Uncovering Top 6 Deal Killers in M&A Transactions with Jared Johnson and Jarryd Osborne

In this episode of Private Market Insights, two small business M&A experts returned to Private Market Insights for a captivating back-and-forth conversation about the top deal killers that come up before closing. Jared Johnson is Vice President and Senior Business Officer at First Internet Bank, and he runs a podcast titled “Before you buy or sell a business.” Jarryd Osborne, who recently guested on Jared’s podcast, is a seasoned figure in the M&A field, currently serving as a buy-side advisor at ReVera Capital. 

We pivoted from our usual format, featuring a power ranking-style rundown on each guest’s top reasons why deals falter. The ensuing dialogue dissected each point in depth. The following article summarizes the discussion, but for an engaging and thorough experience, we highly recommend that you check out the full episode:

Deal Killer #1: Overstepping and Inexperienced Attorneys 

The outcome of a deal often hinges on two major attorney-related factors in M&A – their experience and the extent of their involvement. Our guests emphasized the necessity of hiring a seasoned M&A attorney and managing them carefully.

A significant issue arises when an attorney, although proficient in their personal area of legal focus, lacks M&A transaction expertise. This lack of familiarity can result in notable delays if the attorney approaches the transaction too aggressively, ignoring our industry’s norms and consuming precious time and resources. Attorneys may overplay certain deal aspects, leading to needless complications, increased legal costs, and prolonged timelines. For instance, one deal saw legal fees surge to $170,000 due to excessive attorney interaction, even though it eventually closed.

  • Actionable Insights

Seasoned M&A attorneys offer invaluable legal insights for complex deals. However, deal leaders must steer their attorneys’ focus to avoid wastage of time and money. In tricky situations, consider having separate calls without attorneys to smooth the way with the seller and broker. This strategy can make negotiations less tense and maintain focus on the deal, not legalities.

Deal Killer #2: Disorganized Financials

Organized financials are essential for successful business transactions. Disorganized records can cause confusion and delay, putting the deal at risk. This can result from sellers juggling business operations while simultaneously managing the sale of their company. It can also be a sign of key-person risk, where the owner understands the operations of their company, but an outsider might struggle to do so themselves. Delays, particularly when SBA lenders encounter inconsistent financial statements and tax returns, can complicate the process.

Disorganized financials aren’t necessarily indicators of a poor deal, nor should they be deal killers necessarily, but they do require careful understanding, due diligence, and risk management by the buyer.

  • Actionable Insights

Buyers may encounter unclear financials but still want to proceed due to other attractive deal elements. It’s critical to understand the risks involved, how they’re managed, and how expectations for clarity are addressed in the Letter of Intent (LOI).

Understanding financials isn’t just about numbers—it’s about the story they tell. Buyers should be open-minded and willing to explore unconventional practices. Even imperfectly managed businesses can be profitable if the buyer is ready to dig deeper into the actual situation.

Deal Killer #3: Lack of Professional Guidance

Successful business transactions often depend on a professional mediator, such as a broker or attorney, for smooth communication between buyer and seller. Without such guidance, potential conflicts can jeopardize deals.

While buyers may consider focusing on non-brokered deals in hopes of obtaining better prices, broker-led deals usually progress faster with more structure, thanks to brokers’ familiarity with the transaction path. However, an inexperienced or poorly trained broker can disrupt and frustrate the process. 

  • Actionable Insights

Establishing a respectful relationship with your broker and treating them as advisors, not just intermediaries, is beneficial. Regular phone calls instead of emails can enhance rapport and smooth the process. Buyers should beware of unprofessional brokers, indicating a lack of experience or training.

The episode’s Q&A raised an interesting, related question: Who manages the seller’s emotions? While a competent broker plays a significant role, both Osborne and Johnson believe the buyer also shares this responsibility. Direct conversations at key stages can lessen tension, and continuous communication can prevent unnecessary seller stress.

Deal Killer #4: Inflated Seller Valuation Expectations

A common obstacle in business deals is sellers’ unrealistic valuation expectations. Fixation on a predetermined sale price, often ignoring the business’s actual value, can disrupt negotiations. Overvalued businesses, typically due to exaggerated add-backs hinder the buying process and complicate loan acquisition. Despite these hurdles, inflated seller expectations aren’t necessarily deal-killers.

  • Actionable Insights

Brokers should conduct independent valuations uninfluenced by the seller’s asking price. This results in accurate listing prices. Sharing recent data from similar transactions can help align expectations about the business’s real value. Creative financing options like seller carry notes can bridge the valuation gap. These agreements let sellers finance part of the purchase price under negotiated terms.

Through patience, communication, and creative deal structuring, transactions can succeed. Solutions often lie in the details.

Deal Killer #5: Choosing an Unfit Lender

Prospective buyers often select their lender based on who offers the lowest rates and most permissive covenants, sometimes leading to failed deals due to partnering with unproven lenders. In many cases, banks without substantial SBA experience, even large ones, can slow down deals due to a drawn-out underwriting process or need for SBA approval (in the event that the bank is not already a pre-approved SBA lender).

Delays from such lenders can exhaust sellers, leading to impatience and deal withdrawal. This waiting period also allows sellers to gain new clients, potentially increasing their company’s value and causing them to reconsider selling. Apart from choosing the right bank for your transaction, choosing the correct individual as your main contact person within it is crucial. Jarryd Osborne noted that a deal might languish on one SBA lender’s desk for weeks due to inaction or get tied up in intensive underwriting due to a banker’s lack of seniority, while another individual from the same institution could underwrite the same deal in a much shorter time.

  • Actionable Insights

Always consider experienced Business Development Officers (BDOs), as they usually have higher success rates due to trust from their investment committees or underwriting teams.

Timely and efficient response is a key marker of a competent lender. If a deal stagnates, check the lender’s communication for signs of genuine evaluation. If they don’t respond within 24 hours, consider alternatives given the importance of time in such transactions. 

Deal Killer #6: Ignoring the Seller’s Emotional Investment

In a business acquisition, the financials, operating performance, and other facets of the company are typically the focus. However, buyers should not neglect the seller’s emotional attachment to their business and what it represents to them personally. Entrepreneurs often see selling as more than a transaction, making a strong buyer-seller relationship crucial. It facilitates smooth transitions, eases negotiations, and manages tensions. A strong connection can often out-value a high financial offer. Sellers tend to lean towards buyers they trust and believe will uphold their legacy. A positive relationship can also lead to favorable deal terms, though a balance between professionalism and empathy is key.

  • Actionable Insights

Understanding, empathy, and personal connection play a significant role in negotiations and can greatly impact the deal’s outcome. Buyers should initiate a positive relationship, learning about the seller’s motivations and background before delving into financials. While quantitative factors are essential, they should not overshadow the transaction’s human element. 

Small Business M&A Antidotes for Deal killers

After going through top 6 red flags to watch out, the conversation also brought under the spotlight some green flags to consider in your buying journey:

  • Good Brokers: An experienced broker actively involved in the transaction can guide both parties through potential obstacles, manage expectations, mitigate issues, and facilitate clear communication. Jared Johnson emphasizes the importance of having a good broker, stating, “Working with a really good broker who’s experienced… that stays involved in the transaction goes a long way.”
  • Responsive Buyers: A responsive and diligent buyer who shows genuine interest and enthusiasm can significantly expedite a deal. According to Johnson, “If I’m asking for something and then they’re giving it to you right away, they’re working on trying to get it done… usually it’s going to get done.”
  • Positive Attitudes: Respect and gratitude toward those involved in the transaction are also important. Johnson mentioned, “I’ve got buyers that are super nice, that are very grateful that we’re helping them… so many people involved in the transaction are willing to go the extra mile and do more for them and try to keep it on track.”
  • Motivation: Strong motivation from both the buyer and the seller is another green flag in a business acquisition. Jared Osborne highlighted the importance of assessing the seller’s motivation by building a relationship with them and understanding their reasons for selling. By asking some questions, “you can start determining if they’re really just testing the market.”

Deal Killers Conclusions: At the Intersection of Business and Personal Satisfaction

Successful business deals are not just about financial gain, but also personal satisfaction. Both guests recounted some of their memorable deals, often involving challenging circumstances that didn’t turn into deal killers, but ended with both parties feeling content and satisfied.

Johnson fondly recalled a transaction where a high-end restaurant in Hawaii was sold to a dedicated husband and wife team, despite challenges. Osborne shared a similar sentiment, mentioning an HVAC company deal in California that almost ended up having working capital as one of the deal killers, but finally closed after intense negotiations. He notes, “Sometimes the best businesses that close are the ones that you don’t think are going to close and they finally end up doing it.”

In conclusion, navigating the complex world of business acquisitions requires understanding the technical aspects, managing emotions, regular communication, and celebrating the satisfaction of successful deals. Whether you’re a buyer, seller, or an intermediary, keeping these insights in mind can help make the acquisition process smoother and more rewarding.

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