Buying a business can be a complicated process. Even when the financials look good, there are a number of reasons a buyer might walk away from a deal. Understanding these reasons can help sellers prepare for negotiations and improve the likelihood of a successful outcome:
- The company is not what it seemed: During due diligence, the buyer may discover that the target company is not what they expected. This could be due to operational issues, poor recordkeeping, inadequate systems, or other concerns.
- Financial concerns: Buyers are looking at a company’s financial health and future earnings potential. If, during the course of due diligence, they find significant financial issues, such as declining revenue, aggressive addbacks to increase EBITDA, or inaccurate financial statements, the buyer may stop the deal process.
- Cultural red flags: Buyers and sellers should have culture discussions before entering into a letter of intent. But sometimes new information reveals itself as the parties work together. If the buyer perceives significant culture differences, they may walk away to avoid integration challenges or disruption to their own corporate culture.
- Liability concerns: Buyers don’t want to face an unexpected lawsuit or deal with the aftermath of someone else’s improper corporate conduct. Concerns here include ethical and legal issues, including employment practices, regulatory requirements, and tax liabilities.
- Environmental issues: Many transactions will include an environmental site analysis. Unfortunately environmental events do occur, and some sellers find themselves tied up in years of environmental remediation issues before they are able to alleviate buyer worries and put their business back on the market.
- Strategic shifts: Sometimes changes in the buyer’s business strategy can prompt them to reconsider an acquisition. Even something as simple as the buyer losing a key executive can sideline an otherwise healthy transaction.
- Negotiation issues: Negotiating an M&A deal requires reaching consensus on a wide range of deal terms, including price, payment terms, contractual obligations, warranties, working capital, and more. Resolving these issues can be a critical point of failure for many deals. That’s why it’s important to establish these expectations early, before signing a letter of intent.
- External factors: Finally, some deals get foiled by factors outside the buyer’s or seller’s control. For example, COVID-19 killed or delayed many deals. The housing bust, political shifts, 9-11, supply shortages, rising interest rates—these are just some of the many events that have stopped deals from moving forward.
Before entering into negotiations with a buyer, your advisors can help you check their refences and deal history. You want a buyer with a history of completing deals and staying true to commitments.
