How a third-party can derail your business sale

|Advisor Corner

During much of the diligence process, the buyer and seller are the only parties aware of the potential sale. However, as the transaction nears the end, sellers are at the mercy of outsiders who can throw a wrench in an otherwise cordial process. Here are some examples of real situations we’ve experienced over the years where a third-party impacted the transaction:

A landlord renegotiating less favorable lease terms

A seller approached their landlord to request a lease assignment transitioning the lease to the buyer. The landlord noted that for the new buyer party, they would not keep the favorable historic rental rate. This was a challenge given the business was priced off of the current lease rate going forward. The buyer worked with the landlord right up until closing to negotiate a new lease with fair go-forward rate and terms.

Key customers delaying the assignment of their contract

Getting customer consents is always a rush at the end. You can’t request consents too early because you don’t want customers to be aware of your pending transaction without strong confidence to close, but if you wait too long, you risk not having required consents prior to closing. We’ve worked through scenarios where the customer’s legal team had significant mark ups on the consent or it took a long time to work through their legal department. Customers have not returned the consents or noted they would only provide verbal consent. In the end, each scenario required its own solution and working closely with the buyer through this process helped us identify the high priority consents we had to get before closing.

A bad customer survey

Often during diligence, the buyer hires a third-party to complete a customer survey and confirming satisfaction and likelihood of continued business with the selling company. Unless there is a known situation going into these surveys (i.e. a known warranty issue or pricing conflict in process), it’s very challenging to work through an unexpected bad survey. The customer has all the power in these surveys to outline their expectation and impression of the business. In one situation, troubling survey results from a key customer put the closing on hold until we could work through a resolution that the buyer was comfortable with. This resulted in an unexpected 30-day closing delay.

Software vendor charging an exorbitant fee to transfer the ERP system

With so much involved in running a business, it’s no surprise that business owners aren’t always 100% aware of the fine print terms of certain contracts and agreements they are party to. In several transactions, we’ve had to work through the challenge of excessive fees (i.e. 50-70% of the cost new) required to transfer software licenses. Business owners aren’t always aware of these provisions and it can cause a delay at closing if the buyer is a) unwilling to pay the transfer fee or b) if the process to transfer the software takes longer than expected. If possible, work to negotiate a reasonable or no-cost transfer fee when contracting software services.

A large warranty claim right before closing

While a common challenge in business, a warranty claim that comes in during the final weeks before closing can cause a buyer to pause the transaction. In one particular instance, a manufacturing client had a large warranty issue arise thirty days before closing and to get the buyer comfortable, the seller had to prove this issue would be resolved in the weeks before closing and legal worked together to outline a special indemnification specific to this warranty claim.

A key employee pushing back on a new employment agreement

Buyers want to make sure the key employees crucial to the operation remain post-transaction, especially when the business owner plans a full exit. It can become a challenge when key employees ask for provisions that are not in line with market. It’s important for the seller provide good direction to key employees as they walk through the process of fair employment terms with a new owner.

In one scenario, the General Manager was to take over as President after closing (with an exiting seller). Given the buyer wouldn’t take a role in the day-to-day operation, they were relying on solid leadership from this GM. Before closing, he had his litigator sister (with no M&A experience) review his new employment agreement and she marked it up with terms that were not close to market. As a result, the buyer walked from the transaction – not confident the GM had their best interests at heart going forward.

While the decision to sell your business is yours, it’s important to recognize how outside parties can influence the trajectory of your closing process and where you can face challenging roadblocks that have to be addressed. These are areas we keep at the forefront as we work through the transaction process together.

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