Selling a business is a serious commitment, and for many small company owners it might be the biggest decision of their lives. So it’s only natural to have second thoughts, and for any number of reasons—changes in industry trends, a breakthrough with a new product, a revelation about the buyer, or simply a change of heart.
For companies that come to this crossroads, it's important to either move ahead without regrets, or to consider the alternative—when and how to back out of the deal with minimal damage.
There are potentially many trigger-points along the lengthy sale process that offer opportunities for sellers to change their minds. In fact, the sale of a business can be broken down into four major steps:
- A letter of intent from a buyer
- The ensuing due diligence
- The financing phase
- The creation of the purchase agreement.
It's important for business owners to have a contingency plan in case any one of these steps goes awry. Each of these steps offers an opportunity to walk away. The closer a business is to the beginning of these steps, the better its outcome will be in retreating from a sale. Consider the following options at each stage for a business owner to walk away from the deal.
Walk Away During Initial Negotiations
Even before a letter of intent is drafted, the buyer and seller must come to an agreement on a fair sale price. When the underlying factors behind a company, its personnel or its industry change, there is a legitimate reason to reconsider selling.
These negotiations offer the best opportunity to break with the suitor with minimal legal, financial or reputational impact.
Reject the Letter of Intent
A letter of intent from the buyer is a preliminary place-holder that is intended to show the earnestness of the buyer. It is generally not a legally binding document, though specific aspects of it may be, such as first right of refusal and non-disclosure clauses. Again, the seller has a broad set of options to walk away from a potential sale during this phase.
Do Serious Due Diligence
The due diligence phase allows for open books and, often, a massive amount of discovery—both on the part of the buyer and the seller.
This is the real work of any acquisition and where most deals break down.
More commonly, deals are called off during due diligence because of unexpected information about the acquired company. Even so, sellers have the same rights to uncover deal-breaking scenarios under due diligence. Some of the bigger red flags include issues around creditworthiness, financial management and employee practices.
At this stage, sellers need to consider how any revelations would impact the likelihood of the deal going through, as well as what it means for the future of the business.
Due diligence can take days or months, but buyers should already be working on how they will finance the acquisition. A buyer has a reasonable window of time to pull together financing and to close the deal.
If the buyer cannot meet this obligation, there may be some room for a seller to terminate the deal if the purchase agreement includes a so-called reverse breakup fee. A reverse breakup fee is an amount payable to a prospective seller if the buyer fails to follow through on the acquisition specifically due to conditions in the acquisition agreement. That breakup language could include stipulations around the failure of the buyer’s proposed debt financing.
Meanwhile, if the acquisition requires seller financing, there may be more legitimate reasons for a seller to back out of the deal. Again, the ramifications increase as the sale gets closer to completion.
Approaching the Point of No Return
There comes a point in the process when the barriers for backing out become more significant. The implications—including direct costs and long-term reputation in the marketplace—become more material with each stage.
As a deal progresses, outside scrutiny also becomes magnified. If there are sensitive personnel or market reasons to keep an acquisition confidential until it closes, it’s best to break off before the more visible due diligence phase.
Beyond that point, sellers will need to consider how changing gears will impact its standing with customers, suppliers and employees—not to mention would-be acquirers or partners down the road.
Ultimately sellers should have legitimate reasons to sell a company from the outset, and the same is true about walking away. When company leaders can present concrete reasons for saying “no thank you,” it’s an opportunity for managers to illustrate good judgment and long-term thinking. If second thoughts are simply due to a change of heart, however, it may be best to move ahead with the transaction.
Selling a business is never easy, which is why it pays to work with an experienced mergers and acquisitions team from the beginning. Outside experts can help companies navigate unforeseen barriers, keep emotions in check, and make good decisions every step of the way.