Why Deals Blow Up: Lessons from Family Office SMB Acquisitions

"We're ready to buy this thing right now, with no financing contingencies for $11M cash."

I've had the privilege to say this sentence (and many derivations thereof) on many occasions with zero bluster or bravado. I'm fortunate to work for a family office doing the kind of work I love most; identifying compelling hidden opportunities, collaborating closely with entrepreneurs, and assembling intelligent acquisitions.

You might be surprised to learn though that so many otherwise great deals fall apart - deals that would be life-changing for the founders and exciting for the acquirer - and that in probably 96% of cases the issues are completely avoidable.

I've evaluated hundreds of companies. I've done diligence, negotiations, and purchase agreements with dozens of businesses of all types. While I haven't "seen it all," I've certainly seen a lot, and I wanted to share some practical lessons on what blows up an otherwise great deal, and how founders and business owners can set themselves up for success.

1. Understand that Deals are Partnerships and Sales:

Even if you're looking to sell your company to move swiftly into retirement, the acquisition of your business is a longterm partnership nonetheless. I would argue that the faster you wish to transition out, the more you need to see things this way. The acquirer needs to feel comfortable and secure in knowing that questions can be answered, support can be called upon, and that they won't run into unnecessary speed-bumps in the form of unreturned calls.

I have seen so many great companies get lost in deal purgatory, only to go unsold or sit on the market for years simply because the owners take an excessively hands-off approach to the transaction. Even if you have an interested and capable buyer, make sure you're constantly sharing successes, educating on vision and market, and give your prospective buyer whatever information they need (and then some.)

Lastly, understand that buyers (especially the most credible ones) will be busy evaluating other opportunities, and thus might be scarce on time. Get disciplined about answering questions clearly and succinctly, and presenting effectively. (We have had more than one deal fall apart simply because conversations were so lengthy and disorganized that we simply couldn't keep investing the bandwidth into seeing things through.)

2. Set Up Organized Materials and Good "Color Commentary:"

Just because you know your business inside-out, and the buyer seems educated and informed, don't make any assumptions about what might be obvious. Did margins drop one year because of supply costs? Explain it. Is there a particular quarter with higher legal spend because of a labor dispute? Clarify it.

Your job when it comes to selling your business is to make it easy to understand; from products, to organization, to financials - you need to be able to share an easy to digest story. How does all this work? Wherever anything is out of the ordinary, make sure it's well explained and easy to understand.

Many business owners and founders I've worked with find themselves getting tired and frustrated with the deal process, yet at least half of it can be eliminated with thorough and well organized materials. Diligence requires answers to questions, and when those questions can only be answered with back-and-forth, that's where both parties lose momentum, energy, and sometimes interest.

3. Decide What Matters and BE CLEAR About It:

Never assume that what you want in an ideal transaction is obvious to the other side. It's become standard practice for me to ask this question on our first call: "In addition to the valuation, what does an ideal transaction look like for you? What has concerned you in the past about selling your business?"

On this one, I put a lot of fault on well-intentioned but ineffective brokers. In so many cases, a broker will push for an excessively siloed negotiation process that makes it challenging for either side to articulate in simple terms what it is they are looking for. The cost of this is that important details can remain unspoken or unclear, only to be discovered to mutual frustration deep into discussions.

Whether it's valuation multiple, earn-outs, financing structures, asset v. stock sales, or transition timelines etc., have a clear sense of what you're looking for, and make sure there are no mysteries. Even if the buyer doesn't agree, it's far better to disqualify a deal early on than to get within inches of the finish line only to discover a blocker.

4. Create the "My Business for Dummies" Playbook:

The nature of selling an SMB is that in all likelihood, the acquirer will also be the new operator. In some cases, that operator might not be an expert in the field, despite being a competent and credible buyer. Confident and relaxed buyers make for easy deals, and more seamless transitions. For this reason, I highly recommend that SMB sellers put together a practical and clear "operating manual" that makes it easy to understand how things work today. Where do new leads come from? How does customer data get managed? Where do payments go? How do you organize and stock the warehouse? How does the product get serviced? What tools and infrastructure are being used, and how?

It might sound like a lot, but not only will this add value to your business by making it even more sale-ready, it will also help to guide practical and efficient conversations regarding transition and operation.

As a note: I see this kind of document in perhaps 10% of deals, but anecdotally, those deals seem to get done at 90%+ rates... so you do the math.

5. Build Structure Wherever You Can:

A huge misconception (surprisingly perhaps) is that even a "small" few million dollar deal takes quite a bit of time. The old adage that "time kills deals" is extremely accurate, and while you should be working collectively to keep things efficient, organized, and timely. There are elements of M&A that unavoidably take time. I would argue equally that "lack of structure and unclear expectations kills deals" with similar lethality.

I've seen deals fall apart when one side loses confidence when too much time passes without communication or update. I've seen deals blow up because one side (or both) get tired of seemingly pointless calls or meetings. The antidote? STRUCTURE. Does it make sense to have a standing check-in meeting once a week? Can you make calls more specific to a particular topic? Can you agree on expectations on response time to emails? If you say you're sharing updated financials by EOW, but can't, are you sending clear updates?

At the end of the day, great entrepreneurs (and acquirers) aren't just great risk-takers, they're also great risk-mitigators. With this in mind, you should be constantly thinking about where you can reduce risk, uncertainty, confusion, and fact-finding effort. Present a "low-risk" deal that is ready for discussion and negotiation; you'll command a higher premium and likely get things done much faster.

This is the first article in an ongoing series that I plan to write from my adventures as a founder, investor, and as a family office professional evaluating and acquiring SMBs. Any questions? Any suggestions? Drop them in the comments or send me a note, I would love feedback and discussion!