Sunday, 2 February 2014

Why Deals Drop Aside

“Skeletons in the Closet”

An undisclosed material fact discovered during the due diligence phase or just before closing can crater a deal quickly. Every business has its own “warts” – items that are less than perfect, pending litigation, warranty problems, environmental issues, etc. The buyer may discover that important pieces of equipment are old and the parts needed to repair them are difficult to find.
The deal could be blown if the seller discovers that the cost of replacement will force a reduction in the purchase price or the buyer is unwilling to invest the funds necessary to replace the equipment.
The best way to handle skeletons in the closet is to reveal them from the very beginning of the deal. Buyers (and sellers) hate surprises. Addressing them from the beginning with a plausible explanation should eliminate this problem. Sellers should realize that the skeletons will come out of the closet somewhere along the line.

Financial Issues Surface

A major deal breaker occurs when sales and/or earnings suddenly drop. If the buyer has been made aware of a drop – for example, decreased sales due to seasonal business – most likely, no problem. But, if there is no apparent reason, the buyer could become spooked and either lower the offering price or drop the deal all together. It is important that management continue to run the business during the sales process.
The other financial issue that may surface involves the seller getting cold feet. All of a sudden, the seller realizes that the proceeds from the sale are not what he or she expected. After paying off suppliers, bank debt, taxes, etc., the seller realizes that it really doesn’t pay to sell and the deal craters. A seller has to sit down with his accountant and intermediary and go through the numbers to determine just what the real proceeds will be.

A Personality Clash

Chemistry between buyer and seller is very important. If it is not established, or is fragile, the skeletons and roadblocks that might come up could destroy the deal. A casual dinner between buyer and seller can go a long way in working out problems along the way.

Lack of Flexibility in Negotiating

If either party becomes inflexible in the negotiations, the deal could crater. An unreasonable demand half-way through the deal could sink it. The seller decides midway that he wants the carry-back notes collateralized. Or the buyer wants the seller to warranty the equipment. Major issues should be revealed prior to a letter of intent being drafted. If either side has a non-negotiable item, it should be broached initially. Great chemistry won’t solve all problems.

Using the services of an experienced and professional Business Valuation Services intermediary can eliminate, or at least lessen, some of these issues before the parties get too involved in the deal-making process.

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