Top four missteps that derail a deal
There are many issues that can derail a deal. They all fall under one category, and that is mismanagement. In this column, I will cover a number of disciplines that will help you with the process when you are ready to sell your business.
Many of the deals our firm has represented required more than one offer before they finally closed. Those sellers experienced both the joy and the excitement of receiving an offer, but then the bitter disappointment of seeing the offer slipping away.
Deals fall apart for a variety of reasons. Some deals fall apart through no fault of the seller, and other deals fall apart due to completely avoidable misunderstandings.
Let’s look at a few common issues that can cause a deal to blow up before the buyer and seller can sign on the dotted line.
There’s really only one reason a deal falls apart
We can come up with many reasons why deals disintegrate, but in reality, there is only one reason for a deal to go south — mismanaged expectations.
I’ve often said that surprises are deal killers, but this isn’t entirely true. Good surprises certainly don’t derail acquisitions. But bad surprises are most certainly deal-breakers.
If a buyer makes an offer with a certain set of expectations, but later finds the reality to be different than their expectations, this is normally the reason that causes nearly every deal to break.
So as you prepare your business for sale, or as you go through the process of selling it, understand that you are engaged in a process of “setting expectations.” If you properly manage your buyer’s expectations, you’ll increase your chances of closing the deal.
Let’s look at some specific scenarios.
Forgetting to disclose elements in your history
A few years ago, one of our advisors was helping a client sell his business. He moved our client through the process of selling smoothly and without issue. It wasn’t long before a buyer was found and started doing his due diligence.
At the end of the due diligence period, however, the buyer discovered a previously undisclosed lawsuit. A few years back, our client was on the wrong end of a lawsuit, but when the buyer discovered this omission, it caused a ripple effect that eventually unraveled the deal.
The lawsuit itself was a non-issue. It was a frivolous lawsuit that the plaintiff quickly dropped. The problem was that it had been concealed.
It is not enough to simply disclose everything you are thinking of — you need to take stock of what you may have accidentally omitted and disclose that as well. Our client did not intentionally withhold information about the lawsuit from this buyer. He legitimately forgot it even happened since it was some years back and to him was a non-issue.
Remember to disclose everything, and take the time to identify anything you may have missed.
Recent downturns in financial performance
It is all too common for a business to experience its worst financial performance during the week leading up to the closing. If the process of selling your business isn’t stressful enough for both you and the buyer, your business may decide to have a hiccup in sales, leading to doubt for everyone.
A downturn in your business shouldn’t come as a major surprise, however. Many CEOs say that selling their business was more work than actually running the business.
When you sell your business, you’ll be buried in negotiations, legal document reviews, running reports and generating statements. Not only will your time be swallowed up whole during these stages, but your mental bandwidth will be completely consumed as well.
So you should plan ahead for this downturn as much as possible. Understand that your time will be in very high demand, and plan for late nights at the office and early mornings.
Most importantly, try to avoid major life changes. It never ceases to surprise me the number of sellers who sell their business during a move, city relocation, marriage or birth of a child. One major life event is stressful enough. If you can avoid having two at the same time, it would be good for your sanity.
As I said at the beginning of this article, not every deal falls apart because of something the seller does. In fact, I would say that less than half of the deals fall apart due to seller error. Some deals fall apart because of the vendors.
Even if you think that you do not have a special relationship with your vendor, your vendor may think otherwise.
I have been party to multiple transactions in which a vendor tried to change their terms for the new buyer. Their explanation is always the same — the change in these terms was coming for the seller eventually. You just happened to step in at the time the change was pending. An unlikely story, but how can you disprove it?
The reality is that some vendors are opportunistic, and some vendors are hesitant to offer the same grandfathered terms to a group they do not have a history with.
Opportunistic vendors are a major barrier to getting a deal done. So you may want to consider contacting the vendor in advance about your intent to sell your business. Alternatively, you may want to research a backup option should any of your vendors choose to get greedy. Having a backup option will give you leverage to negotiate the same terms for your buyer.
If you are not comfortable talking to your vendors before a sale is guaranteed, just be sure to be present during this process. Having your presence during the transition will help in ensuring a smooth transfer.
Over the years of owning your business, you have unconsciously developed habits, shortcuts and efficiencies, many of which you may not even realize you do. A buyer, however, will notice these shortcuts.
If a buyer has trouble envisioning themselves in your role, or replacing your role, you will have difficulty closing the deal. Therefore, it is essential that you take the time to document your processes as much as possible.
Around one year before you sell your business, document your processes into standard operating procedures. Then match up your actual workflow to these standard operating procedures. Modify them as needed.
Obviously, we always hope for every deal to proceed smoothly and close without a hitch. Unfortunately, life can sometimes throw a series of speed bumps in your way, which can complicate matters. But with the right amount of preparation, and the right mindset going into a negotiation, silly misunderstandings can be avoided, and you can close the deal in a timely manner.
Bob Wolter is Mergers & Acquisitions Advisor of Creative Business Services/CBS-Global.
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