What can go wrong when purchasing a hosting business or customer base? A Seller’s Perspective.

What can go wrong for a seller?

When considering purchasing a business, most would immediately think of what can wrong for a buyer but the reality is that there is just as much risk involved for a seller.

One major issue that can cause a lot of stress for a seller is finding out that your buyer isn’t financed. Unfortunately this is something that may not become evident until post signing of an LOI (Letter of Intent). At this point, for the seller in particular, there has been a lot of time and resources used to move the deal forward. The best case in this scenario is the buyer manages to secure financing but the worst case is the seller needs to start the process again with a new buyer. This results in lost time, potential hard costs related to attorney fees or staff resources as well as potentially lost opportunities with other buyers.

Another problem we see sellers encounter is the buyer tries to renegotiate the offer during the due diligence period while under a signed LOI. While the seller normally enters into an LOI in good faith with a buyer, the buyer, either as a result of a predetermined underhanded strategy (possible but unlikely) or through legitimately finding issues with a deal, revises their offer. This leaves the buyer with a tough predicament. Do they accept what is in all likelihood a less desirable offer or do they terminate the deal and attempt to source new prospective buyers starting the process all over again with no guarantee there will be a next offer or that it will be any better. This of course would again come with the same potential costs as mentioned above.

While it is always preferable to enter into a deal with an experienced buyer, there are more and more inexperienced buyers entering the market. A buyer who is not experienced likely lacks a plan and if a migration is being undertaken, this is likely not going to end well! Although a botched migration will clearly affect the value of the buyer’s new asset, it may also cause problems for the seller. This could be due to a seller’s embarrassment with previous customers with whom they know well including family and friends who may now reside under the buyer’s control. Future payments to the seller may be in jeopardy if the buyer is reliant on the continuity of a revenue stream from the customer base they acquired and which ends up becoming eroded. The seller may not continue to receive subsequent payments if the buyer either blames the seller or can’t financially afford to continue to pay the seller due to this loss of anticipated revenue. Another scenario may be that the seller was offered a position with the buyer’s company and this may become in jeopardy due to financial challenges or simply just a strained relationship between the two parties.

The root of all problems is not always the buyer however. It can be that the seller’s expectations aren’t aligned with reality in terms of timeframes, their involvement and selling price.  A seller also may not have planned well enough to handle the work load and discovers they don’t have sufficient resources (human, time, capital) to support the transition to the extent needed and promised.

Payment is always a contentious issue. There is a possibility that the seller doesn’t get paid as per the terms of the agreement or that the buyer defaults on payments for various reasons. Some such issues could be a disagreement on the payment terms, a disagreement on breaches of reps and warranties or worse, the buyer simply becomes unresponsive.

While in the midst of a transaction, time is of the essence. If a buyer disappears or takes longer than is reasonable to perform due diligence and complete the transaction, this delay can result in missed opportunities for the seller. This obviously would cause the seller stress and may have significant financial implications not just with the sale of the business in question, but for future opportunities that the seller may not be able to capitalize on.

Any delay in the process also leaves a seller in a position of wondering whether to wait for the buyer to respond or continue with a new buyer and their potential offers.

Whether buying or selling a business, there are many factors to consider. As a seller, you must be as educated and informed as a buyer. Being prepared and making sure you have the resources, systems and documentation in place to support a sale before entering into a deal will ensure you are starting the process with a strong foundation and will better position you to deal with any issues that may arise.