Three Reasons Deals Fail to Close
So, you’ve completed the letter of intent (LOI) stage of trying to sell your business. You and the buyer have reached an agreement on the primary terms of the transaction, signed a non-binding agreement, and even perhaps made a public announcement (likely against the recommendations of your advisors). The deal is as good as closed, right? While signing the LOI is a crucial stage in the sale process, over half of transactions still fail to close after reaching this point. Here, we cover the three primary reasons why deals fail to get across the finish line.
The LOI Was Poorly Done
The LOI is the foundation the closing process is built upon. If you do not clearly outline the conditions the sale is predicated upon, there’s a meaningful risk that disagreements could cause the deal to fail. While it may be tempting to leave some detail out in an effort to move negotiations forward, it is nearly always better to hash these details out early to determine if a critical issue is a deal-breaker.
Just as important as including all of these terms is making sure that the parties to the transaction have a clear and full understanding of what the terms mean. Slow down and make sure to take the time to discuss all terms in detail and make sure everyone is on the same page. Some common issues that are ripe for misunderstandings include:
Referencing a multiple without being specific regarding the associated earnings number (some add-backs may not be accepted, last year’s vs. last twelve months’ vs. a multi-year average EBITDA, etc.)
Mechanics and terms of an earn-out
Working capital levels to be left in the business
Terms of non-competes, particularly if they will applied to the owner’s family members
We recommend both parties thoroughly reviewing the LOI together in “plain English” to unearth any differing interpretations.
Poor Communication During Due Diligence
Communication is key during this phase of the sale process. The stakes are high, and all parties are afraid of what might go wrong. Readily communicating and being responsive to requests will foster good-will and give the other party to the transaction confidence that they are working with someone they can trust.
A key component of good communication is organization. The due diligence process is highly comprehensive, and the buyer will need all kinds of detail about financial results, human resources, business operations, insurance, legal information, and so on. Having this information well organized and clearly presented from the start allows you to quickly respond to requests and helps the buyer find what they are looking for without unnecessary effort.
Finally, make sure you are upfront and honest about any bad news that arises before and after the LOI is signed. Bad news almost always is discovered eventually. It is better to proactively volunteer and spin negative developments that materialize, rather than having your counterpart discover it on their own. This demonstrates honesty and allows you to frame setbacks in the best light.
Business Performance Declines
Nothing will shake a buyer’s confidence like seeing numbers come in under budget during the closing process. During this phase, the buyer is watching everything with extreme scrutiny and looking for any reason to pay less for the business. The sales process is time-consuming and may cause management to take their eye off the ball, neglecting the day-to-day task of operating the business. Any short-term decline in business during the closing process will likely force the buyer to extend their due diligence to ensure that this is a temporary blip and not a trend that will continue after the transaction closes.
Sometimes, sellers choose to change aspects of the business pre-closing in hopes of making short-term gains that maximize their earnings and value. Often, this decision will have the opposite results. The business tries a new process that ends up disrupting normal operations, leading to a decline in business performance rather than the intended increase. Even if you are successful in improving performance, its unlikely you will receive full credit as its sustainability remains in question. You will already be distracted by the sale process, so focus on doing what you know best and avoid the temptation of making changes in search of quick short-term results. By the time you’re actively in the market, the better course of action is to suggest changes to the buyer that they can make after the deal closes. Show them what results they can get by making the changes themselves, shifting the risk of executing these changes to the buyer.
The fact is, not all deals close after a signed LOI. Until the ink has dried on closing documents, you should continue to operate their business assuming that a sale is not going to occur. Selling your business is a once-in-a-lifetime event for most owners, with significant value at stake– Sweat the small stuff, focus on the details, and you will significantly increase your chances of successfully closing the deal.
This article was originally published in Forbes.