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Deal Killers to Avoid When Selling Your Business

By Generational Equity

03/20/2017

I met with a team of our dealmakers a few weeks ago to discuss a number of topics, one of them being the most common “deal killers” they had seen. These are generally situations or challenges that dealmakers like to anticipate and avoid at all costs. However, even despite their best efforts, stuff still happens.

Since some of our readers are business owners who will eventually be trying to close a deal for their companies without the aid of M&A professionals, I thought I would pass on these common problems to avoid so you can successfully complete your transaction.

The most common deal killers include:

  • Missing base year revenue and/or earnings projections
  • Losing a key employee during due diligence
  • Losing a key customer before the close
  • Discovering an unknown environmental compliance issue during due diligence
  • Finding a significant error in the company’s financials
  • Undisclosed legal issues
  • Taking far too long to answer the buyer’s questions during due diligence
  • Not being a truly committed seller (and figuring this out far too late)

There are probably a few dozen more that we could add to this list that happen far too frequently. However, this is a good place to start. By themselves, each of these items can be overcome, and a deal will still close. What will change, though, is that the valuation and/or structure of the transaction will be revised.

In other words, if these types of events occur (and it is rare for things to go perfectly in any transaction), the buyer will either change his/her offer due to increased risk, or the deal structure may be revised so that the seller assumes more of the liability if financial forecasts are not reached. This can take many forms, the most common being an earn-out, where future payments to the seller are contingent upon revenue/earnings targets being met.

Since many transactions are closed via bank loans, if these events occur, usually the party most concerned is the lending institution. Quite often they are the hardest part of the buyer’s team to placate when the unexpected arises.

Control What You Can Control

Remember, you are only human and cannot anticipate every possible scenario that could befall your deal. However, the ones you can control, the ones that truly impact your ability to sell, are those items that you need to disclose as part of due diligence.

For example, if you are going to miss your base year revenue by 10%, tell the buyer that as early as you can and explain why. Withholding that until a later date can have a severe negative effect on a transaction.

If you know of any pending litigation, likewise disclose that early in the process so its magnitude (or lack thereof) can be factored into the valuation metrics by your buyer. Same with environmental, OSHA, insurance-related information, etc. 'Tis far better to over-disclose than under-disclose.

Again, this is just a short sampling of deal killers that you should avoid. To learn about others and more importantly discuss how you can prevent them, you should attend a Generational Group executive exit planning conference. These are complimentary and highly educational, designed to get you up to speed quickly on how you can close a deal for your company at a maximum value – by avoiding these common pitfalls along the way.

Here are some links to give you more information about us and our exit planning services for executives:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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