Why do so many deals fail to close at the last minute?

In the last semester of 2024, we tracked numerous potential deals that searchers were confident about closing. Unfortunately, many of them failed to materialize at the last minute. After months of searching, evaluating, negotiating, and investing resources in conducting due diligence, searchers often face a harsh reality: deals can fall apart at the eleventh hour. Understanding the reasons behind this phenomenon is crucial for mitigating risks and improving success rates.

One major factor we’ve observed is the increasing equity gap in many deals, which complicates both timing and confidence for searchers to close their transactions successfully. Are investors becoming more selective than before, or is the quality of deal flow declining?

Here are some of the main reasons why deals fail to close:

1/ Discoveries during DD

The due diligence phase is designed to uncover hidden risks and verify the business’s financial and operational health. However, it often reveals unexpected red flags that derail the transaction.

Common issues include financial inconsistencies (inflated revenues, understated liabilities, or poor cash flow management), legal and compliance concerns (unresolved litigation, regulatory violations, or flawed contracts), operational challenges (outdated technology, supply chain vulnerabilities, or over-reliance on key personnel)…

When these issues arise late in the process, they can erode the searcher’s confidence in the deal or necessitate renegotiations, which may alienate the seller.

2/ Valuation misalignment

Valuation disagreements remain a leading cause of failed deals. Sellers often have emotional attachments to their businesses, leading to inflated perceptions of value. Conversely, searchers, backed by investors expecting attractive returns, must adhere to disciplined valuation models. The gap between these perspectives can become insurmountable if neither party is willing to compromise.

3/ Financing challenges

Searchers typically rely on a mix of equity and debt to finance acquisitions. However, if lenders or investors withdraw their support due to market conditions, changes in the deal structure, or risks uncovered during due diligence, the searcher may find themselves unable to proceed.

Recently, we have observed an increasing equity gap, making it more challenging to cover the required equity to close deals. This can be attributed to several factors: deals being too small or too large, sector-specific investment preferences, poor expected returns, insufficient recurring revenues, or more selective processes driven by a growing deal flow.

This financial uncertainty can be particularly destabilizing in the final stages, often prolonging the time needed to close the deal and potentially frustrating the seller.

4/ Seller hesitation

Even when a deal appears to be on track, sellers can experience last-minute doubts. For many owners, particularly those of family-run businesses, selling their company is an emotionally charged decision. Concerns about the buyer’s intentions, the legacy of the business, or the welfare of employees can cause the seller to reconsider.

5/ Cultural and strategic misalignment

Beyond numbers, deals must also make sense strategically and culturally. If either party perceives a misalignment in management style, vision, or integration plans, it can prompt a reevaluation. Sellers, in particular, may pull back if they believe the buyer lacks the expertise or values necessary to steward the business effectively, especially when they are often asked to reinvest in the new company or provide a seller loan.

6/ Over-negotiation and legal complexities

Lengthy negotiations over contractual details can sour relationships and stall momentum. Disputes over indemnities, warranties, or earn-outs can introduce friction, causing one or both parties to lose trust or interest. In some cases, legal teams may amplify risks rather than facilitating solutions, further complicating matters.

How searchers can improve their odds of success

To mitigate these risks and increase the likelihood of closing deals, searchers can adopt the following strategies:

• Prepare thoroughly: Conduct robust pre-due diligence to identify potential deal-breakers early, and involve your mentors and investors in the process. This approach enables searchers to address issues proactively rather than being blindsided later.
• Foster open communication: Build a relationship of trust with the seller by maintaining transparency and addressing their concerns empathetically. A seller who feels understood is more likely to stay committed. The same principle applies to your investors—engage them early to identify who is keen to participate in the transaction.
• Be flexible in negotiations: While maintaining discipline is essential, being overly rigid can alienate sellers. Demonstrating a willingness to compromise on terms, within reason, can help bridge valuation gaps and resolve disputes.
• Secure reliable financing early: Engage with lenders and investors well in advance to minimize last-minute financing uncertainties. Structure backup plans proactively—don’t wait until an equity gap arises to contact a dozen potential alternative investors.
• Develop a clear integration plan: Articulate a thoughtful vision for the business post-acquisition to reassure sellers about the continuity of their legacy and the well-being of their employees. Additionally, this strategy can instill confidence in investors that you have a solid plan to grow the company.
• Manage expectations: Understand that not all deals will close and that sometimes walking away from a bad deal is the best decision. Building resilience and learning from setbacks are vital traits for successful searchers.

Conclusion

Closing an acquisition is a complex and multifaceted process, fraught with challenges that can arise at any stage. For searchers, understanding the common reasons why deals fail at the last minute is the first step in mitigating these risks. By fostering trust, preparing thoroughly, and maintaining flexibility and permanent communication with investors and mentors, searchers can enhance their ability to navigate these challenges and achieve their goal of acquiring a business. In the end, persistence and adaptability are the defining traits of successful SF entrepreneurs.