Not all transactions end up closing. The buyer or the seller might decide it’s not the right fit. What are some things that can stop a deal when you’re selling your business? In this PKF Texas – The Entrepreneur’s Playbook® episode, Audit and Transaction Advisory Services Director Chris Hatten, CPA, CVA, CM&AA, walks us through some different scenarios.
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Jen: This is the PKF Texas – Entrepreneur’s Playbook®. I’m Jen Lemanski, and I’m here once again with Chris Hatten, a Transaction Advisory Director, and one of our Approachable Advisors™ here at PKF Texas. Chris, welcome back to the Playbook.
Chris: Appreciate it, Jen.
Jen: So, we’ve talked a lot about transactions that close success for the seller, success for the buyer. What happens when a deal doesn’t go through? Do you have any kind of stories about what contributed to a deal not closing?
Chris: Yeah, and I’ll even just focus on ones that are outside of maybe what we typically do – so outside of the Q of E process from the consulting side. And surprisingly, this actually takes place a lot more than you would think. Just because I come up to you with my hundred-million-dollar offer, doesn’t mean we’re going to get a deal done. So, I just want everybody keep that in mind, because again, just because somebody approaches you, don’t be going and spending that money until the wire is in the bank.
Transaction Stopper 1: Private Equity Groups’ Due Diligence
But with that being said, when we’re doing our work concurrently, the PE group is also doing their due diligence. They’ve got their own checklist, and it’s a heck of a lot longer than what ours is. And so, they might be going through that, and they have their own deal busters. Sometimes it could just be a bad fit between management and the private equity group. Just different personalities on what their vision is of the potentially acquired company.
As part of their due diligence, they’re also doing legal due diligence, and they might come across a lawsuit that they weren’t made aware of and it’s something that they could potentially set the deal aside for until that’s ultimately resolved because they don’t want to get into something where they then inherit a potential payout. We’ll just say that. Or it could be something that’s like, “No, we didn’t know about this.” It calls into question people’s character or that kind of stuff. Good thing about this is that those are the type of items that you’re usually going to get resolved or identified earlier in the process.
Jen: Fairly quickly.
Chris: Yeah. So, you don’t get both sides sinking hundreds of thousands of dollars into a deal, only then have to call it off. So, that’s the upside to those ones.
Transaction Stopper 2: Seller Gets Cold Feet
The other one is, we’ve seen it within our client base – is that the seller gets cold feet.
Jen: Wait, I’m not quite ready yet.
Chris: Yeah. And some of it could be what we call the deal being re-traded or reworked as they get into the process. And some of those could be deal killers for the seller. Some of it might be is they thought would’ve continued involvement in the company. But I think the biggest one that I see, a lot of these owner-operated businesses, that’s their baby. That they have helped…
Jen: They’ve grown it from nothing to success.
Chris: Exactly. And those are the best stories. But as they decide… maybe they don’t have a transition family member in place or some other avenue, kids decide, “Hey Dad. I don’t want to take over the business.” And so, they decide it’s a good time to sell, but as they get going through that process and the thought of giving it up, giving it away it becomes too much for them really.
And so, we’ve seen that where then they call off the deal. They might’ve started seeing what it looked like for them after a sale, and they decided maybe they’ve still got some work to do on the business. And a lot of times the team members that they’ve been involved with for years, they don’t want to sit there and leave it up to the private equity to determine their future.
Jen: If they continue on. Yeah.
Chris: Right. So, some of it is a, you know, they’re actually looking past the dollar amounts and making sure that their people are continuing to be taken care of like they have over the past several years.
Transaction Stopper 3: Legislation Activities in Washington
Maybe the last one would be… it could be what we’re seeing currently within Washington. Whether it’s tax reform in some form or fashion getting pushed through or some other type of incentives. I mean, we saw within the last couple of bills what they’re trying to work in was infrastructure changes. So, using that was an example. Look, if you’re a construction company owner, and you see that we’re about to sink billions of dollars…
Jen: Into construction-related projects.
Chris: Exactly. And your revenue could potentially double along with your bottom line. You might be part of a way into a deal, and then that actually comes to fruition because you never know what’s going to go on at Washington. But all of a sudden, it gets pushed through and then you’re set up for another five years. So, then you’re going to pump the brakes and say, “Well, wait a minute. Historically, this is how we are doing, but this is how we see things going.”
Jen: Yeah. Let’s make some more money before we sell again or try to sell again.
Chris: Yeah, exactly. And the same could be said for a potential buyer where it’s—legislation comes out that might cut against the company that they’re looking to acquire and drive down its value. And so, they’re going to pump the brakes and say, “Well, yeah, we still like the business, but more so at this price.” And so, those are the type of things that kind of go on that are outside of our realm, and when it’s time, a lot of times we just have to put down our pencil and we move on to the next deal.
And so again, these are items that happen a lot more frequently than you think about. So, it’s not totally unexpected when we get that call saying, “Hey, we’re shelving this deal. We’ll think about you guys on the next one.”
Jen: Thank you for getting us to this point, but we’re done.
Chris: Yeah, exactly. And then your curiosity takes over, and you wonder what happened.
Jen: What happened? What’s going on?
Chris: Exactly.
Jen: Perfect. Well, sounds good. We’ll get you back to talk some more transaction-related things in the future. Sound good?
Chris: Sounds like a plan.
Jen: Perfect. This has been a thought leadership production brought to you by PKF Texas – The Entrepreneur’s Playbook®. For more information about this and other transaction topics, visit www.PKFTexas.com. Tune in next week for another chapter.