Most people in the merger and acquisition business recognize that when a seller reaches the letter of intent stage, the chance of closing is only about 50 percent.  Recognizing the various deal breakers will help sellers anticipate hurdles to overcome.  The following items are merely a few potential deal breakers.

• Undisclosed material facts surfacing in due diligence, such as loss of a major account, customer concentration, product recall, environmental problems, and missed sales/earnings projections
• Higher than anticipated taxes, which may be due to an asset sale for a C corporation
• Unacceptable details of Purchase and Sale Agreement for either the acquirer or seller (collateralization of note, the insistence of escrow account, or the rigidity of the "reps and warranty" agreement)
• Lack of chemistry between the principals of the acquirer and seller
• Undercapitalized acquirer who cannot provide the necessary financing
• Remorseful seller who becomes discouraged when the deal lags and ultimately walks away

Deal breakers can sometimes be short-circuited if most of the potential problems are addressed early on in the buyer-seller relationship and if both parties are willing to consider alternative solutions.

Part of the problem is not recognizing a deal breaker until it is too late to resolve it.  To overcome this pitfall, it is useful to have several people on each side during the various meetings to improve the overall communications.  Another way to recognize deal breakers is to bluntly ask the acquirer to express concerns. The expectation is that concerns can be addressed if uncovered, but if concerns do not surface, then it is unlikely they will be resolved.

Numerous deals fail because of sellers' greed. Instead of accepting a slightly lower price from a well-financed buyer, some sellers will go with acquirers who offer a slightly higher price, only to find they cannot finance the deal.

The best way to close is to offer all cash at closing with few contingencies.  Conversely, complicated deal structures with numerous contingencies have a less likely chance of closing.

Many deals are aborted because the actual financial results for the recent quarter are substantially lower than the projections.  Consequently, the acquirer gets cold feet and withdraws, often without a counteroffer.  One of the most important factors for a seller is to not let up on increasing sales and earnings, as the acquirer will be carefully scrutinizing each quarter, each month, and maybe each week to measure any weakness in the seller's performance.

Look Deep into Their Crystal Ball

In addition to checking out the acquirer's credit and management history, see what he or she plans for the company's future.  This is especially important if the owner will be maintaining some involvement with the company as a consultant or employee, or if a portion of the purchase price will be deferred.

Even if the owner will be making a clean break from the business, he or she should be reasonably confident that the acquirer is capable of running the enterprise successfully.  Otherwise, the owner runs the risk of being sued for fraudulently misrepresenting the business's financial state, assets, or products if the new owner fails miserably.