Selling a Company | Why do some deals fall apart?

selling a company why do some deals fall apartIf you tried to sell your company, maybe you had an accepted offer that seemed like it was going to close and it didn’t. Or perhaps you are considering the possibility of selling your company and want to learn about the process so you can be aware of the reasons why some deals fall apart. This will help in taking steps to prevent this from happening.

Based on sixteen years of experience in the sale of hundreds of companies we’ll discuss what we have learned from some deals closing and some falling apart.  In addition to our experience with our deals, we have heard about many other deals from sellers that contact us after their deals fell apart with another Business Broker or M&A firm. They will typically tell us all of the details so that we can avoid these deal breakers and improve on what the previous Broker did.

In some cases, they didn’t even get buyers introduced to them, they didn’t get any offers, or the offers were too low. The previous Business Broker may have priced the business too high or didn’t properly market the business. Or they may not have had experience selling that type of company before.

However this article is about the other cases where the seller accepted an offer, but the deal fell apart for a variety of reasons. We learn from what happened, and in many cases, we have been successful in selling their company after the other Broker’s deal fell apart. Also in some cases, we are not able to sell the business either.

We try to learn from anything that goes wrong whether it was from a previous Broker that didn’t close the deal or whether it was our deal that didn’t go through. No accepted offer is ever 100% until the deal is closed. We’ll discuss what can go wrong and what can be done to try to prevent this from happening so that you can have a successful closing where everybody is happy.

Accurate Financial Information

When a potential buyer is making an offer, they will do so based on the financial information that is presented to them. If during due diligence it’s discovered that this initial information is not confirmed and there are discrepancies this will often cause a deal to fall apart. It’s essential to understand the reason for the difference, and if there is a valid reason, it’s important to communicate this effectively to the buyer and their accountant so that the buyer’s trust is not lost. If the discrepancy is minor and there was a valid reason than usually, the deal can stay on track.

Of course, the best way to avoid this is to have the right information presented to the buyer from the beginning.  Everyone would like to put their business in the best light, but honesty and openness go along way in getting a deal closed without any surprises during due diligence when the seller and their accountant will do a detailed financial analysis of the business.

Why some deals don't close business brokerFinancial Trends & Updated Financial Information

Sometimes all of the financial information presented to the buyer is accurate but in between the time when the buyer received the data and the time it takes to close the business the revenue and profit of the company have declined. Or perhaps the buyer received information that was for the previous financial year and made an offer based on this information but its already six months into the current year and the numbers have gone down. In both cases, you want to have as up to date information as possible to avoid possible negative surprises. Also, it pays to try to close a deal in a timely fashion. Every business has some variability in their revenue, and the longer it takes to close a deal the higher the variability is likely to be.

If the variability is minor, then the deal can usually move forward however if there is substantial variability that is negative then sometimes the seller has to accept that the business is worth less and may have to lower the price of the company. We have had other cases where the revenue went up a lot, and the seller changes their mind to sell at the current terms.  We represent sellers, and if they want to walk away from a deal, it’s their decision to make. Of course, we like to work with motivated sellers and buyers that want to get the deal done and understand that revenue will fluctuate some.

Letters of Intent

Before a purchase agreement is signed, it is customary to sign a letter of intent (LOI). An LOI outlines the price, terms, an overview of the assumptions about the business that will be verified in due diligence. You want an agreement on these issues before spending a lot of time in due diligence so that most of the major points can be agreed to before time is invested.  We will help to draft and negotiate the terms of the letter of intent which will be used after due diligence as an outline for a purchase and sale agreement.

The Owner’s role in the Company

If during due diligence the buyer discovers that without the owner there really isn’t much of a business, this can cause buyers to head for the hills. In most companies, the owner plays an important role. It’s best to have a plan for a transition of ownership where the seller’s position in the company is backed up by other employees that can take the place of the seller.  If the seller has some financial incentive with payments after the sale, this helps to give the buyer confidence that the seller will do their best to help the buyer succeed after the sale is completed.  During a transition, the seller will typically train the new owners or managers to take over the seller’s role in the company.

The more skills and relationships with customers and suppliers that an owner’s employees have the easier it is for buyers to feel comfortable that the business can do well once the owner leaves. If you have a management structure in place, this makes a buyer more comfortable with a potential acquisition. Also, it’s important to point out things that the owner isn’t doing which a new buyer can do to improve the business.

Customer & Suppliers

Some of the stories we have heard from deals that fell apart with other brokers are that the financial information presented is confirmed to be accurate, but the buyer didn’t find out until due diligence that the seller had one or two customers that makeup half of their revenue. We will ask these questions before we start marketing the business so that buyers know this information before they submit an offer and begin due diligence. Some buyers might not make an offer but its best to move forward with a buyer that already knows this information and is prepared for it rather than wasting time with a buyer that doesn’t have this information and will back out after taking up everyone’s time during due diligence.

If there are contracts with the large customers, we’ll also want to point that out because that can help to ease a buyer’s concern. If the large customer has been a customer for a long time, we want to state that as well.  And, if none of these apply than often a deal has to be negotiated where part of the price can be paid out over time based on the revenue of the company for a year or two after the sale is completed. Every business can lose some customers whether there is a change of ownership or not, so it’s essential to continue to try to add new customers during a business sale process to keep the business healthy and limit the risk of potentially losing one or two large customers.

If you are selling a manufacturing and distribution business, or other company that relies heavily on suppliers it will be necessary for a potential buyer to be confident that the most critical suppliers will stay with the company after the sale. If there are written supplier agreements in place, we’ll want to point that out to buyers as well as the length of the supplier relationship and that the seller can provide a seamless transition to transfer these relationships.

Financing is a factor in whether a deal will close or not

In a perfect world for a seller and Business Broker, buyers wouldn’t need outside funding. Many buyers don’t, and of course, we prefer to have a buyer like this that makes a great offer. But sometimes the best offer comes from a buyer that requires financing. Then the seller has to make a decision (with our input) on whether they will move forward with a buyer that needs funding. We’ve done many deals with bank financing and have established relationships with banks that can pre-qualify buyers and the business thus giving us greater insight as to whether a buyer will be approved for bank financing or not.

Even with this, the bank is now a third party to the deal, and they will do their due diligence work which must pass their underwriters approval. They also will require the approval of the purchase agreement to make sure their interests are protected. We will work with you and the bank to negotiate issues that come up.

Sometimes to avoid the bank financing procedures and at the buyer’s request, the seller will finance part of the purchase price. The key with seller financing is for both seller and buyer to be confident that the business will succeed with the new buyer. Once you have established this after meeting face to face and exchanging information than the terms can be negotiated so that each side feels comfortable that the buyer will be able to meet the payments on the loan to the seller. Keep in mind seller financing is not usually as large of a percentage as bank financing. The bank may finance 75% to 90% of the purchase price. Seller financing typically ranges from 10% to 60% of the purchase price.

Cold Feet can sometimes cause a deal to fall apart

The buyer may get overly nervous and get cold feet and change their mind on buying the business. We usually look for buyers that already own a company that they started and even better if they have already purchased one company or more. It’s less likely that the experienced buyer will get cold feet compared to first time potential buyers. Particularly if that first-time buyer is still employed or looking for a job as an option versus buying a company. This would not be an optimal buyer.

It also helps to have a buyer that has experience in the industry and can leverage the customers and products and services that the company has. This will give the buyer more comfort that they can add value and grow the business. We’ve worked with thousands of buyers so we can provide you an expert opinion on which buyer is more likely to close on a deal when you have multiple buyers to choose from.

Sellers also get cold feet sometimes. If the deal is dragging on perhaps some of their children now want to consider taking over the business, or maybe the seller wants to delay retirement. Since we only get paid if we close on a deal, we look for sellers that are motivated and have already made up their mind to sell. Most of our sellers are in their 60s and 70s and are ready to retire. If they don’t fit this demographic than we look for other compelling reasons which would cause them to sell. Sometimes it’s a health issue, burn out, the desire to relocate, or another business that they want to focus on.

Personal Issues can derail a deal

Any number of personal issues can come up that can potentially derail the deal.  For example, there have been scenarios where during the due diligence the buyer has a major health problem, or one of his immediate family has a major issue that needs his attention. In this case, you have the option of giving the buyer additional time to resolve the issue hopefully, or if it’s going to be a while, then it might be best to move on to another potential buyer.

Good communication helps to keep deals on track

There is always some give and take in getting a deal done. There are a lot of details to be negotiated and its best to keep calm when disagreements arise. This helps to keep either buyer or seller from walking away from the deal because they feel that they can’t get along with the other person. This is important because typically they will be working together during a transition period. This is why face to face meetings are important to establish chemistry and a good relationship between buyer and seller before they decide to move forward on a deal.

Attorneys and Other Advisors

It’s best if the buyer and seller’s attorney have experience handling the sale of a business. Usually the more experience, the better. You don’t want your attorney learning on the fly with a deal that means a lot to both parties.  Of course, each attorney’s role is to protect their client’s interest, but if they are experienced in business acquisitions, they will know what is customary in the purchase and sale agreement for a business. You also want an attorney that communicates effectively to look for solutions for disagreements, rather than digging in their heals. It’s best to have someone that can find compromises to move things forward.

You want to look for accountants that are established but aren’t overwhelmed with too many clients so that they have time to be responsive, and information can be passed from seller to buyer efficiently.  The buyer’s accountant will need experience and time to analyze the data in a timely fashion and get any questions answered from the seller’s accountant.

In terms of valuations, we find that the accountants for the seller often give very high estimates for the seller’s business that might be unrealistic.  And the buyer’s accountant may say the price being paid for the company is too high. It’s essential to rely on information from actual sales of similar businesses that have sold rather than a valuation that is based on theory.

If your attorney or accountant doesn’t have the right skills or available time for a business sales transaction we are happy to recommend some that our clients have been happy with.

Unofficial advisors such as friends and family may be well meaning with their advice but most have not purchased or sold a business and if they have its usually only one or two experiences that they have had. It’s important to listen to advisors that have handled many business sales transactions and then draw your own conclusion rather than being swayed by friends that really don’t have the details or much information about the process.

selling a company why some deals fall apartClosing Deals for over 16 years

As you can see from this article there any number of things that can cause a deal to fall apart. That’s why it’s essential to choose an experienced Business Broker or M&A Firm that only gets paid if the sale closes. This way you can be confident that if they have been around for a long time, they must be effective enough in overcoming hurdles and closing deals to continue to be successful. And if a deal falls apart, you want a Broker that has other potential buyers to turn to.

Synergy Business Brokers has been successfully closing deals for over 16 years in manufacturingconstructiontechnologyhealthcaredistributionservices, engineering, education, and transportation.  We only focus on these areas because we know we have closed many deals in these areas and have built up a large pool of over 24,000 potential buyers that are interested in acquiring companies in these industries.  You can see some of the deals we have closed and the testimonials from our customers.

We offer a confidential consultation to discuss your business and give you a potential asking price. To get started, please fill out our easy form online, email [email protected] or call (888) 750-5950.  We sell companies throughout the US and worldwide.

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