It takes a lot of diligence and hard work to close deals, especially mergers and acquisitions, and there are ample opportunities along the way for things to get derailed. Even if a deal manages to stay on track, it is all too common for the closing date to be postponed and postponed because of both foreseeable and unforeseeable obstacles. Here are five common roadblocks to a timely close and some tips on avoiding them:
During the due diligence investigation, the team overseeing the process will no doubt inquire as to any prior or ongoing disputes, particularly if there are any specific litigation matters. Any time a dispute arises, whether legal or otherwise, it can drag on for years and become quite the financial drain. Even if the deal is allowed to go forward in the face of an ongoing dispute, depending on when and how things are resolved, there is a good chance that the deal will never make it to closing. Given the many unknowns associated with litigation and other types of conflicts, it is always best to have things sorted out well before embarking on any sort of massive deal.
Contracting is a routine part of running a business, but many contract terms are dependent upon the existence of some very specific circumstances. For example, in some industries, a contract between two firms may be nullified if one of the companies has a significant change in structure or ownership. Although plenty of contracts will not interfere with a potential deal, it is important to examine the contract portfolio beforehand to be sure. There may be contract provisions allowing for an assignment of rights or some other predetermined manner that will allow for a smooth transition, but if there is not, it will be necessary to figure out how to navigate the situation before it becomes a dealbreaker.
Real, personal, and intellectual property are all valuable company assets, the transfer of which can only occur if there is clear ownership, title, and the appropriate legal protections instituted. If a company does not have the proper leases, there are any kind of mortgage issues, key equipment is not in working order, licensing agreements are inadequate, or intellectual property is not being properly protected, a prospective purchaser may demand postponing the closing or even backing out completely. It is absolutely critical for companies to pay close attention to all pertinent property matters to ensure the right safeguards are in place. Property issues are often document heavy so having an organized data room to keep key paperwork in a central and easy to review system is vital.
Debts and Taxes
When it comes to deal killers, financial issues are usually the prime suspect. Even if the heart of the problem is property or dispute related, the reality is that the concern is over the financial fallout associated with the issue. In addition to a prospective buyer worrying about having to spend a bunch of money to rectify certain issues, a company may also have financial problems with respect to their outstanding debts or tax status. These financial issues may also end up interfering with a deal, as any payments due subsequent to closing immediately undercut the company’s profit potential. Some of these matters may be unavoidable, but it is imperative for companies to implement the proper auditing processes and be wholly transparent to avoid surprises when the closing date is approaching.
In order to effectuate the sale of a business, the company’s shareholders will likely have to vote on the decision. Depending on how a company’s shares are allocated, there may be minority owners who can actually impede the deal. The key is to engage all relevant stakeholders early on in the process and to communicate regularly to ensure that everyone understands the goals and advantages of the transaction at hand. It would be foolish to assume that everyone is on board and then find out later on in the process that there is a way for the minority owners to hold things up if they are not satisfied with the deal.