Issues That Keep A Transaction From Closing | O'Keeffe & O'Malley

Issues that keep a transaction from closing

Aug 16, 2017

What could be worse than spending months trying to sell your business, only to have the deal fall through? It’s a giant waste of time, and it happens more often than it should. Mergers and acquisitions (M&A) transactions fail to close for a variety of reasons.

At O’Keeffe & O’Malley, we’ve seen it all. But most failed transactions have one of three things to blame: the buyer, the seller, or the business itself. Here are some of the common pitfalls – and what you can do to avoid them.

The buyer

Selling a business can be like dating. If it doesn’t work out, it could very well be the other party, not you. But when you’re selling your business, it’s your responsibility to do some reverse due diligence about your prospective buyer. Make sure that the buyer is qualified to purchase your business. And if you find some red flags, don’t ignore them. Most often, a buyer’s issue is not putting enough equity into the deal or their inability to get financing. Your M&A advisor will help you research and pre-qualify buyers.

The seller

It’s amazing but true – many sellers get in their own way. Here are three ways sellers shoot themselves in the foot:

  • Unfulfilled requests – Part of due diligence is fielding information requests from a buyer. If a seller is reticent to provide financial and operational data, it’s a red flag. If the documentation comes back late, incomplete, or not at all, it’s often a sign of a seller who isn’t actually ready to sell. Many buyers jump ship at this point.
  • Inability to delegate – Another key part of due diligence is sharing the personnel structure. If there’s nothing to share, that’s a problem. Without a management team, what would the buyer actually be purchasing? If a business is built around the seller, what will happen to the business once that person leaves?
  • Valuation expectations – Determining the true market value of a business can be an emotional rollercoaster. Many sellers have unrealistic expectations. They may hold on to what they wish the business was worth instead of moving forward with its actual market value. This inability to shift gears can stop a deal in its tracks.

Before you put feelers out that you’re looking to sell your business, search your soul – and your office. Make sure you’re really ready to sell and that you have the documentation needed to make the process a smooth one.

The business

Whether it’s a car or a company, nobody wants to buy a mess. Businesses that don’t sell often have messes like:

  • Lack of documentation – Think of it this way: if it isn’t written down, it doesn’t exist. Companies that don’t have written records of business processes, production information, or inventory controls are going to have a rough time during due diligence. Vague or incomplete regulatory or financial reporting can lead a prospective buyer to run for the hills, too.
  • Litigation or outstanding taxes – If a business is involved in a lawsuit – no matter the situation – it can make buyers uneasy. This is especially true if the lawsuit could materially impact the business. Same goes for outstanding taxes. It’s best to clean up your financial house before trying to sell your business.
  • Earnings fluctuations – When earnings aren’t meeting projections, it can be a game-changer for buyers. Valuations and lending become much more complex. While potential increased earnings might be an attention-grabber, accurate projections pay off when it comes to selling a business. Ideally, a business should have on-target reporting and be poised for flawless operation before going on the market.

With a little planning and the right guidance, you can get your business ready for sale. When you’re ready to get ready, O’Keeffe & O’Malley can help. We’ll help you avoid pitfalls that can stall selling. To have a confidential conversation about your business, give us a call at 913-648-0185.