There are plenty of good reasons why deals fall at the final fence. Don’t let your deal be one of them.
Purchasers and investors use the due-diligence process to manage the risk of doing a bad deal. Even small transactions involve financial and accounting, commercial, environmental and property, pensions and IP reviews.
The more due diligence that’s performed, the greater the burden on the target business. And due diligence is likely to bring up issues that could scupper an agreed deal.
The most common cause for deals falling over at a late stage is a sudden slide in performance by the target business during the due diligence process. This causes a crisis of confidence for the purchaser or investor that makes them back off.
Yet the reason for missing targets is often the preoccupation with doing the deal. With deals absorbing more and more valuable management time, shareholders should be ruthless about maintaining the business’s momentum.
One unexpected hiccup – whether it be missing a monthly profit figure or letting a new contract slip between your fingers – can have a disproportionate effect on your chances of completing the transaction.
Purchasers and investors may try to renegotiate deals at the 11th hour. Their excuses range from general economic uncertainty to stock market volatility but their aim is the same: to “chisel” at the pre-agreed price, just as the finish line is in sight.
After a painful eight-month process, it’s hardly surprising that exhausted vendors accept a price reduction just to complete the deal.
Delay is the great deal-killer. Imagine the temptation for buyers to undertake “just one further due diligence review” because they last looked at your business two months ago. But beware, a lot can happen in two months.
It is easier for decision-makers to say “no” rather than “yes” especially when they are ambitious managers being asked to sanction a £10m acquisition. Their deal decisions will often be dictated by their own career agenda rather than commercial logic.
It’s often easier to back off a deal than proceed. This isn’t intended as a blanket criticism of purchasers – corporate finance is a personality based-process that brings out the best and worst in people.
So what are the solutions?
Do your internal review before exposing your business to external scrutiny. Rehearse the process with your advisers. If you know what to expect, you can begin preparing the information requests.
The more time you allow for due diligence, the more time you can spend on managing your business during the most intrusive stages of the deal.
Make sure that you only break good news to the purchaser or investor – it’s so much harder for a buyer to justify a price chisel when you deliver a monthly profit that’s ten per cent above budget.
If the buyer or investor still brings out the chisel, immediately terminate any period of exclusivity. The best rebuttal to such ploys is to walk away from the deal – ideally, turn to the party who offered the second-best deal.
To avoid unnecessary delays, set a timetable to completion when you agree the non-binding heads of agreement.
Choose your purchaser carefully. Check whether you are a genuinely strategic target for them. Verify that they have the cash available to pay the price.
Demand main board approval before signing heads and granting exclusivity. Ensure that exclusivity lapses if certain milestones are missed.
If anyone tells you that worse things happen at sea – don’t believe them!
First published in October 2002. There are plenty more of Jeremy's contributions in our fully searchable archive.