Deal Breaker

Deal Breaker: Reasons for failed negotiations

Deal breakers are reasons for the end of negotiations that a seller or buyer may identify during a sales process. There is almost no limit to the imagination for deal breakers, and there are curious stories as to why transactions did not go through. For this book, however, I want to focus on the major and most common reasons for failed deals. The following deal breakers are unfortunately far too common from a buyer’s perspective:

  • Different understanding between the seller and the prospective buyer on the terms of sale
  • Legal disputes of the company with third parties or with the tax office
  • An overly complicated corporate structure and interrelationships with other companies
  • A corporate structure abroad, which is difficult to understand by the prospective buyer
  • A lack of understanding by the seller of the buyer’s position
  • A lack of transparency during due diligence by the seller
  • A lack of honesty by the seller in communication
  • Non-compliance by the seller with agreements already made, especially from the NDA as well as LOI agreements
  • Personal differences in negotiation discussions
  • Too much cultural differences, especially in industry or cross-border deals

Not only for an investor there are reasons to cancel a deal. For you as a seller, there are also legitimate reasons to pull the ripcord. The following deal breakers could make you as a seller stop negotiations with a party:

  • Differing perceptions between the seller and the prospective buyer on the terms of the sale
  • The buyer does not have the financial resources to make the purchase
  • A lack of understanding on the other side of your position as the seller
  • Personal differences in the negotiation discussions
  • Non-compliance by the prospective buyer with agreements already made, especially the agreements from an NDA as well as the LOI
  • No honesty in communication on the part of the seller
  • Indiscretion on the part of the prospective buyer

As a general rule, potential deal breakers that become real deal breakers are the worst possible scenario for a deal. In such a case, the sales price is lost for you and the prospective buyer has spent his resources on the purchase talks and due diligence in vain. So, if someone in your deal wants to stop the sale because of a deal breaker, try to resolve the issue first if the prospect of resuming negotiations is legitimate. If your counterpart is seriously willing to talk and compromise, it’s all worth a try to find common ground again and return to serious sales discussions. 

However, for serious deal breakers, it is better to actually end the sales discussions. Especially, as soon as the negotiations on the sales price and payment should become frivolous. For example: Your negotiating partner oversteps the mark with sudden discounts on the sales price or the financing of the sales price is not secured. Then it is time to resort to the last resort and end the talks. 

In my observation, the topics of purchase price determination and the payment terms of the price are among the most common reasons for broken negotiations. It will certainly not surprise you that the price is often discussed fiercely and emotionally. Therefore, it is important that both sides know, understand and also accept the calculation of the selling price.  

Of course, there is never complete protection against deal breakers for you as a seller. You can, however, reduce the likelihood of your deal falling through with the help of the following guiding questions. 

  • Have I done a proper investigation of my prospective buyers?
    • Do the buyers have the financial strength to pay the purchase price?
    • Are the investors reputable and binding? 
    • What has been the experience of other buyers with this investor?
  • Are the expectations on both sides clarified by the LOI?
    • Is a minimum and a maximum sales price mentioned in the LOI?
    • Will the sale price be paid in one installment or are there still agreements that could change the sale price even after the deal is closed?
    • What is the maximum time period the parties agree upon for due diligence?
  • Can I perform reliable M&A project management?
    • There are many questions to answer and data to prepare for due diligence. Can I as a seller correctly and promptly fulfill the requests and requirements of due diligence?
    • Do I have all documents at hand quickly?
    • Do I know the procedures and next steps of a sales process?
    • Can I also answer critical questions about my business?
    • Can I remain factual even when communication becomes emotional?
    • Can my counterpart remain factual even when communication becomes emotional?
    • Do I know several ways to negotiate the best possible terms for the sale?

Honesty lasts

When preparing a business for sale, you should know that regardless of the industry, there have been attempts at manipulation by sellers in some deals. For example, in some company sales in the past, the profit in the profit and loss statement has been deliberately manipulated by the seller. However, manipulations have so far (almost) always come out and often even become deal breakers. There have been cases where an owner has significantly reduced costs in the run-up to a sale, even though it has hurt the business and growth in the long run. This can be the case, for example, with marketing or PPC expenses, or when personnel costs have been shifted to other companies even though the personnel are very much working for the company being sold. Practiced buyers and investors know the tricks around manipulation of profit and will therefore check very carefully if sales and profit really match. 

In addition to deliberate manipulation, however, there are also legal activities to increase the value of the company for a sale. Deliberately and legally improving financials for a business sale is what some people call “brightening up the bride.” Now I think any bride is entitled to make herself pretty for a wedding. However, from my deep conviction, “prettying up” should remain within the bounds of what is reasonable. For this reason, you should not hide costs, for example, in order to increase the profitability of your business in the hope of thus increasing the sales price.

So don’t use tricks to make your company’s metrics look better than they really are. Because if you’re not honest in your prettying up, sooner or later you’ll fall flat on your face. In a professionally managed M&A process, any deliberate manipulation of financials will eventually be noticed. Instead, make much more of an effort to achieve real positive development in your organization, because a good organization increases sales and profits in the long term. You can achieve these improvements by automating and standardizing your processes. You will have more of that anyway, because you will increase your profit, which you are sure to have in any case – no matter if you sell your whole company or not.

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