Some transactions just don't close, despite the huge amount of time the owner sinks into them. Here's why.
Just because you’re looking for an exit from your company doesn’t mean you’ll be able to find one. Some transactions just don’t close. More often than you’d expect, the owner has invested a great deal of time, money and energy in the process – packaging the company, marketing it to potential buyers, going through due diligence and negotiations with the intended buyer – but despite his or her best efforts, the deal falls apart, sometimes at the eleventh hour.
Why, then, do middle-market deals fail? Here’s how to make sure you don’t waste your efforts when it’s time to sell.
The financial advice isn’t good enough
When an owner tries to sell a business himself, and he’s never gone through the process before, he just doesn’t know what’s normal to expect. Although he’s great at running his company, he’s not necessarily familiar with the mergers and acquisitions industry. He probably won’t be expecting the level or structure of due diligence that’s necessary and the human resources needed to meet the buyers’ information needs and timeline.
Here’s an example: I fully understand the concept of how a sailing yacht works. The sails fill with wind and move the boat forward. But that does not qualify me to captain a ship in an around-the-world yacht race! An M&A transaction has so many moving pieces, and any one of which can derail the process. A systemic understanding of the process is absolutely crucial.
The owner changes her mind
Just as in any other strategic move, people change their minds about whether they really want to sell their company after all. Sometimes a business owner changes her mind about selling her company when the proverbial "prodigal son" returns—that is, when a family member who previously showed no interest in running the company sees that the business might be sold and decides that he wants to be involved after all. Or maybe the company has gone through several difficult years, but partway through the sales process the market turns around and the owner starts to have fun running her business again, and decides to stick around a little longer.
Another reason is that sometimes, the offers that come in just don’t match the owner’s valuation expectations. That can be because the owner is just plain greedy, or because she got bad advice about how much her company was likely to be worth in the marketplace – another reason to make sure you have quality financial advice during this process.
The owner loses focus
It requires a laser-like focus to get an M&A transaction done in the middle market, so this is not the time to start any new major strategic initiatives. If a client comes to me in the middle of the sales process, suddenly enthusiastic about the prospect of redesigning his core product line, or merging with his brother-in-law’s company, or dropping everything to focus on getting a major government contract, my heart sinks. Of course the company should keep growing and implementing new products or services within its overall strategy, but you can’t sell a company that’s in the middle of reinventing itself. If the new project is worth pursuing, it’s best to put the sales process aside until later.
Data isn’t available
Let’s say you offer a range of sauces and condiments. The first thing a prospective buyer is going to want is a breakdown of the gross profit margin contribution of each product by SKU line. That means that the seller needs to find people to break down the costs of marketing and manufacturing for each individual product. While you’re scrambling to figure that out, the buyer comes up with three more data requests, each time looking for data that you just don’t track that way, or with that level of granularity. Sellers frequently become frustrated (or in some cases even enraged) with the information demands the buyer is making, and the transaction goes off the rails. I often recommend using high-level analysts or CFOs from a financial outsourcing firm that offers transactional support, precisely to take this burden off the shoulders of the company’s employees.
The company’s performance changes drastically from expectations
When a company fails to meet the numbers it has forecasted and the expectations it has set, every conversation with the buyer begins with a horrible question: “Can you explain the negative variance here?” It doesn’t matter whether it’s your specific company, or the industry in general, or the economy as a whole. That conversation never goes well. Buyers negotiate their offers down or just walk away. The seller doesn’t want to move forward with a deal that’s suddenly offering a lot less money than she thought. Although it is less common, I’ve seen the reverse happen, too: When a company’s growth and profitability suddenly starts to skyrocket, the seller’s expectations go up with it, and sometimes the buyers are no longer comfortable.
Selling your company is a complicated process, but if you manage to avoid these pitfalls, you should be able to have a very successful transaction.
DAVID LONSDALE built and sold three venture-funded companies before becoming president and co-owner of Allegiance Capital in 2005, which provides M&A financial services to middle market business owners. @MiddleMktMandA