Why Do Deals Fall Apart? A Private Equity Perspective
Not all deals come together. In this article, we provide the perspective of four private equiteers on the reasons why most deals fail.
Deals fall apart for a variety of reasons. In part 1 and part 2 of our private equity series, we have asked some prominent private equiteers to give us their perspective on why deals fail. These guys are some of the best in the business, so take notes...
Blackhawk Partners, Inc.
"During my twenty-five years as an investor and financier, I have identified 'The Four Myths of Private Equity' and why most deals fall apart. The first is that private equity is a win-lose game. In this scenario, investors win and entrepreneurs lose. This is the favorite myth of people who are looking for someone to blame for their bad choices.
The second myth is that valuations are the only consideration when you’re shopping the deal. The valuation approach is certainly an important consideration. You want to get a fair price when you sell your company; however, it’s equally important to partner with an investor who shares your goals and who will work with you to achieve them.
The third myth is that private equity investors don’t add value because they haven’t been in an operating role. This may be true in some cases, but should be avoided as a generalization. Most financiers and professional investors I know have ample experience with operating issues.
The fourth myth is that the taking of venture capital or private equity money means you lose control of your company. This often refers to the sharks and other predators looking for a quick kill. It can also stem from a person who is so determined to get their idea to market that they will accept any terms offered. The reality is that if you take on a minority interest, you can continue to control your company, make all operating decisions and have the ultimate say over strategic issues. It is my experience that the majority of investors do not want to run your company. They are busy running their own. Selling less than half of your company leaves you in charge, while providing liquidity to you and other early shareholders. Whether or not to take on private equity financing is a complex decision, requiring in-depth analysis of your personal and business goals, the market environment, and the financing options available.
Focusing on these important considerations and avoiding the more common misperceptions will help an entrepreneur make the right decision."
Ziad Abdelnour, President and CEO of Blackhawk Partners, Inc. and Author of "Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics"
Corrosion and Abrasion Solutions Ltd.
"There are a couple of things that will kill a deal. The first is a lack of transparency in disclosure. If the buyer finds something of a critical business nature that the purchaser either overlooked or deliberately withheld, the mental response is what else didn't they tell us and the deal bogs down in additional due diligence efforts.
The second deal beaker that is common for our business is signing off on responsibility for environmental liability. If the vendor insists on no responsibility or the buyer wants indemnity forever or beyond legislative requirements it's a tough one to get past.
More than anything both the buyer and the seller need to make their own assessment of real business risk in both situations, listen to legal counsel but make their own informed judgment."
Terry Freeman, CEO at Corrosion and Abrasion Solutions Ltd. (CASL)
"Deals are challenging to complete and even the best planned deal processes can go awry. Due to the complex nature of an MA process, there is no such thing as the same deal; however, in my experience, there are two common pitfalls that keep a large majority of deals, even very good deals, from getting done.
Misaligned expectations - Ensuring clear expectations in terms of enterprise value, financial results, and process timing is critical to the success of a deal. Successful deals are done at the right price, where people feel like some (though never all) of their needs were met, with a clear understanding of timing and the steps necessary to get the finish line. Clear expectations are even more important when something goes wrong. For example, if a seller sets a financial forecast for the year, but results come in below forecast, quickly and effectively communicating this (as opposed to suppressing and surprising the buyer down the line) is an example of ensuring expectations for what is being bought and being sold remains well understood by all constituencies.
Overly powerful third parties - It is important that both buyers and sellers set clear goals with all third parties on the critical path. Third parties may include investment bankers running the process, lawyers negotiating the transaction and accountants scrubbing figures. These parties must always be part of the solution to the goal (getting the deal done) and never part of the problem that stops a deal from transacting."
Matthew Thompson, Director at Riverside Partners
"Deals usually fail due to misguided expectations and lack of clarity about the process. There may be an expectation gap that is tough to bridge if expectations are not discussed right at the onset. The valuation of the business is oftentimes the more common hurdle, but it's not the only challenge. Usually, the bigger issues relate to how the seller and buyer perceive the seller's level of involvement in the business after the transaction closes. If the seller expects to move away from the business, while the buyer considers his/her involvement critical to success going forward, this needs to be discussed early as eventually this will surface and potentially kill a deal. Also, the seller may expect to have as much autonomy as he/she had before the transaction, when in reality the buyer may want to make or influence major operational and strategic decisions. As the deal close approaches, the level of involvement is better articulated via an employment agreement, and if the seller doesn't perceive it to be the way he/she expected it, it can easily derail the deal. The basic antidote to move deals along is to have the seller and buyer sketch out early in the process the 3, 6, 12, and 24 month plan in a detailed fashion so that there is no misconception of how things are expected to proceed. That way, there are no surprises pre and post closing of the transaction."
Erick Hamdan, Co-Founder of Divestopedia