Seller preparation examples: five owners who fixed the wrong thing first

The five situations below are invented. No real business, owner, buyer, or transaction is described. There are no figures. In each case, money was decided by a choice made months before any number was discussed.

Each seller prepared, in good faith, for the wrong thing. The reasoning that would have pointed at the right one follows.

What to take away

One: the lease that ran out in the middle

The setup. A well-run business in premises it had occupied for years, on a lease with a few years left. The owner spent the preparation year on the books, which was the right thing, and went to market with a clean record.

Where it went. Diligence took longer than expected. By the time a buyer was ready to sign, the lease had under a year to run, and the buyer's lender would not advance against a business whose right to occupy its premises expired before the loan did. The landlord, now aware that a sale was in progress, offered a renewal on terms the buyer would not accept.

The reasoning. The lease is not part of the background. For a business that depends on its location, it is part of the earnings, and a lender reads it that way. Preparation should have included a renewal negotiated from a position of strength, with a term running well past any plausible completion date, before the landlord knew there was a sale. This is a lawyer's item, and it belongs at the start of the preparation year, not at closing.

Real named anchor. SBA Standard Operating Procedure 50 10 governs SBA 7(a) loans. Lenders such as Live Oak Bank typically require a lease term at least equal to the loan maturity, often 10 years.

Two: the deputy who was the business

The setup. The owner had, sensibly, stepped back. A long-serving manager ran the operation, handled the largest customers, and made most daily decisions. The owner presented this as the ideal: a business that did not depend on its owner.

Where it went. The buyer agreed that the business did not depend on its owner. It depended on the manager, who had no contract beyond ordinary employment, no stake, and no reason to stay after the sale. The buyer moved a large part of the price into an earn-out conditional on the manager remaining.

The reasoning. What the buyer pays for is the part of the value that stays with the business when its people leave. Value that walks out of the building with an individual is personal, and buyers treat it differently from the goodwill that belongs to the enterprise. Reducing owner dependence by concentrating it in one other person changes who the buyer is worried about, not whether they are worried. Preparation here meant a retention arrangement for the manager, agreed before market, and a second layer of people who could run parts of the operation without either of them.

Real named anchor. Key person insurance, sold by providers such as Marsh or Northwestern Mutual, is a common tool. Retention agreements often vest over 2 to 3 years and can fall under IRC Section 409A.

Three: the renovation

The setup. An owner with a year to prepare spent it, and a good deal of money, on the premises: refitting, new signage, a rebuilt website. The business looked better than it ever had.

Where it went. Buyers' accountants ignored all of it and asked for the reconciliation between the management accounts and the tax filings, which had never been done. The refit showed up in the accounts as a large cost in the year before sale, which had to be explained as non-recurring, and the explanation was one more adjustment on a list the buyer was already skeptical of.

The reasoning. A buyer prices earnings and the risk to them. Presentation moves neither. Every hour and every unit of money in that year should have gone through the question a buyer's accountant will ask, which is whether the earnings are real and whether they continue; the diligence guide sets those questions out. The refit answered a question nobody was asking.

Real named anchor. A quality of earnings report from providers such as RSM, Grant Thornton or Deloitte commonly costs $25,000 to $100,000 for a lower middle market business. The book to tax reconciliation is IRS Schedule M-1.

Four: the staff told too early

The setup. An owner who valued the team told them, a year ahead, that the business would be sold and that everyone would be looked after. It was meant as respect.

Where it went. Two of the strongest people found other jobs within months, reasoning that a new owner is an unknown and a current offer is not. Customers heard from those departures that the business was for sale. Trading softened in the exact year the accounts were meant to show strength, and the buyer, when one appeared, asked why.

The reasoning. Confidentiality is not a courtesy to the buyer. It protects the seller's own record during the one year it most needs protecting. The intermediary's process exists in large part to keep a sale anonymous until a buyer is committed; the business brokers page explains why that is often the most valuable thing they do. The people who need to know before the letter of intent are the accountant, the lawyer and the intermediary. Nobody else.

Real named anchor. Virtual data rooms from Datasite, Intralinks or Ansarada keep documents anonymous until an NDA is signed. Public companies also face SEC Regulation FD, which restricts selective disclosure.

Five: the license that would not move

The setup. A business whose trade required a license held in the owner's own name. The owner had prepared well, had clean books, and had agreed a price and a share sale with a buyer.

Where it went. The issuing body would not transfer the license to a new controller of the company without a fresh application, which took longer than the deal timetable allowed and was not guaranteed. The buyer would not complete without it. The deal was restructured, late and under pressure, with a portion of the price held in escrow until the license came through.

The reasoning. Whether a license survives a change of ownership is a fact that the issuing body will state on request. It decides whether an asset sale or a share sale is even possible, and it should have been the first item on the lawyer's list, because it shapes every structure that follows. Found early, it is a timetable. Found late, it is a holdback, a delay, and a buyer who now wonders what else was not checked.

Real named anchor. The California Department of Alcoholic Beverage Control requires a new license application for a change of ownership, a process that commonly takes 45 to 90 days. Cannabis licenses in Massachusetts require a similar new application to the Cannabis Control Commission.

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