Does one really know why a potential sale of a company fails? As an investment bank, we have witnessed transactions “blow up” for any number of reasons. No one can prove the failure rate of deals managed by business brokers or Ibankers. The best “shared” private data is that well over half of these exclusive arrangements, maybe up to 70%, end in a failure.
Let’s examine the more prevalent reasons for failed deals. The reason this is important is that any and all parties to a possible closed deal should reflect on these issues to avoid them.
- Inexperience or incompetence of the agent (business broker or investment banker).
- Seller “testing the water” and not fully committed to a sale.
- Seller hides one or more significant problems, such as the loss of a major contract; use of IP without owning it; impending or in-process litigation, etc.
- None of the solid buyers are willing to pay what seller believes is his minimum price.
- The seller’s agent is so anxious to get hired that they overlook all of the obvious obstacles to a sale. The retained investment bank is mostly interested in the upfront fees.
- Buyers assess that seller has customer concentration.
- Seller cannot justify near term growth for his firm or industry niche.
- Seller unwilling to accept the earnout proposed by buyer.
- A seemingly minor personal dispute arises between seller and buyer personnel.
- Negotiations erode over rather small disagreements re the deal terms.
- Buyer uncovers earnings discrepancies as part of Quality of Earnings (Q of E), and cannot renegotiate the transaction pricing.