Two reasons why buyers end up making bad deal transactions
It’s not a secret that the process of buying a business can be lengthy, complicated and arduous. Once a buyer gets to the point of the process where they’ve struck a deal—after they’ve completed their search, found their target, made an offer on their target—it could very well be six months to a year after their first day of searching for an acquisition opportunity.
Existing in the thick of a transaction deal, for both buyers and sellers, is taxing, to say the least. At this point in the acquisition process, the buyer and seller have had countless conversations; advisor teams have formed; extensive target research has occurred; buyer financing has been established; due diligence is underway; negotiations are seesawing.
Despite all this work, the purchase process isn’t over; there’s still a great deal of labour to be done before the deal closes and the transaction is made.
Why Do Buyers End Up Making Unfavourable Transactions?
The tedious nature of the buying process can inevitably cause buyer restlessness. At a certain point, buyers are raring to end the limbo that comes with being caught in a stage of back and forth negotiations. Therefore, they commonly hit this juncture in their journey to acquisition where they are either ready to dissolve a deal or agree to make compromises to get the transaction done. Such compromises, like an increased purchase price, may turn out to be unfavourable for the buyer.
1. Buyers lose patience because of the time it takes to close a deal.
According to Bob Goldsmith of Forbes Magazine, when it comes to acquisition transactions, “nothing good ever comes with the passage of time.” As time passes, impatience can boil over.
Various actions in the business buying process take a considerable amount of time to work through; however, such actions are necessary as they lower the risk of a buyer’s investment and increase the strength of their acquisition. For example, conducting thorough due diligence can be a lengthy task, especially if issues arise with the target that need to be resolved before transaction. The time it takes to complete due diligence is a crucial sacrifice. Frustrations occur when time is spent unnecessarily.
As a buyer, letting time loiter can be detrimental to the success of your acquisition. Instead of succumbing to breeding impatience, remain motivated, determined and thoughtful about your actions to get the deal to its closing stage.
It’s crucial to be prepared and have a strong team of advisors as a buyer. This is so you can carry the upper hand by beating the nuisance of time, and, instead, move quickly, but thoughtfully to the finish line—agreeing on a deal that best benefits you, your business and your future.
2. Buyers experience deal fatigue.
According to Divestopedia, “deal fatigue is a condition during a deal negotiation in which the involved parties begin to feel frustrated...as negotiations drag on endlessly…” Frustrations with the back and forth negotiation process may "cause a lack of interest in active negotiation and the tendency to give in to pressure, ultimately providing an unfair advantage to one single party.”
The Corporate Finance Institute lists the following as common reasons for deal fatigue in an acquisition:
- The occurrence of an unending deal process due to lack of a proper deal structure.
- The lack of subject matter experts who aid the acquisition.
- The uncovering of previously undisclosed information from all parties involved.
- The continual changing of deal terms and conditions during negotiations.
As a buyer, the best way to prevent deal fatigue is to come to the negotiating table prepared, organized and determined to reach a fair deal. Setting a deal schedule in your letter of intent (LOI) can also be a way to keep your expectations and the time spent deciphering negotiations on track.
Additionally, having trusted and experienced advisors on your team can relieve the stress of deal frustrations.
All in all, the goal of buying a pre-existing business is to reach a deal that allows you to gain the capital you need to drive your business and professional success forward. Recognizing the importance of a balanced approach to time and a will of determination allows you, as a buyer, to see through the haze of buyer fatigue and impatience. This will, ultimately, push you and help you accomplish your objective of reaching the opportune deal close and obtaining a worthwhile acquisition.
