Deals That Fall Apart

Once an investor has reviewed the prospectus and met with the business owner, and both parties have agreed upon an offer to purchase, the deal is 90% done, right? Wrong!

“We frequently see business owners and business buyers feeling somewhat relieved once an offer has been agreed upon,” says Achim Neumann, President of A Neumann & Associates, a New Jersey based mergers & acquisitions and business brokerage firm.  “However, this is not the time to sit back and rest; as a matter of fact, most of the heavy lifting is still to come.”

Let us take a look at why deals fall apart. There are essentially three ”categories” to which we can attribute a failed deal:

1. Poor business preparation and organization on the seller’s part, mostly a lack of financial organization, and missing legal, administrative and environmental matters;
2. Buyer’s lack of lending resources; and
3. Seller’s (or buyer’s) remorse

As we have discussed in previous newsletters and published articles, business preparation is a crucial success factor for completing a deal. This includes maintaining a functioning, up-to-date financial reporting system, close linkage between financial and operations systems, and the organization and availability of all legal and administrative documents.  Depending on the industry, this also includes obtaining and maintaining the required environmental certificates.

“Needless to say, if any of these elements are missing, it will not only slow down the process, but it will also engender buyer mistrust — and ultimately kill the deal,” says Frank Arcoleo, Managing Director.

A second factor that could come into play, albeit not that often, is the buyer’s failure to obtain bank financing.  For one reason or another, the buyer might not have provided his/her complete financial picture during the pre-qualification process.  All of the sudden, the bank discovers these omissions and refuses to lend in what appeared to be a perfect deal.

This may come as a surprise, but by far the most significant factor in deals that fall apart is seller’s remorse. This manifests itself by a loss of momentum, phone calls not being returned by the business seller, or when requested due diligence documents are simply not provided on time, or at all.

“It’s generally not the price or terms of the deal that cause seller’s remorse, but most often it’s an emotional issue,” says Achim Neumann. “The seller gets cold feet and sometimes, due to personal reasons (like not having thought about what to do after the sale!), he or she begins to sabotage the deal.”

Other seller motivations come into play, too, like not being ready, or having the time, to provide the requested due diligence documents.  In other cases, it can be simple old fashioned greed as sellers want to increase the price – or may not want to sell the company at all anymore – as the result of some positive upswing in sales or profits.

Buyers, on the other side, are more cut and dried: typically, they realize fairly fast if they want to proceed with a business acquisition, and if the requested due diligence information is consistent with the information presented in the prospectus, they will go forward with the deal.

A highly qualified M&A firm is well-positioned to guide the business seller and buyer through the due diligence and deal closing processes; however, if there a “second agenda,” then the process can be quite daunting.