Beatrice H. Mitchell, principal at New York investment boutique Sperry Mitchell, has been in the trenches making deals for small-business owners for 20 years. There may be no absolutely fail-safe way to prevent deals from crumbling, but Mitchell says sellers can increase their odds of success by hiring a good team. Then expect the unexpected.
Q: How often do deals fall apart?
A: In my experience, about 10% of the time. The most common reason is that a client doesn't hit his numbers. Say a client has projected $5 million in earnings this year. Instead, he loses money because his company is importing from China, and suddenly the price of goods in China rises.
The buyer will want to renegotiate for a lower sale price. In those cases, a seller almost always walks away from the deal.
Q: What causes buyers to change their minds and back out?
A: In a seller's market like this, buyers behave very carefully. But one reason is that the buyer doesn't get all its financing. We tell them to find bridge financing. You don't let your client take the hit.
Q: When deals collapse, second-choice buyers often lowball. Should sellers accept those bids?
A: If the second bid is within the range of what we thought the company was worth, we often recommend they do.
Some sellers will say: "Let's take it off the market." But that's not a good situation. If you have to go back to the market, you often need to wait at least a year.
Q: Why do you tell sellers to hire a lawyer they haven't worked with before?
A: A lawyer who has worked with a company for years has a vested interest in the deal not going through because he's going to lose a client. So sometimes an attorney that has a long relationship with a company will take an extreme position, and that's where the nail biting comes in. We refer sellers to a lawyer experienced in mergers and acquisitions.
Q: What questions should sellers ask potential brokers or bankers?
A: What are the last couple of deals you've done? At what multiples were they done? Can we talk to the sellers and buyers? Then ask about the firm's success rate -- what percentage of deals do they close? When you do talk to the sellers, ask how close the price they eventually got was to the value the banker had put on their company. That tells you if the banker is giving a realistic appraisal of your company, [or] if they're just trying to get your business by quoting a high valuation.
By Virginia Munger Kahn