In this article, I have prepared a listing of the most common issues I've encountered during the due diligence that a buyer will perform before closing on the sale of a business. While it is not a comprehensive listing (there may be other skeletons lurking), these little demons can definitely rear their ugly heads at any time. Therefore, it is a good idea for the seller to be aware of possible skeletons in the closet in order to avoid surprises that may scare away potential buyers. So, air out the closet and brush away the cobwebs.

It is important to shine the light on problems now and correct them, if possible. The best case scenario is that the seller is able to explain how problems have been rectified and the buyer is satisfied with the answer. If a problem has not been resolved but is fixable within a reasonable period of time, the buyer may leverage the issue to renegotiate the purchase price. The worst case scenario is a complicated and unresolved problem remains, and the buyer loses interest in the purchase and walks away.

28 Skeletons

This list is a compilation of potential problem areas and may not apply to all types of businesses. It is not meant to be all-inclusive and is in no particular order:
  1. Accidents;
  2. New competition in the market;
  3. Changes in technology;
  4. Equipment obsolescence;
  5. Liens on the business;
  6. Business licenses that are not current;
  7. Facility obsolescence;
  8. Market shifts;
  9. Declining revenues;
  10. Poor financial records - this is one of the biggest reasons businesses do not sell or sell at a value considerably less than their fair market value;
  11. Low margins;
  12. Capital improvements needed;
  13. Lack of supplier diversity;
  14. Lack of customer diversity - if too much of the business' revenue is concentrated with just a few customers; the risk factor is increased. Should one or more of the customers discontinue their patronage, revenues will be seriously impacted;
  15. Uncollectable receivables;
  16. Low backlog;
  17. Restricted credit;
  18. Regulatory violations;
  19. Environmental issues - these are of concern because it is possible that any and all former owners can be held accountable by the government for very expensive cleanup costs;
  20. Insurance cost and availability;
  21. Slow moving, outdated and/or excessive inventory - these types of inventory tie up money and make the business difficult to sell. Buyers will refuse to buy or will deeply discount the value associated with these types of inventory;
  22. Obsolete marketing collateral;
  23. Key staff leaving;
  24. Poor property lease terms - not having a lease or being locked into a lease with onerous terms, such as high escalations, detracts from the value of the business. Not having a lease to assign to a buyer runs the risk that the landlord will increase the rent for the new owner. If the rent goes up, the earnings go down and, consequently, so does the value of the business;
  25. Product liability claims;
  26. Patent expirations;
  27. Sales contract expirations or unassignability; and
  28. Cash flow problems.

If You Expose Them, Is Your Business Less Valuable?

Yes, but only if you do nothing about them. This list provides a comprehensive checklist that you can apply to your business whether you are selling it or not. It will identify problem areas that can help you improve the business' attractiveness when the time to sell comes. Each item can be further analyzed and a solution can be developed that will improve the company's profitability, revenue stability, cash flow conversion and risk management. These are improvements that all business owners should look for, whether thinking of selling the business or not.