In the fascinating world of business sales, we explore some common reasons around trust and why some deals don’t reach the finish line even after a letter of intent has been agreed.
- Last-Minute Price Haggling, Sellers Change of Heart:
- Scenario: Having agreed to a good deal, the seller suddenly seeks a higher price; sometimes based on self-confidence as a superior negotiator, or spurious advice from friends or accountants (with no business sales experience) or an inherent belief that the blood sweat and tears of previous years with little dividends are not being adequately recognised or, sometimes just wanting more to support a future lifestyle…
- Outcome:
- The sellers advisor is put into an awkward position, their credibility is questioned and the seller is seen to be unreliable, the buyer may walk, or,
- the buyer may have concerns about working effectively together in the final stages of closing a deal and question whether they can even finalise the detailed documentation with an unreliable seller, or,
- there may be a transition phase where the seller remains in the business for a period, the buyer may have concerns that they can work trustingly with the seller resulting in the deal being terminated.
- Buyer’s Nitpicking, “Nickel and Diming”:
- Scenario: The buyer scrutinizes and disputes every detail during due diligence, even minor ones such as in the final week of a $17million deal, makes an issue over $11,000 and starts renegotiating to reduce the price by this small amount….
- Outcome: The seller gets angry, loses confidence and respect for the buyer, the relationship is sullied with final negotiations tempered in this brittle atmosphere of mistrust. The deal may collapse due to the buyer’s ego and rigid stance and “point scoring” attitude (it’s not about the money).
- Undisclosed Items Exposed During Due Diligence:
- Scenario: After the letter of intent is agreed upon, during the due diligence process the buyer discovers undisclosed issues—whether it’s hidden liabilities, pending lawsuits, overstatement of financials/irregularities or a simple oversight. Did the seller purposefully not reveal these items?
- Outcome:
- Deal Collapse: If the undisclosed items are significant and impact the deal’s fundamentals, trust can be irreparably damaged, leading to a collapsed deal.
- Renegotiation: Alternatively, the buyer may choose to renegotiate terms based on the newly revealed information. However, this renegotiation often comes with heightened caution and skepticism and a lot of unhappiness for the seller. Had the items been disclosed, a reason or cause for a revised price would not have been presented.
- Slow Due Diligence Material Submission:
- Scenario: The seller takes too long to provide requested due diligence (DD) materials.
- Outcome: Delays can erode trust and cause the buyer to reconsider. Buyers have capital to deploy and want certainty that a deal will complete and when. Buyers may prioritise other opportunities on their list that have greater chance to complete.
- Legal and accounting Delays:
- Scenario: Lawyers or accountants take an eternity to respond to document requests or turn around emails causing frustration on both sides.
- Outcome: Parties may lose patience and walk away, feeling that the process is dragging on unnecessarily, or something is being “hidden” or the “house is not in order”.
- Exceeding the DD Time Limit:
- Scenario: Due diligence exceeds the agreed-upon time frame.
- Outcome: An alternate buyer may step in, seizing the opportunity while the original deal stalls.
- Missing Final Board Approval:
- Scenario: Despite prior agreement in principle, the final board approval isn’t secured to complete.
- Outcome: Without this crucial step, the deal remains in limbo. Keep the board on side throughout the journey.
Successful business sales require clear communication, trust, and commitment from both parties. Even seemingly minor issues can derail a promising deal. The effects of poorly prepared heads of agreement allowing misunderstandings, struggles during DD disclosure and attempting to renegotiate a deal have cumulative effects and can lead to a deal falling over. If you’re navigating a business sale, stay vigilant and address challenges promptly, each party has a long memory. Integrity and mutual trust between all parties in the sale process ensures a smooth journey and successful outcome.
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