All too often, when a small business is up for sale, the net result for many of their vendors is bad debt expense. If you hear that one of your customers is selling their business it’s time to be very careful with outstanding receivables and new orders.
WHY WOULD THEY SELL THEIR BUSINESS?
If the business is doing well, why would the owner want to sell it? Perhaps it’s time to retire and they don’t have children to take over the business. Maybe they need or want to move for personal reasons. Or maybe the business is doing great and they want to cash out. In situations like this, creditors are not likely to have problems getting paid by the current owners. Remember though that everything changes when the business is sold.
But more often than not the reason a business is for sale is due to financial struggles. Perhaps the owner just isn’t making enough money. Maybe there are personal issues (divorce, illness of a family member) creating financial strain or the need for change and stability. Or worse, the business has been losing money and the owner is almost out of resources to keep the business going. Trying to sell the business is often a last gasp effort to salvage something from all the effort and monetary investment by the owner.
I’ve been negotiating mergers and acquisitions for 30 years. Most potential deals don’t happen. It is very difficult to find a buyer of a small business. It usually takes 6 months to two years. The due diligence process is demanding. Then a contract has to be negotiated. All of these steps require substantial investment of time and eventually money. When deals fall through, the owner has to start all over.
While an owner is focused on trying to sell a business, they don’t have as much time to manage the business. This usually causes revenue and/or profitability declines. If they were under financial pressure before, it usually gets worse during the selling process.
Think about all the local businesses that you know that have closed over the years. Many of them were up for sale before they closed. No one wanted to buy the business because potential buyers couldn’t be found or they too couldn’t see how to make the business profitable enough to justify the investment. It’s extremely rare that creditors get paid in full when a business closes.
AFTER THE BUSINESS IS SOLD
Creditors still face risk when a profitable business is sold. The new owners may not have sufficient working capital. Or they might have struggles managing the business. This can quickly lead to payment problems.
They also may not have loyalty to historical vendors. The new owners may be responsible for unpaid invoices under prior ownership. Frequently they choose to negotiate for big discounts or just refuse to pay historical invoices as a way to reduce the overall purchase cost. They may also deny that they are responsible and make it difficult for creditors to prove the new owner is liable.
Most smaller businesses are sold as an asset deal where the buyer does not assume the liabilities from prior ownership. Our commercial collection agency frequently gets claims where the seller takes the money from the buyer for their personal use and makes strong efforts to hide from creditors. In those situations where the seller was having financial struggles prior to the sale, all the sales proceeds may quickly be used up for personal expenses and paying down personal debt. All too often these business owners have repeatedly promised their vendors they would get paid when the business is sold, only to disappear when that actually happens.
Make sure your sales, delivery, customer service, credit and collection staff know that hearing a business is up for sale is a BRIGHT RED FLAG of potential credit problems. When they hear this, they should make polite inquiry for further details and then report immediately to the senior manager responsible for credit.
Once you learn a business is for sale it is time to be very careful with outstanding receivables and continuing to extend credit. It’s difficult to legally ensure that you will get paid out of the proceeds of a completed sale, but it is worth a try. Move quickly to deal with any delinquencies. Don’t hesitate to use a collection agency sooner than your normal policy – the longer you wait the lower the chance of collecting.