This particular morning was a beautiful morning in South Carolina. Afterall, it was Friday, the weather had cooled a bit with low humidity, and the weekend was here. A touch of fall was in the air. I was encouraged by my pipeline, with a large business acquisition on its way to approval and closing that was my top priority. It was the setup for a perfect day. What could go wrong? As I made my way to my office desk, I got a call from my buyer who said he was going to pull out of his letter of intent (LOI) today. Since this was a $7 million dollar transaction, you can imagine my surprise and disappointment. When I asked him what had gone wrong, he simply replied: “The seller is not being cooperative.”
I had been working with my buyer for about a year and he had been diligently looking for the right business. He was very qualified and knew what he wanted to buy. I had connected him with a solid business advisor, and after several looks, he had finally found the right business. A full price LOI went out and was immediately accepted. We got an initial set of financials, I made my review, and issued a financing proposal. Just like it is supposed to happen. My client/buyer began requesting the basic documents for his due diligence: customer lists, bank statements, WIP report, employee list, etc.
The first indication of trouble came that Wednesday before, and my client had expressed some concern about the flow of information from the seller who indicated that he was not able to provide some of the requested diligence items. I didn’t think too much of it. The seller had been largely cooperative to this point, and the listing broker was experienced and helpful, so I figured it was just a hiccup. The client asked me what I thought, and I told him to reach out to the seller’s broker to assist. He did, and the seller’s advisor relayed information from the seller that he wasn’t a “records” guy and wasn’t sure how much more information he could provide (we still needed several key items). I told my client to “blame it on the bank” and tell the seller that the bank needed the information, which of course, we did need in order to underwrite.
What transpired between Wednesday and Friday was the seller stonewalled the buyer, later citing his reluctance to share confidential information even though a solid LOI was executed, and the advisor had my assurance this was a serious buyer. When I spoke to the advisor later that Friday, I said that regardless of who the buyer is, they are going to need to complete due diligence before spending millions of dollars. The advisor agreed wholeheartedly and said that the seller has been very difficult to work with in providing information. I didn’t have to tell the advisor what he already knew. I simply closed with the comment “well, he just cost himself a whole lot of money”.
Hopefully, this story illustrates a simple point, which is: to get to the closing table, you absolutely need to have a cooperative seller who is forthcoming with information that both buyers and lenders will need to complete their diligence. What is being purchased is a reliable cash flow stream, and documenting how that cash flow is derived and why it is likely to continue is the key. I suppose this seller will run through a couple more buyers before he gets the message, or he may end up selling the business for millions less to account for the risk of buying a business with less-than-enough information for a buyer to feel comfortable. The advisor told me he will no longer be accepting listings from difficult sellers. Good start. In any case, a cooperative seller would more than likely gotten us to the closing table. A poignant reminder of the importance of seller cooperation.