Due Diligence: When to Walk Away From a Deal
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Question:
We are currently in due diligence on a wholesale/distribution company and we are finding the operations do not seem to run as smoothly as the seller has indicated. My future partner feels we should try to get a price reduction. I think we should walk away from the deal altogether. Do you have any thoughts on how to handle this situation?
Answer:
Most businesses don't operate as well as the seller represents - remember, they're trying to sell you their business! That being said, I don't agree with you to simply walk away because that will likely lead you on an endless search for the perfect business which doesn't exist.
In nearly every due diligence, you are going to uncover some inconsistencies. The issue is to separate them into incidents and/or catastrophes. You should overlook the incidents and deal with the catastrophes. This could mean renegotiation or it could require you to walk away from the deal.
In this case, it doesn't sound like a catastrophe at all. However, you need to determine what it will take for you as the new owner to get the business running like you want it to and at what cost. This is part of the process of buying and operating the business.
My bigger concern here is the fundamental difference you and your partner have in evaluating this business. It sounds to me like you have very different criteria about what you each want in a business and you both need to have the same philosophy in evaluating businesses even if you have different strengths. This does not mean you must always agree with each other. Constructive debates are a good thing, both now and when you are co-owners. However, the overall vision of what you want in a business, what constitutes a good business, what each of you are looking for, and how you will agree to deal with challenges and set-backs during this process and after you are owners, should be issues that you deal with together right now.
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Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center. Richard Parker is also the author of BizQuest's Business for Sale Blog |