Why Deals Die

“Failure is only the opportunity to begin more intelligently.”

– Henry Ford, American

Why don’t some businesses sell, and what can you do to ensure a successful sale and maximize the price of your company?

Most transactions die during one of the following stages:

• Marketing: These transactions never get off the ground because the seller and their M&A advisor or investment banker can’t get the traction necessary to generate meaningful discussions with buyers.
• Letter of Intent: The seller has generated interest from a buyer, but they lose interest after taking a closer look at the business. 
• Due Diligence: The buyer makes an offer, but the transaction dies during due diligence for any number of possible reasons.
• Closing: The buyer successfully concludes due diligence, but then the deal dies sometime before the closing.

In the following section, I’ll examine and analyze real-world case studies from businesses I worked with through my company, Morgan & Westfield, that ultimately didn’t sell. Reviewing these examples gives you insight into the salability of your own business, what can potentially go wrong, and steps you can take to help ensure your company sells for top dollar when you do decide to put it on the market. Let’s get started …

What follows are some actual scenarios of sales that never materialized, and why: 

• Risky: One business was considered too risky for buyers due to a recent entry of venture-backed competitors into the industry. No buyer was willing to make an offer due to the increased competitive nature of the industry.
• High Customer Concentration: One customer generated over 40% of the revenue for a business, and no buyer was willing to take the risk inherent with such a high level of customer concentration.
• Inaccurate Financials: A buyer made an offer on the business and then discovered multiple inaccuracies in the financial statements during due diligence. The buyer attempted to clarify the inaccuracies with the seller’s accountant, but the accountant couldn’t assuage the buyer’s fears in a timely fashion and the buyer walked as a result.
• Competition: A technology business generated significant buyer interest. During the process, an announcement was made that a major competitor received a large capital injection from a venture capital group. Once the news reached the buyers, they became apprehensive and downgraded their valuation of the business, which the seller was unwilling to accept.
• Personality Conflicts: An offer was made and accepted. Due diligence began smoothly, but personality conflicts between the buyer and seller developed and spiraled out of control. The parties became deadlocked on several issues, and both refused to budge. The problems mounted to the point where the transaction reached a stalemate and it died a slow death.
• High Growth: One business was growing at a rate of 30% per year. Buyers were only willing to buy the business based on the historical earnings, but the owner wanted to be paid based on the next 12 months’ projected earnings and wasn’t willing to consider an earnout.
• High Revenue, Low Profitability: A business had high revenue but was breakeven. Our marketing efforts yielded poor results because buyers dismissed the business due to its lack of profitability.
• Revenue Declined: For one business, the revenue declined by 10% between the time a letter of intent was accepted and the time due diligence was completed. The recent decline in revenue implanted fear in the buyer, and they walked as a result.
• Minority Partners: We put a business on the market, successfully generated several buyers, accepted a letter of intent, and began the due diligence process. The owner then contacted us and told us their minority partner was demanding a 200% premium for their minority share of the business. The owner refused to give in to the demands of the minority partner and the buyer subsequently walked.
• Industry: A buyer made an offer on a business in the consumer goods industry and the seller accepted the offer. But, as the buyer performed due diligence, it became evident that the impact of the changes in the industry was uncertain and difficult to predict. As a result, the buyer retracted the offer.
• Lack of Preparation: A construction-related business for sale seemed like a promising investment for a buyer in the industry and, in fact, an offer was eventually made from a competitor. During due diligence, the buyer uncovered numerous defects in the business that could have been prevented with proper preparation. Some of these defects included inaccurate financials, a lack of proper insurance (cash flow was overstated due to inadequate insurance coverage), no tax planning (the business was a C Corporation and subject to double taxation in an asset purchase), lack of approval from a minority partner, and a lack of employment agreements or retention plan with key employees.
• Third-Party Delays: A seller of a service-based firm in the Midwest accepted an offer and the buyer began due diligence. During due diligence, the buyer noticed several inconsistencies in the financial statements. The seller forwarded the questions to their CPA, but two months later the questions remained unanswered and the CPA was generally unresponsive. The buyer walked as a result of the delays.
• Lack of Financing: A potential buyer of a specialty manufacturing business made an offer and conducted due diligence, which proved to be successful. But the buyer was unable to obtain financing and didn’t have an adequate down payment for the seller to consider financing the sale.
• Owner Not Willing to Finance: A buyer made an offer on a middle-market business in the healthcare industry. The offer included an 80% cash down payment, but the seller was unwilling to finance more than 10% of the purchase price and the offer wasn’t accepted.
• Dependent on Owner: A professional services firm received significant buyer interest in a short period of time. But as most of the buyers dug deeper, they discovered the owner was inextricably tied to the business and determined that a transition would be too difficult, costly, and risky. Most of the clients were close friends of the owner and the name of the firm was tied to the owner’s name, though the owner wouldn’t allow a buyer to use the company name moving forward. As a result, no buyer was willing to make an offer despite the high cash flow and attractive price of the business.
• Key Employee Dependency: In another transaction, a valuation was performed on a business in the online education space. An offer was received and the buyer began performing due diligence. During due diligence, the buyer discovered that two employees were instrumental to the operations of the business. The seller allowed the buyer to talk to the employees to ensure they would be retained, but the employees demanded a salary increase and equity incentives that were far beyond what the buyer considered reasonable. The buyer walked as a result.
• Employees Fail to Cooperate: An offer was received on a commercial landscaping business. Once the management team received news of the offer through the grapevine, they felt slighted and were determined to derail the transaction. Despite the seller’s attempts to pacify the team, their resentment couldn’t be contained. Once the buyer received news of the lack of cooperation from the management team, they rescinded their offer.
• Tax Returns Not Reconciled to Financials: An offer was accepted on a roofing company and due diligence uncovered disparities that couldn’t be reconciled between the financial statements and federal income tax returns. The differences couldn’t be explained by the seller’s accountant and the buyer downgraded their offer, which the seller was unwilling to accept. Upon the advice of the buyer’s CPA, the buyer walked.

As you can see from these examples, there are a variety of factors that can cause a business to not sell. But, every single one of these business owners could have dramatically improved their odds of success if they had invested time to prepare their business for sale well in advance. Many of these problems could have been mitigated or prevented altogether through proper preparation. 

While some problems can’t be completely overcome, buyers often consider the totality of the circumstances. The more risk the buyer perceives, the more likely they are to walk away from the business. For example, if a business has high customer concentration but the customers are secured by a long-term contract, a buyer may view this scenario as less risky. Or if a management team is in place that has a relationship with key customers and the current owner has no personal relationships with the key customers, the buyer may feel more comfortable. Even the most severe issues threatening to kill a deal can be mitigated through preparation.

The more risk factors that are present in your business, the harder it will be to sell, the more nervous buyers will become, and the less they will pay for it. But many of these problems can be successfully prevented if you give yourself ample time to prepare your business for sale. Even if a problem can’t be completely eliminated, it may still be possible to mitigate the effects of the problem so you reduce the buyer’s perception of risk. The result of preparing your business for sale is that you dramatically tilt the odds of a successful sale in your favor. That’s the purpose of this book.

If you’re serious about selling your business and would like to maximize the value of your business, I recommend you prepare for the sale as early as possible by following the guidance outlined in these chapters. The aim is to help you identify and mitigate as many risk factors in your business as possible – well before you put your business on the market. This book contains the collective wisdom of hundreds of transactions – both successful and unsuccessful, and will help you do the following:

• Explore the ideal exit options for your business that help you maximize the price you receive.
• Evaluate the salability of your business.
• Establish a range of potential values for your business from low to high.
• Create a plan to help maximize the value of your business.
• Identify risk factors in your business.
• Identify potential deal killers in your business.

There’s a lot that can go wrong in a sale. It pays to invest time maximizing the worth of what is likely one of your most valuable assets. Let’s get started.