Unfortunately, not every Letter of Intent (LOI) that my clients sign results in the sale of their company. In my experience, 25% of deals fall through based on their original terms. That means either that get “retraded” down to a lower price or the deal falls through.
Here are common things that happen:
Financial Statements Don’t Match
During the due diligence, the financial statements don’t match the tax returns or the bank statements. Once a buyer sees one mistake, they suspect others. This can cause a “retrading” of the deal downward or for the buyer to cancel the LOI. I prevent this by making these comparisons before selling the company and making sure the financial “house is in order”.
Due Diligence Issues
Buyers conduct thorough due diligence to assess their risks and opportunities associated with buying the business. The detailed data they receive during the process tells a story. If the seller is unable to confirm their assumptions, then they decide against proceeding. We try to disclose as much as possible and run all the business metrics before an LOI is signed to make sure there are no surprises.
Legal Complications
Legal issues, such as undisclosed lawsuits, pending litigations, or unclear ownership structures, can kill a deal. Buyers want a business with a clean legal status. Sometimes lawyers cannot agree on some of the deal terms like escrow, net working capital requirements, non-compete agreements and reps and warrantees. If this happens, I get the seller and buyer to take an active role in bridging the gap.
Financing Challenges
Sometimes, there is more than one buyer especially if they are getting financing from a third party like a bank, SBA or venture firm. That company sometimes votes against doing the deal. It is best if the financing from the transaction comes from the company’s cash on hand.
Market Conditions
Market conditions change. Either the company had a bad quarter or the stock market is going down. This also can cause the buyer to get cold feet!
Navigating a successful business sale requires planning, effective communication, and negotiation skills. As a licensed business broker, I am able to address issues with the buyer when the seller is not able to since they might be working together going forward and don’t want to damage the relationship.
