Why Deals Die
It’s a frustrating scenario that many of us have experienced all too often: The owner of a company wants to sell and has found a buyer interested in purchasing it. The two parties have reached a “gentlemen’s agreement” and written it up in the form of a letter of intent. Everything seems right. Due diligence hasn’t been completed yet but the buyer likes the business, the seller likes the buyer and is willing to entrust his “baby” to him. The price is right and, by all indications, it all should be over but the shouting, right?
Not so fast. Too many times, something happens and the deal falls apart. Why? How did what seemed like a done-deal suddenly fall apart? And how can we prevent such disappointments from recurring in the future? Following are just a few of many reasons why deals die.
FAILURE IN DUE DILIGENCE
After agreements as to price and terms, buyers are entitled to do their due diligence. Due diligence involves a thorough check of all aspects of the business. The buyer is going to write a big check, much of which is other peoples’ money, and he is obligated to find out about all of the details of the company. He will check the veracity of everything the seller has told him and will also delve into other matters that he and the seller have never discussed.
There should never be any surprises at this stage. The seller’s materials should all be truthful. If there are any “warts” on the business, it is imperative that the seller talk about them first before the buyer discovers the issues on his own – a company’s “dirty laundry” always becomes evident during due diligence. If the seller has done his job, the buyer will uncover nothing new during due diligence. The due diligence materials should be clear, thorough and well organized and, even before their release, sellers should volunteer analytical material to help the buyer understand the business. Employees and friendly customers should have been well informed by the seller as to what is going on and they should be prepared for the conversations the buyer will inevitably have with them during due diligence.
Sellers should carefully review the due diligence process even before the marketing materials on the sale of the company are prepared. Due diligence is always a pivotal moment in the deal making process for which the seller should be well prepared to avoid disaster. No surprises ever!!!
Don’t do this alone. Maybe this goes without saying, but you need advice and plenty of it. The key members of your team are your deal maker, your lawyer and your accountant. Your deal maker, sometimes called a broker, investment banker, or other less-mentionable names, is usually the team leader. He will prepare the materials, sort out the numbers, do the major negotiating and see the deal through to closing. What you want most in a team-member is experience. Nothing beats experience, although honesty and competency certainly helps.
Be cautious when retaining a deal maker who claims to have done many deals in your industry. If he really has done many deals selling “little fish” to “big fish”, there is a chance that he might really be representing the buyers even though you pay the fee. Buyers may come to expect the deal maker bringing them “good deals” and “good deals” may mean lower prices. This is not to say that industry experience is not valuable, but it is important to be cautious when you find yourself dealing with industry insiders.
You probably have a family lawyer and a business lawyer, but neither of these is likely to be the best lawyer to choose for your deal team. Instead, the lawyer you want will be a specialist in mergers and acquisitions whose firm can provide him the advice he needs on issues such as environmental, HR, intellectual property, etc. An inexperienced lawyer will tend to make mountains out of molehills and distract himself from the more important work of finding solutions to disagreements.
Lawyers must protect their clients and sometimes the best protection is to simply walk away from the deal. Shy away from lawyers who will charge you a higher fee if you close than if you don’t close. Sounds tempting but you never want your lawyer to be dis-incentivized to saying “No.” It may be the most important “No” you never heard.
If there is truly a willing buyer and a willing seller, then all concerned parties should make every effort to compromise where necessary, to be protected as much as possible, and to let the seller go home with a big check.
To me, there are only two kinds of lawyers – deal makers and deal killers. Try to be sure you have a deal making lawyer. I’ve seen too many cases where the lawyer has never done an M&A deal in his life, becomes overly cautious due to his inexperience and walks into the first meeting shaking his head “No” to the deal. That is not the approach that will lead to a successful close.
We all know that it’s not how much you get that counts, it’s what you take home. Accountants are very important for the advice they give, mainly with regard to tax. The more M&A deals they have done, the more they will be able to help you in your situation. We know you love your brother-in-law, but this is too important not to find the best person you can afford. Very often, the less tax the seller pays the more tax the buyer pays, and vice versa. Agreed upon points often take a turn when tax effects of the agreements become the conversation. So buyer and seller have to remain flexible, and the tax accountants have to work things out as best they can. You never pay tax unless you make money, so hire a good accountant and take the long view.
PRIDE AND EGO
Owners’ egos are probably some of the most significant roadblocks deal makers run into.
The deal team has to keep its client grounded with his “eye on the prize.” So often, angers flare and deals fall apart over silly things. This is not how selling clients got rich running their companies, but it is often the posture they adopt when they sell their businesses. Professional buyers seldom allow their emotions to interfere with their deals. Their profession is to buy companies, and they will not allow themselves to become distracted by diversions like this. Owners will stomp out of the room before professional buyers do. These buyers will keep at it until agreement is reached.
Also sellers sometime adopt the attitude, “This business has treated me very well for 35 years. Here’s my tax return -that will prove it to you. I’ll take you on a tour of the plant. I want $10 million, take it or leave it.” Maybe somebody has been successful doing that once in the history of the world, but an approach like this shows that the seller’s ego has taken over, and it is not the way to do a deal. This seller’s deal team, if he ever had one, has probably run away long before he started talking like this. When he tours buyers through his plant, an ego-drive owner insists on doing all the talking rather than turning parts of the tour over to his managers and showing them off. The seller is going to be retiring anyway. Buyers need to evaluate his people, but sometimes they can’t get the seller out of the way in order to do so.
A smart seller will realize this tendency in himself and will ask his deal team to reign him in when he needs to be. This is the true mark of a business owner who really wants to sell his business for the highest possible price.