for more than has been agreed formally. This sort of issue might not materialise until some way down the process and perhaps even after due diligence has been completed
- There is too much of a gap between the buyer’s valuation and the seller’s price expectations
- There are issues coming out of a due diligence exercise which are troubling to funders
- The business just isn’t sale ready ie it needs some improvements to operations, people or processes to get it in to a sale ready position before a transaction can progress
- The owners don’t like the idea of accepting deferred consideration or they simply don’t understand it (this can often be due to their adviser not explaining things or the adviser can be averse to an offer including a deferred payment structure as a result of their fee being based on the completion payment alone)
There are numerous reasons you might wish to pull back from exploring a specific business. The key thing to remember is that, once you start to engage third party professionals such as lawyers, corporate financiers, accountants and due diligence experts, you will be paying for their time, even if you drop out of the transaction, so it is vital to do the maximum amount of research on a target business before engaging and committing to pay any third parties.