Why Deals Don’t Close


Directors have it doubly hard when it comes to acquisitions.

They have to hire someone that knows how to find appropriate candidates and execute transactions successfully (this person needs a combination of very specific talents – often misrepresented in resumes) and the board must be clear about the criteria necessary in the search (the difference between needs and wants).

Talking with M & A lawyers, you will find that about 50% of deals don’t make it to closing. There are just so many things that can go wrong and it is so costly when it happens.

My saddest story of a too stinky to close deal, was the due diligence discovery of a brother-in-law that had siphoned off inventory and run his own private business by stealing from the family (for many years).

It was almost impossible to know how many employees knew about it, were involved in it, or were paid from it. Bringing that transaction to a closing table would be a bad idea for a great many reasons. The aged owner never did prosecute his family members. I can only imagine how unhappy their holiday and family gatherings were afterwards.

Another fellow chose to gift his company to his daughter’s new husband to incentivize them to move near mom and dad (just a few days before the closing was to take place).

While it cost him a considerable sum to lawyer his way out of the deal, he had the money and it just did not matter to him.

One gentleman so abused his key man, that when the poor fellow discovered how little respect he was being given (as he had successfully managed the company for the absentee owner for many years), he took a position with a competitor and scared the buyers into walking away from what had been a very nice deal for all parties.

I have witnessed other heart breaking deal failures. Many because of misrepresentations, lack of trust, outright fraud, one death and consequent legal entanglements, several mental breakdowns. Family businesses suffer from all the problems of families and business.

It’s a huge deal to walk away from a family business that has been the key part of someone’s life for 20 or 30 years.

The one thing these stories all have in common, is the significant outlay the buyers had in their search, investigation, and investment (financial and lost opportunity), and the transactions collapse came out of the blue with little or no chance to save the deal.

My recommendation is to execute an extensive search, review multiple well suited opportunities and be prepared for bad news.

If bad things happen, at least you have a backup plan and your process will only suffer a brief interruption (instead of the huge time lapse that occurs if the search only included “one” candidate.

Add your stories and comments about why deals don’t close.

4 thoughts on “Why Deals Don’t Close

Add yours

  1. Life-style company owners enjoy a certain level of comfort, predictability and blissful ‘ignorance’ that often manifests itself in operations, finance and assumed (and sometimes unbeknownst) risk. The art of window-dressing these types of companies for sale, combined with the science of introducing necessary controls, professionalism and metrics to address serious deal-breaking issues, usually will go a long way towards getting qualified investors interested and a term sheet proffered. On the buy-side of the equation, deal size usually doesn’t matter when it comes to putting forth the effort and executing a refined and comprehensive due diligence process. Even in the smallest companies, significant risk and liability abound, and if not surfaced early on, could erode most if not all of the projected value post-close

  2. Dr. Earl R. Smith II • Michael, I think you need to be more precise when it comes to the nature and size of businesses before you can get at your question. For instance, what I call dinky deals often go the way you describe. But they are not a serious focus for most major M&A attorneys. A related type is what I call life-style companies. These are companies that grew to a certain level – the comfort level of the founder – and then entered a revenue range. The problem with these companies is that the team has been built to the expectations of the founder. Growth is not in their DNA. Both categories have a very high do-not-close rate,

    My experience has been that mid-sized companies with a history of sustained growth fare differently in the M&A process. The team is more focused of growth, the culture more professionalized and the records are in far better shape.

    I recently helped a friend sell his business. It was running about twenty million and had a couple hundred employees. A strategic buyer that I knew well became interested and sent down a preliminary diligence team. We were shocked when ten people arrived. Remember, this is before we has a term sheet. When I talked to the lead partner from the law firm, she said that a team of this size was normal for them in the early stage. They had found that getting a sharper picture early on helped shut down acquisitions that were not going to work out.

    One of the reasons that deals don’t close is that companies fail this increasingly common early and in-depth review.

  3. There are only three reasons why deals don’t close. 1. The Buyer decides not to buy, usually as the result of due diligence disappointments, or 2. Seller decides not to sell, usually because he really wasn’t a good seller to begin with, or because of unhappiness with continuing contingent liabilities or warranties, or 3. A third-party condition cannot be satisfied, usually financing hurdles, sometimes regulatory issues, but often unwillingness of key non-selling individuals to agree to acceptable terms. Variations on these three themes are endless, but 99% of deals not closing will be in one of these categories.

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