In last month’s article, we concluded the three-part series on the Biggest Mistakes Buyers Make. In this article, we examine the 5 Biggest Deal Killers.
Deal Killer #5: Misunderstanding Risk
Any transaction involves a certain amount of risk for both buyer and the seller. The key point here is to understand and measure the risk and determine your own specific level of risk tolerance.
Several years ago, we worked with a seller client who was in her late 60s and owned a modestly profitable distribution business. The owner and her attorney told us they would not make any representations and warranties about the accuracy and validity of the information they would provide to potential buyers. Furthermore, they would not provide any indemnification to buyers. The attorney said, “Our client wants absolutely no risk after she sells her business.” We told the client we might find buyers willing to accept these conditions, but the buyers would factor the increased level of risk into the prices they offered for the business. End of the day, our position was proven when buyers, faced with accepting 100% of the risk in the transaction, offered the seller less than 25% of what we all thought the business was worth.
Buyers and sellers each need to assume some risk in a transaction. This is especially important to remember as you move into negotiation of the legal documents and when meetings with your attorneys devolve into discussions of “worst case scenarios.” While we appreciate the minimization of risk, running a business is a risky venture in and of itself. By selling your business, you are trying to minimize risk, but you will not be able to eliminate all of your risk…unless you are willing to take a huge discount to do so.
Deal Killer #4: Poor Process Preparation
We often tell our seller clients, “Selling a business is a marathon, not a sprint. You have to be prepared for a long process.” Too often, sellers and buyers are not prepared for the process of selling or acquiring a business.
We encourage sellers of businesses to seek the counsel of trusted advisors who have experience in transactions to guide them through the rocks and shoals of the selling experience. Too often, we speak to sellers who say, “My best friend sold his company in 30 days.” Unfortunately, selling your company in that time span just isn’t realistic…especially if we consider the entire process, from start to finish.
First and foremost, are you mentally prepared for the process and are you committed to the process? (See Deal Killer #3 below for more on this point.) There are going to be peaks and valleys and you may feel as though you are on a roller-coaster. If you are not ready for the ride, you shouldn’t get on.
Second, are you ready for buyers to visit you at your business and to provide them with all the information they need, both for the marketing of the company and the due diligence process? It is unreasonable to think you can sell your business without sharing information about the company with potential acquirers. If you are unwilling to share any information about your company, you will have big problems trying to sell it.
Marathon runners train for weeks, months or years to run a marathon. You need to train and prepare yourself for the sale or acquisition of any business before you enter the race.
Deal Killer #3: Emotions
There is an old saying, “Business owners should not fall in love with their iron.” Broadly speaking, what this means is business buyers and sellers should not fall so deeply in love with their ideas or their “stuff” that they are unable to part with them.
We have seen deals tank and crater over the most ridiculous reasons: the seller who torpedoed a deal because the buyer would not agree to provide the seller’s daughter with a lifetime employment agreement (even after the buyer pointed out the seller was not willing to give such an agreement to his daughter); the buyer who scuttled a transaction with our seller client because the seller had the temerity to ask to keep the artwork in her office, much of which was created by her grandkids; the seller who killed a deal because the buyer would not guarantee to keep the business in its current location….forever; the seller who terminated discussions with the buyer after the acquirer mentioned their plans to replace the seller’s older equipment, much of which was built personally by the seller, with more modern, efficient (and lower operational cost) machinery.
Buying or selling a business is an emotional experience, especially for founders of businesses. When you enter the process to sell or buy a business, you need to remember to check your emotions at the door and remember the words of Don Corleone, “It wasn’t personal, it was only business.”
Deal Killer #2: Surprises
When you are a child, surprises are exciting. However, when you are selling or acquiring a business, surprises are not fun and tend to kill deals.
If you have issues or problems you need to “hide,” rest assured, the other party will find out about them and the consequences will not be pretty or enjoyable.
We have a saying, “If we disclose the problem to the other side, it is like a small cut that can be easily bandaged and repaired. However, if the other side discovers the problem without us telling them, it will require major surgery to repair. The surgery may kill the patient—in this case, the deal.”
We also tell our clients, “Disclose, Disclose, Disclose.” Of course, there may be things you cannot disclose until a certain point in the deal (especially if the other party is your direct competitor), but you are always better off disclosing issues than hoping the other side does not discover them.
For example, we were engaged to sell a client who is a distributor of compatible cartridges and related products. As we all know, IP litigation is an industry risk and our client had been embroiled in a couple of the major suits we have all read about. The buyers we approached for this seller were not familiar with the industry. Rather than bury the IP litigation risk in hopes the buyers would either not learn about the risk or would not be concerned, we put the issue front and center in our discussions with buyers. We disclosed the magnitude of the issue and the potential risks to the acquirer. End of the day, we received several offers from buyers who all said they understood the IP risk and were willing to proceed with the transaction in spite of this perceived risk. Had we not approached the issue of IP risk head-on, we would not have had the successful outcome we achieved for our client.
When in doubt, disclose and avoid surprises in a deal at all costs.
Deal Killer #1: Time
Simply said, there is no bigger deal killer than Time. Move too fast or too slow and you will certainly kill the transaction.
For sellers, deals seem never to move quickly enough. Once an owner makes up her/his mind to sell her/his business, the process can never move as quickly as they would like. They want to get as quickly to a close as possible. However, buyers often get spooked by sellers who insist on moving too quickly, telling us, “If the seller is so eager to sell, there must be something they are afraid of happening soon.”
For buyers, deals seem never to move slowly enough. Most acquirers are very careful and want ample time to review data and financial information about the company. A typical refrain we hear from the chorus of buyers is, “What will they do this month? We want to wait and see the current results before we move forward.” This seemingly endless do-loop of “wait and see” from buyers is a sure-fire deal killer.
Sellers must understand the process of selling a business takes time; we estimate the due diligence and closing process alone may take between 60 and 120 days to complete. If an SBA-backed loan is involved, the process can take longer. That is the time needed to close the deal and does not account for the time it takes to get an offer. Patience is a virtue for sellers.
Buyers must understand by continuing to drag out a deal, they risk trying the patience of the seller and losing the deal by “leaving it on the street” too long. This is especially important for buyers who are not involved in a “formal process” where they are the only buyer negotiating the deal with the seller.
There is a very delicate balance between too fast/too slow in transactions. My 25 years of experience in the M&A business has taught me time in deals is a little like Goldilocks: we aim for “just right” but it is an inexact science at best.
Plus, surprises, emotions, deal preparation, and risk factors also play into the timing of a transaction. If you remember you are preparing for a very long race and need to be prepared for everything, and most importantly, you need to be patient, you will avoid all 5 of the Biggest Deal Killers.
I am happy to answer any of your questions regarding this subject or any previous articles. In my next article, I’ll discuss the subject: Foreign Buyers, Myth or Reality.
