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Advisors, CEOs

Ask the Network: Why Do Deals Fall Apart?

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The process of selling a business is complicated, no matter the size. From fee negotiations to valuation, exiting a business can take a long time and there’s no guarantee the transaction will be finalized.

According to a Q1 2016 report by the International Business Brokers Association, deals across all company sizes only close 50% of the time. In a similar report, Sutton Place Strategies found that only 25% to 30% of companies brought to market are sold.

So, given the bleak statistics, we asked investment bankers and private equity investors the following question:

 

Why do deals fall apart so often?

 

Stephen Lewis, Headwaters MB

“In diligence, it usually becomes very apparent when sellers and other members of the leadership or management teams don’t get along or see eye to eye. I’ve seen a CFO walk out of the room during a CEO’s presentation to investors. Picturing someone else managing the business you’ve been so focused on for so long is very difficult.”

-Stephen Lewis, Headwater MB

 

 

Screen Shot 2016-09-16 at 2.57.57 PM“With most processes in the mid-market, there is a Quality of Earnings report done during diligence by a third party accounting/advisory firm to verify Adjusted EBITDA, the basis of valuation. If the report essentially says the earnings are not as high as what was represented in the materials given to the buyer, the buyer will often either walk away or lower the price/offer because EBITDA is actually lower than the EBITDA mentioned in company materials. If a seller either disagrees with the findings, or has their heart set on a certain sale price despite a lower EBITDA than what was reported, then the two may reach an impasse and part ways unfortunately.”

-Brandon Hinkle, Chicago Capital Partners

 

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“Owners are often too involved with their own organization, completely confident what they have accomplished is worth a high valuation. They forget the market dictates what the business is worth. 99% of the time, the reason a deal doesn’t close is because the CEO/business owner has unrealistic expectations without a good understanding of what the market can bear.”

-Howard Feldman, The ROI Capital

 

 

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“Even once you get on same page around price, there are a thousand possible land mines around structure and terms. All it takes is one where both sides refuse to budge.”

-Giff Constable, Axial (former investment banker at Jefferies/Broadview)

 

 

 

Most people will only sell one business in their lifetime. Every CEO or owner wants to sell to the right acquirer, at the right time, for the best price possible. As the investors and advisors mentioned, there are a great number of potential pitfalls in any transaction, so it’s natural to have some anxiety as you approach the process.

Seasoned intermediaries keep negotiation fair and honest and keep emotion from getting out of hand. Since most will have completed many deals in their career, sellers should feel confident in their ability to provide wisdom to both sides.

See here for our recent EBook where we collect tips for CEOs from professional CEO coaches.

 

 

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