Imagine this: you have finally signed a letter of intent to sell your company. Now begins the 60 – 90 days of due diligence before the transaction closes. Everything is going along smoothly but, inevitably, almost every buyer asks me this question….
“Linda, what can happen between now and the close to mess up my deal?”
Truthfully, the answer is, “a lot can go wrong if you haven’t planned for certain situations in advance.” Many times, sellers enlist my services AFTER (or just before) they sign an LOI. So, often, I don’t have the ability to work with them in advance to help eliminate some of the most common reasons why a transaction might stall or, worse, die.
10 Scenarios That Can Delay or Kill Your Deal
To ensure you don’t end up in that position, here are 10 common scenarios that can prevent a transaction from closing or delay it significantly post-LOI, and how you can avoid them in the first place:
1. A key customer is unhappy.
Every buyer is going to want to speak to a few, if not at least 5 – 10, of your top customers. Of course, we all THINK our top customers are happy, but that is not always the case. In one recent transaction, the largest customer was actually planning on leaving, which represented more than 12% of the seller’s revenue. Needless to say, the deal took a sharp halt.
What you should do: Even if you have high customer SAT scores, NEVER assume your top customers are happy or don’t have plans on staying for other reasons. Right when you sign an LOI, you should immediately “check-in” personally with your customers. No selling, just ask how you can improve your service and wait for an answer. This gives you an opportunity to head off an unhappy customer or do what is needed to fix the situation before the buyer calls.
2. You’ve been served.
Recently, I had two clients who were served with lawsuits while in due diligence; one just days before the close. This could come from either an employee or, more likely, a customer.
What you should do: Ideally, you have insurance to handle this. You will need to immediately contact them to understand what they will cover and how much. This then needs to be disclosed to the buyer, who may decide to escrow additional amounts to cover the claim. Being forthright as soon as possible is always the best course of action.
4. There’s a UCC filing on the company.
Any time you take out a loan or have a line of credit in place, you will have a UCC filing on your company. A buyer will not allow a transaction to close unless those filings are removed and, most times, sellers don’t even know that there is a UCC filing out there (or it may be incorrect).
What you should do: Immediately upon signing an LOI, have your M&A attorney run a search for any filings against your company. Even if you have paid off the loan, additional steps may need to be taken to have the filings removed. Do not wait until the last minute, as they take time.
5. There are vendor consent requirements.
Some vendors, especially in the ERP space, require a consent before you can migrate your customers to another buyer or merge with another company. If they are major vendors, like Microsoft, this can halt a transaction, as finding the right person to make this happen can be time-consuming.
What you should do: If not already done, run a list of the top vendors for the last year and review your major vendors – this was probably asked for during due diligence. Then, find and review those agreements for assignability, change in control, and consents.
6. Your engagement letter (MSA) has a clause that doesn’t allow you to assign the agreement or doesn’t allow for a change in control.
This happens more often than you might think. Maybe one change was made for a specific customer, but it was never changed back, so every MSA afterwards has “no change” language. This can lead to a last-minute scramble before the close to get addendums out or new MSAs out to your customers.
What you should do: BEFORE you sign an LOI, review all your signed customer agreements, especially if they are modifiable by your sales team. Then, for those that might have unique language, have your M&A attorney review them and make recommendations on how they can be amended or changed. This is a time-consuming process and will absolutely delay a close if not dealt with in advance. Plus, once a buyer is involved, they may have their own way they want to handle this, which could complicate things.
7. Your second-in-command wants to leave.
You finally announce the deal internally to the management team (as you should), and now your second-in-command says they want to leave because you stated you will be moving on shortly after the sale. Unfortunately, the buyer has plans for this person to take over your duties. This will create a huge concern for your buyer, as it threatens the continuity in leadership that they planned on.
What you should do: While you don’t want to alarm your team about the sale in advance (since you don’t know for sure it will close), you do need to be upfront with your second-in-command about your intentions well before you begin speaking to buyers. This is especially true if you plan to leave shortly after the sale and you need them to stay. Implementing monetary incentives such as “stay-bonuses” or sharing in an earn-out can help encourage people to stay. Also, sharing in equity (if rolling equity) can help keep key personnel in place. See my post on how to compensate people when selling your company.
8. Your numbers are declining (sales or net profit).
The smaller the company, the more likely I am to see this happen. The owner does the selling for the company, but they are now busy finding a buyer and have taken the foot off the sales pedal. Remember, buyers will want to see your financials all the way up to the close, and having a significant drop in revenue without a significant backlog to fill it will halt a transaction or change the final numbers.
What you should do: Begin preparing for due diligence early. Download my due diligence checklist, which outlines documents you should begin collecting now to prepare yourself for the future onslaught of requests. Not only will there be financial, legal, insurance, and IT due diligence, but you will have to work on your written representations and warranties before a deal is completed, all of which will consume you entirely. While this is happening, make sure that someone else can handle sales or hire someone in advance of selling to fill that role. You won’t regret it.
9. Your loan on your building needs to be paid off because the company is used as collateral.
For those of you who own your building and purchased it using an SBA loan, it may come as a surprise that you will be required to pay off that loan because it uses the company assets as collateral. To make matters worse, you may also have a second loan with a conventional bank that requires the SBA loan to be in place – meaning you may have to pay that loan off as well. All of a sudden, there is not much cash left after you sell because you had to pay off one or two loans at close.
What you should do: Look at your loan documents now or get an attorney to review them before you enter into a transaction, especially if you have an SBA loan. Refinancing at the current rates may not work to your advantage, so it’s important that you understand the entire financial impact before going to market.
10. A minority shareholder doesn’t want to sell.
Sure, you can override, but it doesn’t look good in the eyes of the buyer, especially if that shareholder owns 49%. The deal will get killed if this is the case. Even 5% shareholders will need to approve the sale if they have a key role in the company. This usually happens when a shareholder feels like their role will be terminated or changed considerably.
What you should do: Before going to market, or once an unsolicited offer that looks good is received, discuss your intentions with your shareholders. Make sure they are included in calls and discussions so that they can help shape their own destiny with the buyer. If there is no role for them long-term, be sure they are offered a severance package as part of the transaction.
One last bonus point which, believe it or not, I have seen multiple times…
11. A key employee threatens to quit or demands a significant raise as part of the deal.
Let me give you an example: a few years ago, we were about two weeks out from closing a transaction, and we decided it was time to let the rest of the management team know that a sale was imminent. Plus, the buyer wanted to meet the management team prior to the close. When sharing the news, the seller also announced that the management team would be receiving a bonus at close. The Director of Sales (who was part of the management team) determined that the only reason the company was successful was due to his efforts over the years. He decided that unless he received 20% of the proceeds of the sale, he was going to leave, take all his salespeople with him, and go to a competitor. Yes, that was really his plan!
What you should do: In this case, we immediately informed the buyer that we had an unhappy Director of Sales who wanted to be compensated in addition to his normal salary, which wasn’t going to change. We scheduled a one-on-one meeting with this person and gave him assurances that not only would his role not be touched, but he would be given a greater role with more commission. This seemed to appease him, and the sale was finalized. I now make sure that all of my transactions have a legal document that the owners can use when presenting bonuses to their key employees that prevents them from announcing or soliciting employees from the company in exchange for their bonus at the close of the transaction. Would this have cured this situation? Who knows. But it has prevented other scenarios like this from happening.
There you have it: all the things that can derail a perfectly designed transaction. Now you know what proactive steps you (and your advisor, if using one) should be taking to ensure a smooth transaction post-LOI.
Want to be even more prepared for your transaction? Read about other potential bumps in the road after the LOI is signed.
How Long Will It Take You to Actually Exit?