Understanding and mitigating risks is paramount when selling your company. Here, we outline four key quantitative reasons deals often fail and offer effective strategies to address them. By proactively managing financial stability, ensuring legal transparency, drafting a detailed letter of intent, and maintaining momentum throughout the process, you can navigate potential pitfalls and increase the likelihood of a successful sale.
Quantitative Reason Number One: Declining Financial Metrics
One of the first pieces of advice we give our clients before entering the market is to maintain the status quo in daily operations, particularly from a financial standpoint, over the six to eight months of our relationship. Key financial metrics such as revenue, market share, census, and profitability are directly tied to your company's value. Declines in these areas can lead to underbids from buyers or even cause them to walk away during due diligence.
Maintaining Financial Stability
To prevent this, ensure your company continues to perform steadily or, ideally, shows growth during this period. Consistent or improving financial metrics will make your company more attractive to buyers and help secure a better deal.
Two: Not Disclosing Legal Issues
We always advocate for full transparency, which is crucial in building trust with us as your advisors and with potential buyers. Sometimes, there may be unflattering legal issues or weaknesses in your business. It's important to address any historical or pending legal claims upfront to avoid surprises during due diligence.
The Importance of Legal Transparency
Transparency helps prevent greater impasses down the line. For instance, a client with an ongoing query from the Office of Inspector General (OIG) managed to navigate through the issue by disclosing it at the right time, allowing us to work with the buyer to resolve it and successfully complete the sale. Being upfront about legal matters ensures a smoother due diligence process and increases the likelihood of a successful transaction.
Three: Signing a Boilerplate Letter of Intent
A letter of intent (LOI) is usually nonbinding, but it should be robust and serve as a template for the purchase agreement. The more details you can negotiate upfront, the smoother the process will be later on. Key components to address in the LOI include legal representations and warranties, employment expectations, holdbacks, the vesting period for any seller notes, important milestones, the timing of the closing, and who will conduct quality of earnings and legal diligence.
Crafting a Detailed LOI
A well-drafted LOI can save significant time and help avoid potential impasses during the purchase agreement negotiations. By addressing these components early, you can streamline the process and ensure all parties are on the same page, reducing the risk of disputes and delays.
Four: A Lapse in Time
Time can kill a deal. It’s essential to spell out specific milestones and leave a reasonable amount of time to achieve these milestones in the LOI. Once in due diligence, maintaining momentum is crucial. Be communicative, available, and show a keen interest in consummating the transaction. Your intermediary should also be actively facilitating communication to keep the process moving smoothly.
Keeping the Process on Track
Avoiding unnecessary delays helps build trust and keeps all parties engaged. Consistent communication and meeting deadlines increase the chances of a successful sale. A proactive approach by both you and your intermediary can significantly raise the probability of closing the deal.
Understanding these quantitative reasons for deal failure and proactively addressing them can enhance your chances of a successful M&A transaction. By maintaining financial stability, being transparent about legal issues, crafting a detailed LOI, and keeping the process on track, you can navigate the complexities of the sale process more effectively and achieve a favorable outcome for your company.