In Part 1 and Part 2 of this series we received the perspective from private equity professionals on why deals fall apart. This go around, we hear from the advisors who are in the trenches everyday trying to get deals across the finish line. Here are their stories:
Synergy Business Services
"Our firm works with businesses with sales between $1M and $15M. When you’re talking about Main Street and the lower middle market, you need to have two things in order to get a deal closed: a buyer that is 100% committed to getting a deal done and a seller who feels the same way. As far as the sell-side is concerned, you’re usually dealing with a founder who is still involved in daily operations, whether they need to be or not. Here are the top two issues I see that cause deals to crater from the sell-side:
No Post-Exit Plan - Selling the business may be a good financial move for both the owner and his/her family. But soft issues tend to get in the way, particularly the sense that the seller will be losing their identity once they no longer own the business. They have no idea what their post-exit life will look like; it’s like staring into the abyss. This creates doubt, fear and a sense of helplessness. The only way for the seller to take back control is to squash the deal and face the same demons another day.
Unrealistic Expectations - As an advisor, it’s my job to set expectations accordingly with clients. Many sellers have unrealistic expectations from the get go. They have an inflated value in mind, don’t understand deal structure and may not realize just how long it takes to sell a business (usually about a year). A recent post at the Harvard Business Review cited 'frustrated expectations' as a primary cause of stress. When you add this layer to an already stressful situation - selling your business - the odds of success go down dramatically."
Focus Acquisition Partners
"There are many reasons why transactions in the lower middle market fall apart: any substantive change in the business for better or worse during due diligence, any misrepresentation in terms of legal, accounting or environmental factors or simply poor communication regarding the seller’s expectations and buyers’ ability to close the deals.
At Focus Acquisition Partners, we strive to reduce the risk of deals falling apart by managing both buyers’ and sellers’ expectations as thoroughly as possible from the earliest stages of discussions and by helping to facilitate and smooth communication throughout the entire process. We feel that if a deal is not structured to work well for both the buyer and the seller from the point of acceptance of the LOI, then chances are the transaction will have difficulty successfully reaching a close. The seller should be clear with the buyer from early stages of discussions what valuation and structure would satisfy them and not be hesitant in sharing those expectations. Buyers need to understand and be appreciative of sellers’ expectations and make a sincere indication of their ability to satisfy sellers’ expectations and be able to complete the deal. In most transactions, after the LOI is executed, there are invariably breakdowns in communication that, if not managed well, could easily lead to the deal’s demise. It is these moments where it can be most helpful to have seasoned, professional advisors familiar with buyers’ and sellers’ personalities and the transaction’s history that can help smooth out and facilitate communications."
David Parson, Partner at Focus Acquisition Partners
"Some transactions are not meant to be. They fall apart for 'legitimate' reasons: material due diligence findings, potential integration issues, changes in the business, lending environment or competitive landscape. Others, however, die an untimely death for entirely preventable reasons. I attribute most of these failures to five causes.
1. Lack of Empathy. A lack of understanding of the other party’s (or parties’) motivations, interests and options will often kill a deal. The best example of this is when executive compensation and retention discussions are ignored or delayed.
2. Lack of Urgency. Time is not your friend. Deals that are capable of being done today may not be doable tomorrow because of external factors such as commodity prices or financing conditions. Successful deals have a good cadence too them: consistent, but not frenzied.
3. Lack of Materiality. If every little issue is a potential deal killer there is a good chance you are going to kill the deal. It your material issues list is 29 items long, something is wrong.
4. Lack of Chemistry/Trust. Sometimes the other side fails the 'three-o'clock-in-the-morning test.' If it becomes clear that your potential new business partner is not someone you want to spend a lot of time with, it is much harder to get to closing. A breakdown in trust is also hard to recover from.
5. Lack of Kindness. Heavy-handed negotiating may have worked in the movies for 'The Godfather' and 'Gordon Gecko,' but they are highly inadvisable in the real world. Don’t forget, vendors and purchasers ALWAYS have other options.
Good planning, communication and execution can help mitigate these risks and get you to closing in one piece."
Pierre Magnan, Partner at Gowlings