As a merger and acquisition advisor representing sellers of middle-market companies, I am often asked about why deals close and why deals do not close. Based on my experience, this article discusses the three primary reasons deals fail (Deal Killers). Therefore, preventing these from occurring substantially raises the likelihood for a successful closing.
Performance declines. When I market a business for sale, I work with our client to create a best estimate of future financial projections. These projections are based on known facts, historical trends and forward looking credible and justifiable assumptions. We provide these projections to prospective buyers,who are relying on them for their underwriting purposes. Unless justified, I stay away from “hockey-stick” projections…you will see why in a moment.
As the deal progresses and my client and I have narrowed the list of buyers and are negotiating the parameters of a transaction, one of the biggest risks is missing projections. Similar to publicly traded companies when they miss earnings estimates,an earnings miss by a private company in the midst of a company sale process is usually quite detrimental. If an earnings miss occurs, the implications range from buyers discounting purchase price, restructuring the transaction (read less cash at close), to even all buyers walking away from the deal.
Therefore, it is critical to offer a set of projections to buyers that is credible with a high confidence level of achievement. You can see that “hockey-stick” projections are risky as they are hard to believe by buyers, are more heavily diligenced and the likelihood of missing those projections is high. A decline in business and missing projections is a deal killer.
Loss of momentum. There is a natural flow to a company sale process. As the marketing and sale process progresses, so should momentum. There needs to be a sense of urgency by both client and buyer. Deals get on shaky ground if the momentum slows (or even dies). Time kills deals.
If momentum slows, resources devoted to closing get redirected and prioritized elsewhere, communication between buyer and seller slows down, and efforts to resolve even some of the simpler issues inherent in a company sale transaction become difficult.
Why does momentum stall out? What is one of the main ways a seller and his team can ensure this does not happen? One of the most important ways to maintain momentum in a company sale process is to be prepared – have all “ducks in a row” – before marketing the business. What do I mean? Here are examples: (1) Have well documented financials; an audit is definitely preferable to non-audited financials; (2) Ensure all corporate legal documents are in order with no loose ends; (3) Clean up or resolve any major issues –insurance, taxes, legal, environmental; (4) Ensure all customer contracts are valid, executed and in force; (5) Ensure all assets are accounted for…etc.
Also, as negotiations progress and buyer due diligence is in full swing, sellers need to be responsive to requests. If buyers are consistently waiting inordinate amounts of time for information to review, momentum can greatly slow – not good. Being prepared in advance helps prevent this from occurring.
Therefore, it is critical to prepare in advance and have a clean story that can be easily diligenced by buyers. These steps help foster and sustain deal momentum. Loss of momentum is a deal killer.
Seller gets “cold feet”. As the deal nears the end when teams representing both buyers and sellers are working hard to close the deal, sometimes sellers get “cold feet”and decide not to do the deal. Of course, it is their prerogative since they own the company, but it is a substantial waste of people’s time and money. How is this prevented?
This is a difficult issue and not always solvable. But the more a seller and his advisors can perform post-sale planning, the better. What do I mean by post-sale planning?
Sellers need to have clear goals prior to embarking on a company sale process. Sellers need to define why they are selling their business and what they hope to get out of the transaction. If the seller’s goals are not practical, then his advisors need to let him know so he can adjust his thinking.
Sellers need to have a clear understanding of valuation expectations before embarking on a company sale process. If the seller’s expectations are out of line with reality, the deal will never close and there could be a substantial waste of time and loss of credibility.
Sellers need to envision their life after the closing...how and where they will spend their time, will they remain involved in the business in some capacity, how they will feel with the ownership risk lifted off their shoulders, etc. Ultimately, is the vision of that life appealing?
Having no post-close plan may lead to waking up one morning and getting “cold feet”. Deals are difficult. Before embarking on a company sale process, sellers need to have a mind-set and positive expectation the deal will close(assuming the goals of the deal are realized). Not having a post-transaction plan may lead to “cold feet”, which is a deal killer.