Is There Good Reason to Walk Away from a Deal?
If you submitted an LOI and you are going through due diligence, hopefully your deal is going to close smoothly.
If you are hesitant, sometimes there are good reasons to back out of a deal.
However, cold feet is not one of them.
If you are serious enough to put in an LOI, you are serious enough to go through with the transaction.
But if you are in due diligence, there might be something that arises that gives you reason to back out.
The general rule is it is minor or major, and how material is that, and can that be changed by price or some other term that you and seller agree to.
Minor issues that come up during due diligence are to be expected. Minor issues should not drive a wedge where you take advantage of the seller just because you can.
There are major ethics involved. When a seller accepts your LOI, they do it with the impression you are going through with the deal.
If they were not upfront about everything prior to.
Not reading the prospectus in full is not satisfactory though.
Remember, you want to focus on important items during due diligence. Due diligence is about verifying the material items to make sure the business is doing the cash flow stated, and that the seller is selling you the items that resulted in the cash flow. It will ultimately be your responsibility to run the business, so this time period is making sure the seller historically did what is purported to be. The future is uncontrollable by either party – you just want to ensure everything will be transferred to you that resulted in that historical cash flow and that the seller will not abandon you at a critical stage before all items are transferred. The seller’s obligation is to hand over what they purported to sell once the money changes hands, and make sure it is running smooth until day of close.
Sales may decrease during due diligence. Profit may dip.
Is it because of something material or is it because the seller is distracted because of the deal?
The material items that are cause for you to be concerned revolve around debt or income.
A system being a little different than what you expected, something taking more time than you thought, an employee not as competent as you thought, inventory depleted more than you thought, accounts that are harder to keep than you thought are generally not going to be deal breakers.
It is the major ones that can surprise you that may be justification and that can change the structure of the deal where the seller was not forthcoming about a material term in the prospectus.
Material can mean something burdensome like debt they expect you to take over, or a material misunderstanding when it comes to how much time the business requires.
Even if it is material, it can often be fixed with price or terms in the agreement that differ from the initial LOI.
If you want to work together on a deal, we would love to see what you are working on and see how we can help you . Reach out to us.
Phone – (800) 773-1523
Email – [email protected]
Leader in Acquisitions with Expertise in Representing Sellers & Buyers on Deals
Jarbly is a leader in acquisitions with expertise in helping with listings, negotiations, LOI's, asset purchases, company purchases, and real estate purchases. JARBLY has access to high net worth individuals if you are on the sell-side and businesses that may be of interest to you if you are on the buy-side.
- Phone: (800) 773-1523
- Email: [email protected]