The opportunity to work in public accounting for over thirty years has provided me insights into a multitude of businesses and owners across industries and geographical areas. Each business may be unique in its own way, but there a number of similarities regardless of an entity’s size or service offering.
A business owner’s profile is also typically relatively similar – each has an entrepreneurial spirit that has allowed them to be successful. If the business owner has been so successful in starting, running, and growing their business, then why would a potential sale or transfer of the business fail to close?
Since we have worked on both sides of M&A transactions, we can provide our perspective on a few of the reasons why what appears to be a good deal may fail to end in a signed purchase agreement.
- Ease of transferability. Has the business owner built a team that will allow the business to thrive after he or she is no longer involved? Are there employment agreements to retain key senior talent? It’s incredibly important to work on the business, not just in the business. That is, create a business that is transferrable without ongoing involvement by the owner.
- Customer contracts. How “sticky” are the major customers? A buyer is purchasing future revenue streams. If there are customer contracts, are there change in control provisions in the contracts that allow the customer to end the agreement?
- Supply agreements. What provisions are in any supply agreements? Is approval of a major supplier required in a transaction? If terms of supply agreements may be renegotiated after a transfer of ownership, then this could dramatically impact a successful closing.
- Letter of Intent (LOI). Important items in the early stage of negotiations may not make it into the signed Letter of Intent. When matters critical to the seller are not included in the LOI, the seller often loses its leverage in the negotiation and may be asked to make unnecessary or unacceptable concessions. While a significant amount of time and energy is spent on purchase agreements, agreeing on key provisions in the LOI will keep both parties focused on the end game – a successful closing. Although the LOI is generally non-binding, the likelihood of reaching the finish line increases significantly when key matters are included in the LOI.
- Owner fatigue. The process of preparing and negotiating a transaction can be exhausting. Transactions can take from six to twelve months depending upon the scope and depth of due diligence procedures. The longer the process, the greater the risk that a deal will not close. It has been said that time kills all deals. Develop realistic timeframes and stick to them. We’re talking about something very personal to the owner who spent a significant part of their life creating, so if it doesn’t feel right then it’s better to cut your losses early and move on.
Excluded from the list is sales price, as it is assumed that you have determined a fair price for the business. Although important, sales price is just one of many considerations that an owner may evaluate when contemplating a transaction. Not all M&A transactions conclude with a successful closing, but focusing on the above items may increase the probability (and help you maintain your sanity).
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