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Time Kills Deals

Posted by David Humphrey on 6 June 2017 | Comments

Once a deal is reached with a buyer, there is typically a time period between the intent letter and actual closing, usually between 60 and 120 days depending on the industry and buyer. During this time the buyer conducts due diligence and the formal purchase documents are drafted. No matter how well you feel you are bonding with the buyer during this period, remember the deal is not done until documents are signed and the wire transfers of purchase money has crossed from their account to yours. Until these things happen, the deal is still in limbo and you are still in sales mode.

It is important to keep in mind, that once a deal is agreed to with the buyer it never gets better for the seller, however it can get worse. Consider this: 

  • If business conditions get better during the due diligence period, the buyer moves forward with the deal and the purchase price stays the same.
  • If business conditions stay the same, the buyer either buys under the original terms, or he tries to negotiating better terms.
  • If business conditions get worse, the buyer walks away.

In none of these three situations does the purchase price get better for the seller, but it may in certain circumstances get worse. Thus, once a deal is stuck, owners should engage quickly with the buyer to provide necessary support documentation, remove any due diligence hurdles and work with their closing attorney to expedite the documentation and not let the deal sit idle.

Several years ago we worked with a business whose business focused on the automotive space and transacted significant commerce with Toyota dealers, approximately 30 percent of their revenues. Nine days after the closing, a tsunami hit Japan and interrupted Toyota’s business for months. This was truly an act of God event, which even the best planners could not have predicted. If this deal was not closed and was still in progress at the time of the tsunami, the buyer would have been justified in calling a time out and either postponing the deal, renegotiating the terms or possibly walking away. Luckily the buyer was a strong manager and was able to work through this event, manage through the crisis and come out stronger, but it was a very difficult first year for his equity fund. If you were the selling owner when this tsunami struck and the buyer walked away, this single event could have postponed your exit for several years as you demonstrated to new investors that there were no long-term impacts of the storm.