The termination of a purchase agreement entails significant costs for both the buyer and the seller.
Research suggests that relational aspects are as vital as financial considerations. The role of personal rapport between executives, as well as the importance of the bidder’s reputation, have major impact.
First, private equity groups appear to consider the relational aspects of buying entrepreneurial and/or private businesses. The importance of their reputation and of building rapport illustrate that non-financial aspects are important.
Second, sellers should consider addressing potential discrepancies by conducting an external audit and/or quality of earnings study prior to a potential sale. This will mitigate possible surprises when the prospective buyer conducts their own due diligence, which often requires re-negotiating terms. Such re-negotiations are often unsuccessful, leading to bid termination.