The Common Deal Delayer or Killer: New Priority Lag
It’s no secret business transactions are usually quite complex and delicate processes, often involving emotions, tough decisions, and a constant re-prioritizing of objectives. The business advisor’s job is to help minimize such challenges, foresee potential issues, manage both buyer and seller expectations, and get the transaction to a close as smoothly as possible. Sometimes it is smooth, but more often than not, complex transactions require patience, a fluid perspective, and complex solutions. This common challenge is known as “New Priority Lag.”
Understanding New Priority Lag
New Priority Lag is the adverse, but understandable, challenge of not knowing what you don’t know about the transaction, terms, norms, the buyer, the seller, the business, the timing, prioritizing, and even yourself. This lack of awareness can significantly slow down or, in some cases, even jeopardize a deal. It’s like the Dunning-Kruger Effect but in the context of business sales. People who know little about a subject or circumstance don't have the knowledge or skills to spot their own mistakes or knowledge gaps. Simply put, New Priority Lag is the lack of knowledge that slows (or kills) deals.
The Dunning-Kruger Effect in Business Sales
The Dunning-Kruger Effect is a cognitive bias in which people wrongly overestimate their knowledge or ability in a specific area. By contrast, this effect also causes those who excel in a given area to think the task is simple for everyone, and underestimate their relative abilities as well. This tends to occur because a lack of self-awareness prevents them from accurately assessing their own skills. This can happen very innocently with anyone in a given area. Since business owners (sellers) and buyers (often previous business owners) tend to have had some level of success to get them to where they are, it's not uncommon for them to also have a higher level of confidence. Neither may have gone through the process of buying or selling a business, or sometimes worse, they have done it once or twice and think they know how it’s supposed to go every time.
Confidence is so highly prized that many people would rather pretend to be smart or skilled than risk looking inadequate and losing face. Even smart people can be affected by the Dunning-Kruger effect because having intelligence isn’t the same thing as learning and developing a specific skill. Many individuals mistakenly believe that their experience and skills in one particular area are transferable to another.
Obviously, confidence is a good thing to have, unless it’s attached to an impenetrable or fragile ego. Selling or buying a business can be humbling, and more often than not, open-minded buyers and sellers walk away having learned something about themselves, in addition to having sold or bought a business, or not. New Priority Lag is the effect in the process of a transaction that someone or everyone didn’t see, or know, to expect was coming. It will suddenly change someone’s, or the transaction’s, priorities, which will usually delay or can even kill a deal. It can be as simple as a seller suddenly realizing they aren’t ready to sell for a personal reason, or something as external as new regulations not allowing a buyer to acquire a business under the terms they intended.
The Impact of New Priority Lag
Even the most well adjusted, intelligent, and experienced parties in business transactions experience New Priority Lag. Business advisors serve their clients best by honestly managing expectations, being prepared for the worst but optimistic for the best. NPL is why a transaction that should theoretically take a month or two will often take a month or two longer, or more. Due diligence gets delayed because the bookkeeper is on vacation. The seller’s supplier increases prices, thus requiring a recalculation of expected earnings. The buyer’s spouse loses their job, thus changing loan qualification with the lender. Having the right attitude and patience to get past such hurdles is a required skill set to be a successful business owner.
Examples of New Priority Lag
- Expired Patent: Seller doesn’t know their revenue-dependent patent expired, devaluing the business.
- Miscommunication with Family: Buyer or seller assumes their spouse/family agreed with their decision to purchase/sell a business, leading to miscommunication or no communication.
- Unexpected Tax Burden: Seller miscalculates the tax burden, leading to a decision to continue operating for a potentially greater future valuation, but the value actually declined
- Final Offer Miscommunication: Buyer doesn’t share that their first offer is their final offer, causing the seller to expect negotiation, resulting in retracted offer.
- Employee Exodus: Seller thought it was a good idea to tell all of their employees their intention to sell, leading to employee resignations before a transaction.
- Funding Source Withdrawal: Buyer thinks their funding source is solid, but the ‘friend’ had to back out at the last minute
- License Assumptions: Seller assumes buyer is licensed in the trade they are acquiring, buyer assumes the seller will keep their license attached to the business
- Post-Sale Availability: Buyer assumes the seller’s availability post-sale, but the seller is relocating.
- Non-competition Expectations: Seller plans to start a nearly identical business right after selling, buyer expects 10 years of non-competition
- Allergy Discovery: Buyer discovers he’s recently developed a shellfish allergy and backs out of the seafood franchise, buys a car wash instead
- Inadequate Legal Representation: Buyer’s attorney is a generalist and assures the buyer they can handle the transaction, only to find out weeks later they cannot, buyer loses opportunity
- Lease Negotiations: The landlord of the seller’s business requires a profound rent increase for the buyer in order to approve the lease assignment, a month is spent just negotiating new lease terms, delaying closing by a month.
Managing New Priority Lag
Naturally there is learning when experiencing something new, so New Priority Lag will inherently, and most likely always, be a factor in business transactions to a degree, however minor. An experienced business sales advisor will help a seller and buyer foresee and minimize such problems. Ways a buyer or seller can help minimize New Priority Lag for themselves:
- Self-awareness: Routinely question your knowledge base and perceptions. Be your own devil’s advocate.
- Seek counsel: Consult experts and seek advice from others.
- Honesty is key: Don’t assume problems will go unnoticed; be honest about challenges.
- Expect the unexpected: Anticipate and prepare for unexpected obstacles.
- Continuous learning: Keep yourself in a constant learning position.
- Emotional control: Don’t let emotion override logic. Take time to process before responding or making decisions.
- Experienced advisors: Hire experienced advisors, attorneys, CPAs, advisors, partners, to help with the sale of your business.
In conclusion, New Priority Lag is an inherent factor in business transactions, and effective management is crucial for successful deals. Visit BizBuySell’s Broker Directory to find a business broker who can help you navigate the complex process of buying and selling a business.