Deal Dead? Not If You Have the Right Business Broker

Deal Dead? Not If You Have the Right Business Broker

by Gregory Kovsky

Oct 11, 2022

Sports history is filled with examples of teams and individuals rising to the challenge of the moment and achieving great things. A 3 – 2 count, 2 outs, bottom of the 9th, down a couple of runs, and then “Goodbye Baseball”, a homerun, and victory is snatched out of the jaws of defeat; a stoppage time goal; a “Hail Mary” pass completed for a touchdown; or a 12th round knockout when the opponent was ahead on the cards. If you experienced one of these situations as an athlete or fan, it is a memory you will never forget. It is natural mentally to gravitate to positive outcomes of this nature, but every positive outcome also had a negative side to the equation that likely haunts players & fans. Who in Seattle will ever forget an intercepted pass into the endzone late in the 4th quarter when Super Bowl victory seemed inevitable?

It is an interesting study in psychology to assess the losers in the situations described above in the future and see what they did after experiencing adversity. Did they never return to that championship moment or did they demonstrate “heart” and resilience building on the experience to become a better player or team.

As the twenty-two year President & CEO of the Pacific Northwest’s oldest business brokerage firm, IBA, and a nearly three decade professional mergers & acquisitions intermediary with over 300 successfully facilitated transactions on my career ledger, I have unfortunately seen numerous deals fail both with myself at the helm and others captaining the ship. At IBA, we always “Monday Morning Quarterback” failed deals assessing the why for the deal failure. It is rare that deals fail because of our role, due to our market leading knowledge, experience, and skill, but it has happened. More commonly deals fail in the marketplace because of negotiating positions taken by buyers or sellers or external factors.

A question every entrepreneur should ask a potential business broker being hired during an interview process is, can you tell me about a deal you lost and why it failed? This question will tell you a lot about the business broker. If they have not lost a deal, it could speak to their lack of transactional experience. It is easy to say I have never lost a deal, if you have been a business broker for only a couple of deals and/or sold a few businesses. If they are unwilling to provide details of an experience or get defensive when asked, it is reasonable to question how they will respond in difficult, emotionally charged stages of a deal. It is common knowledge that people frequently learn more from failure than from success.

The strongest M&A intermediaries in the marketplace will not dodge the question, but generally respond with a story. The best among this group will frequently end their stories with happy endings. The following are some examples of situations where deals fail.

The two most common reasons deals fail at IBA are due to legal and financing issues. A third common reason for deal failures in the marketplace are discoveries in due diligence where preliminary assumptions are unable to be verified. IBA rarely has transactions fail in due diligence due to our detailed client vetting, internal evaluation process providing pricing guidance (We only list companies for sale that have a probability of sale), and the confidential environment of full disclosure we create for our deals ensuring that both parties enter negotiations from a foundation of knowledge, best practices are employed, and transparency exists.

A common external party that can kill deals are lenders supporting an acquisition. Frequently deals fail in these situations because either the wrong bank was selected or incomplete information was provided to the lender by the buyer. It is strongly recommended that business buyers shop their loans to secure the best market terms and establish alternative options for financing, if the initially preferred lender should falter. Business brokers can be a great source for banker referrals as they will possess the knowledge of who is financing deals, industry preferences of lenders, and changes in underwriting polices that may tighten or loosen credit at specific banks. One of the most unique deal killing situations, I have experienced by a bank was when a loan was approved during one calendar year and rejected the next year due to a corporate policy change while the loan was in the pipeline scheduled for a February transaction completion date with a buyer who checked all the boxes any prudent bank would want in a borrower. I am always cognizant of this experience in Q4 of a calendar year because underwriting policies at banks frequently are modified effective January 1. It is also my recommendation that business buyers select a bank that has a local presence in their area where in person meetings can occur, if necessary, to discuss issues and for enhanced education. Many business sale deals have been saved at a bank by putting buyer, seller, and/or intermediary in a room with decisionmakers to openly and honestly discuss concerns and issues. The best venue for communication remains direct engagement.

A superior attorney and business broker will find a way to get parties to “Yes” in a business sale negotiation. A poor negotiator will “throw the baby out with the bath water” and fail to achieve the objective they are charged with accomplishing. The reality is that if a buyer & seller have reached agreement on a comprehensive Letter of Intent (LOI) on the business terms of a deal, they want to complete a transaction. I remind all parties commencing legal document negotiations, that a fair deal is defined as one where both parties think they have given a little too much. It is also important for both parties to recognize that in an overwhelming percentage of business purchase & sale transactions the legal documents go into a safe after the deal is completed and are never referenced again. The documentation’s role is that of a reference guide on how to deal with situations, if they should develop post closing. If people do what they said they will do and negotiated in “good faith” with integrity, the need for the reference guide will be mitigated. Business brokers can serve as great resources related to who are the top “deal making” lawyers in a marketplace and what is “standard & common” in transactional documents.

Another common entity that can play “God” on a deal and not allow the parties to achieve their transactional goals is the landlord. It is important to recognize that the landlord has no vested interest motivating them to facilitate a lease assignment or new lease creation. From their perspective, they have a satisfactory tenant that is paying rent, why change the status quo. A business sale can create an opportunity to raise the rent amount, which is in their best interest. The buyer may also need a longer term lease than is currently in place to mitigate their acquisition risk or satisfy a lender requirement. It is prudent to employ a business broker who is also a licensed real estate broker in the relevant marketplace, so one professional can facilitate all elements of negotiations (Business Sale, Facility Lease, and/or Real Estate) from a position of knowledge with strong communication with the impacted parties.

A corollary issue related to real estate, either rented or sold as part of a comprehensive asset transaction, that can negatively impact a deal are environmental issues. It is prudent to have a business broker with the experience and connections necessary to facilitate required inspections and/or mitigate environmental issues creating obstacles on the path to business sale completion. As an example, IBA’s Director of Operations in its Transportation Industry Transaction Division, Jeffrey Bryan, recently facilitated a satisfactory solution for the buyer, seller, and landlord to situation where numerous heritage hydraulic hoists in place before the business started operation needed to be certified as creating no contamination issues to satisfy party and banking legal counsel requirements for the deal. A lesser broker would not have had the experience and Rolodex needed to get the deal closed.

Deals can also fail due to an “Act of God” or “One in a Million” occurrences. I once had a deal fail because the spouse of a senior corporate executive checked herself into a mental institution threatening suicide because she was convinced he would fail as an entrepreneur and they would lose their present lifestyle. The deal was unwound to protect her mental health to the disappointment of her husband, who had to shelve his dream of entrepreneurship, out of love. Showing resilience, I laced up my boots again and went back to work selling the business a second time to another buyer and completing the sale.

Just last week, IBA had another deal fail when a corporate merger between two companies was skuttled when the buyer, located in Florida, had to divert resources to deal with the implications of Hurricane Ian to their operations, and backed out of a transaction scheduled for completion in November 2022. As my mother says, “when you make plans, sometimes God laughs”.  My client, although frustrated, will return to the market and in probability complete a sale and achieve his retirement goals in 2023.

A top tier business broker will be knowledgeable, experienced, highly skilled, a problem solver, and RESILIENT. IBA has a double digit team of intermediaries ready to serve entrepreneurs in Washington, Oregon, Idaho, and Alaska. We would welcome the opportunity to interview for the job of selling your business. All communication with IBA is held in strict confidence. 100% of our fees are paid on performance upon deal completion. We enthusiastically grab our bats, walk to the plate with two outs in the bottom of the 9th, and the game on the line. We are also ready to do it the next day, if our line drive is caught or we are called out on a pitch outside of the strike zone.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.