Every time I help someone buy or sell a business, I learn lessons. It’s a fascinating process, but it’s also really, really exhausting, particularly for the Seller. If you read this newsletter regularly, you know we’ve talked about preparing your business for sale, transaction structure, due diligence, and documenting a deal. What we haven’t spent much time on is what causes deals to fall apart. When a deal fails to close there is always blame, some shame, and plenty of regrets. Sometimes, though, it’s the right call for the Buyer, the Seller, or both. What can cause a deal to go off the rails? Plenty of concrete factors and a few amorphous “feel” issues.
Here’s a handful:
1. The numbers don’t work. What elicits an offer and what passes for a deep dive into a company’s quality of earnings are two different things. The scrutiny can put the offer in jeopardy, and if the Seller is unrealistic about price and won’t adjust expectations accordingly, there may not be a way to bridge the chasm between the two.
2. Lack of trust. This can happen on either side. All it takes is the discovery of information that has been withheld or past promises that evaporate to jeopardize your closing.
3. Seller or Buyer think they are mentally ready but aren’t. This usually doesn’t show itself until the very end. Some Buyers freak out, inventing issues where there aren’t any because they are afraid of losing money, taking on something unfamiliar, or getting in over their heads (SBA financing paperwork will do that to you). Sellers may realize the business is all they have ever owned and have no real plan for what they will do post-closing. On the other hand, if the Seller is obligated to stay on, he or she may realize at the last second that there is no way they can work for the Buyer.
4. The slow-burn “you aren’t the right fit”. It usually erupts after an inconsequential disagreement. This is usually more of a Seller phenomenon. Deals take time, energy, and effort. The process is painful and costly. “Deal fatigue,” the daily grind of answers, tons of questions, providing documents, and getting into arguments over “paper tigers” often wears Sellers down. Buyers may be too pushy, too arrogant, too rigid, or too inexperienced. Conversely, they may seem disinterested (e.g., don’t tour the physical plant, don’t want to dig into details, don’t want to work on transition messaging). In these scenarios, Sellers who have been secretly fuming may call a hard stop.
5. Buyer or Seller never really intended to close. I can think of a hundred better ways to spend precious resources than doing the tango with someone you really aren’t that into, but it happens. Buyers may only be looking for competitive intel. Sellers may dive in before they truly assess if it’s the right decision or time to sell.
6. The fickle hand of fate. Timing is everything. I often think about a business owner I talked to in January of this year. He had an amazing business and then walked on a great offer. Fast forward a couple months and his revenue was zero (thanks COVID). Deals in process in hard hit industries evaporated overnight. People get sick, the financing process reveals cracks in someone’s marriage, the Buyer or Seller loses a big customer --- you just never know.
7. Third-party problems. So many third parties, so little time. If you need consent from someone related to the deal and can’t get it, the deal could be at risk. Think about landlords who make assignment of leases impossible, vendors and suppliers who won’t cooperate, government hurdles, lenders who won’t lend or consent, and members, directors, or shareholders who aren’t on board with the sale. Even advisors (attorneys, CPAs, business brokers) can drive a deal into the mud.
How do you prevent deals from dying on the vine? Plan, prepare, communicate openly, build trust, and confront issues immediately. Build a team of advisors who do deals regularly, know you and your business and then trust and empower them to be honest with you.
If you have a deal that doesn’t close, step back and do an after action review.
What would you do differently?
What would your advisors do differently?
Some Sellers have a hard time refocusing their efforts back on their business after a failed deal. This is normal but if it feels debilitating, try working with a coach. Remember just because you didn’t get to say “Yes to the Dress” the first time doesn’t mean another wedding isn’t around the corner. Opportunities often come when you least expect them.